Accounting Textbook Solutions - 63

See Full Questions And Answers at solutionrank.
com
Using the following data on bond yields, calculate the change in the confidence index from last
year to this year. What besides a change in confidence might explain the pattern of yield
changes? ________________________________________ This Year _________ Last Year
Yield on top-rated corporate bonds .................
Suppose you are considering investing in a Telus Corp. corporate bond with a $15 000 face value
maturing on July 23, 2020. The bond's coupon or bond rate is 5.05 percent and interest is paid
semi-annually. The current required market rate or yield to market (YTM) for a bond of this type
is 2.74 percent. (a) Carefully
A coupon bond paying semiannual interest is reported as having an ask price of 117% of its
$1,000 par value. If the last interest payment was made one month ago and the coupon rate is
6%, what is the invoice price of the bond?
Based on current dividend yields and expected capital gains, the expected rates of return on
portfolios A and B are 11% and 14%, respectively. The beta of A is .8 while that of B is 1.5. The
T-bill rate is currently 6%, while the expected rate of return of the S&P 500 Index is 12%. The
standard deviation of portfolio A
See Full Questions And Answers at solutionrank.com
The following bond swaps could have been made in recent years as investors attempted to
increase the total return on their portfolio. From the information presented below, identify
possible reason(s) that investors may have made each swap. 1. Use data from finance.yahoo.com
to answer the following questions. Enter th
Suppose a firm has two business options to choose from and has asked you to help them make a
decision. Option "A" requires an immediate cost of $25 000 along with "upgrade costs" of $5000
in year 3 and $7500 in year 6. The returns from these investments begin in year 2 and are
estimated to be $3000 per year for 3 years
Eagle Products' EBIT is $300, its tax rate is 35%, depreciation is $20, capital expenditures are
$60, and the planned increase in net working capital is $30. What is the free cash flow to the
firm?
Stocks offer an expected rate of return of 10% with a standard deviation of 20%, and gold offers
an expected return of 5% with a standard deviation of 25%. a. In light of the apparent inferiority
of gold to stocks with respect to both mean return and volatility, would anyone hold gold? If so,
demonstrate graphically

The standard deviation of the market-index portfolio is 20%. Stock A has a beta of 1.5 and a
residual standard deviation of 30%. a. What would make for a larger increase in the stock's
variance: an increase of .15 in its beta or an increase of 3% (from 30% to 33%) in its residual
standard deviation? b. An investor w
Recalculate the intrinsic value of GE using the three-stage growth model of Spreadsheet 13.1
(available in Connect; link to Chapter 13 material). Treat each of the following scenarios
independently. a. ROE in the constant-growth period will be 15%. b. GE's actual beta is 1.10. c.
The market risk premium is 8.5%.
Using the historical risk premiums as your guide, what is your estimate of the expected annual
HPR on the S&P 500 stock portfolio if the current risk-free interest rate is 5%?
All else being equal, is a put option on a high-beta stock worth more than one on a low beta
stock? The firms have identical firm-specific risk.
Log in to Connect to find rate-of-return data over a 60-month period for Google, the T-bill rate,
and the S&P 500, which we will use as the market-index portfolio. a. Use these data and Excel's
regression function to compute Google's excess return in each month as well as its alpha, beta,
and residual standard deviat
On January 1, you sold short one round lot (that is, 100 shares) of Snow's stock at $21 per share.
On March 1, a dividend of $3 per share was paid. On April 1, you covered the short sale by
buying the stock at a price of $15 per share. You paid 50 cents per share in commissions for each
transaction. What is the value o
You purchase one Facebook October $80 put contract for a premium of $5.72. What is your
maximum possible profit? (See Figure 15.1.) FIGURE 15.1 Options on Facebook, October 16,
2014
How does investment banking differ from commercial banking?
On May 30, 2015, Janice Kerr is considering the newly issued 10-year AAA corporate bonds
shown in the following exhibit: a. Suppose that market interest rates decline by 100 basis points
(i.e., 1%). Contrast the effect of this decline on the price of each bond. b. Should Kerr prefer the
Colina over the Sentinal bond
The following diagram shows the value of a put option at expiration: Ignoring transaction costs,
which of the following statements about the value of the put option at expiration is true? a. The
expiration value of the short position in the put is $4 if the stock price is $76. b. The expiration
value of the long po
Suppose the yield on short-term government securities (perceived to be risk-free) is about 4%.
Suppose also that the expected return required by the market for a portfolio with a beta of 1 is
12%. According to the capital asset pricing model: a. What is the expected return on the market
portfolio? b. What would be t
Log in to Connect and link to the material for Chapter 9, where you will find five years of
weekly returns for the S&P 500. a. Set up a spreadsheet to calculate the 26-week moving average
of the index. Set the value of the index at the beginning of the sample period equal to 100. The
index value in each week is then
Joe Finance has just purchased a stock-index fund, currently selling at $1,800 per share. To
protect against losses, Joe plans to purchase an at-the-money European put option on the fund for
$90, with exercise price $1,800, and three-month time to expiration. Sally Calm, Joe's financial
adviser, points out that Joe is
You are a consultant to a large manufacturing corporation considering a project with the
following net after-tax cash flows (in millions of dollars): Years from Now ____________ After-
Tax CF 0 .............................................. -20 1-9 ............................................ 10 10 .................
A call option with a strike price of $50 on a stock selling at $55 costs $6.50. What are the call
option's intrinsic and time values?
You buy an eight-year bond that has a 6% current yield and a 6% coupon (paid annually). In one
year, promised yields to maturity have risen to 7%. What is your holding period return?
Suppose two factors are identified for the U.S. economy: the growth rate of industrial
production, IP, and the inflation rate, IR. IP is expected to be 4% and IR 6%. A stock with a beta
of 1 on IP and .4 on IR currently is expected to provide a rate of return of 14%. If industrial
production actually grows by 5%, while
A small manufacturing firm is planning to either purchase new machinery to add capacity or to
outsource part of its business to another company. If they decide to move forward with the first
option, they have to make an initial investment of $20 000 to buy the machinery and pay
additional maintenance and upgrade cost o
A portfolio of non-dividend-paying stocks earned a geometric mean return of 5% between

January 1, 2005, and December 31, 2011. The arithmetic mean return for the same period was
6%. If the market value of the portfolio at the beginning of 2005 was $100,000, what was the
market value of the portfolio at the end of 2011?
Consider the following options portfolio: You write a November 2014 expiration call option on
Facebook with exercise price $80. You also write a November expiration Facebook put option
with exercise price $75. a. Graph the payoff of this portfolio at option expiration as a function of
the stock price at that time. b
The Pet Company must make a choice between two investment alternatives. Alternative 1 will
provide returns to the company of $20 000 at the end of three years and $60 000 at the end of six
years. Alternative 2 will provide returns to the company of $13 000 at the end of each of the next
six years. Which alternative is
Mona is considering investing in a Sun Life Financial Inc. corporate bond with a $25 000 face
value maturing on December 22, 2028. The bond's coupon or bond rate is 6.25 percent and
interest is paid semi-annually. The current required market rate or yield for a bond of this type is
5.42 percent. Use the bond function o
ATech has fixed costs of $7 million and profits of $4 million. Its competitor, ZTech, is roughly
the same size and this year earned the same profits, $4 million. But it operates with fixed costs of
$5 million and lower variable costs. a. Which firm has higher operating leverage? b. Which firm
will likely have higher
Miltmar Corporation will pay a year-end dividend of $4, and dividends thereafter are expected to
grow at the constant rate of 4% per year. The risk-free rate is 4%, and the expected return on the
market portfolio is 12%. The stock has a beta of .75. What is the intrinsic value of the stock?
The financial statements for Chicago Refrigerator Inc. (see Tables 14.15 and 14.16) are to be
used to compute the ratios a through h for 2016. TABLE 14.15 Chicago Refrigerator Inc. balance
sheet, as of December 31 ($ thousand) TABLE 14.16 Chicago Refrigerator Inc. income
statement, years ending December 31 ($ thousa
Suppose there are two independent economic factors, M1 and M2. The risk-free rate is 7%, and
all stocks have independent firm-specific components with a standard deviation of 50%.
Portfolios A and B are both well diversified. What is the expected return-beta relationship in this
economy?
An advertisement reads: "Point Grey Gem $2 798 000.00. Little Australia, by golf course &
close to UBC, beaches, trails & shops! Immaculate 3422 square feet home, 6-bedrooms (4
bedrooms and office on upper floor), 4-bathrooms. Sunny, private 7150 square foot lot.
Renovated basement for that mortgage helper. Queen Mary
A 40-year old man from Bellville, Ontario, Derek Schwager received a great deal of online
reaction after he won the Cash For Life draw and decided to take the $1.5 million lump sum
payout rather than the alternative of $100,000-a-year for life. Most of his online commentators
diverged into two main camps: There were t
You own a fixed-income asset with a duration of five years. If the level of interest rates, which is
currently 8%, goes down by 10 basis points, how much do you expect the price of the asset to go
up (in percentage terms)?
What is the role of an underwriter? A prospectus?
Use the method of averages to find the approximate yield rate for each of the six bonds shown in
the table below. All are redeemed at par. 7.Suppose you are considering investing in a
Bombardier Inc. corporate bond with a $7500 face value that matures in 15 years. The bond's
coupon or bond rate is 7.350 percent, inter
An advertisement in the Vancouver Sun catches your eyes: "MAKE THEM STARE. Not that
they'll have much of a choice. The aggressive air intakes and chiselled lines of the 2014
Mercedes-Benz CLA make a striking first impression. But with a 208 horsepower turbocharged
engine you'll no doubt give them a better view of its L
A $10 000, 7.75% bond with annual coupons redeemable at par in seven years is bought to yield
7.25% compounded annually. Compute the premium or discount and the purchase price, and
construct the appropriate bond schedule.
A bond has a par value of $1,000, a time to maturity of 10 years, and a coupon rate of 8% with
interest paid annually. If the current market price is $800, what will be the approximate capital
gain yield of this bond over the next year if its yield to maturity remains unchanged?
Explain why the following statements are true/false/uncertain. a. With all else held constant, a
firm will have a higher P/E if its beta is higher. b. P/E will tend to be higher when ROE is higher
(assuming plowback is positive). c. P/E will tend to be higher when the plowback rate is higher.
Catherine is planning to invest part of the funds she has in her TFSA account into bonds.
Suppose she is considering investing in Bell Canada's bonds with a $10 000 face value maturing
on April 17, 2026. The bond's coupon or bond rate is 8.88 percent and interest is paid semi-
annually. The current required market rate

The Cap Company has a policy of requiring a rate of return on investments of 16%. Two
investment alternatives are available but the company may choose only one. Alternative 1 offers
a return of $50 000 after 4 years, $40 000 after 7 years, and $30 000 after 10 years. Alternative 2
will provide returns to the company of
Suppose you short-sell 100 shares of IBX, now selling at $200 per share. a. What is your
maximum possible loss? b. What happens to the maximum loss if you simultaneously place a
stop-buy order at $210?
Suppose Baa-rated bonds currently yield 7%, while Aa-rated bonds yield 5%. Now suppose that
due to an increase in the expected inflation rate, the yields on both bonds increase by 1%. a.
What would happen to the confidence index? b. Would this be interpreted as bullish or bearish
by a technical analyst? c. Does thi
Use the following financial statements of Heifer Sports Inc. in Table 14.14 to find Heifer's:
TABLE 14.14: Heifer Sports financial statements a. Inventory turnover ratio in 2015. b.
Debt/equity ratio in 2015. c. Cash flow from operating activities in 2015. d. Average collection
period. e. Asset turnover ratio.
Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either
$50,000 or $150,000, with equal probabilities of .5. The alternative riskless investment in T-bills
pays 5%. a. If you require a risk premium of 10%, how much will you be willing to pay for the
portfolio? b. Suppose the p
Which security has a higher effective annual interest rate? a. A three-month T-bill with face
value of $100,000 currently selling at $97,645. b. A coupon bond selling at par and paying a
10% coupon semiannually.
Your client chooses to invest 70% of a portfolio in your fund and 30% in a T-bill money market
fund. a. What is the expected return and standard deviation of your client's portfolio? b. Suppose
your risky portfolio includes the following investments in the given proportions: Stock
A ..................... 27% Stock
What is the duration of the bond in the previous problem if coupons are paid annually? Explain
why the duration changes in the direction it does.
A $25 000, 10% bond redeemable at par on December 1, 2028, is purchased on September 25,
2017, to yield 7.6% compounded semi-annually. Bond interest is payable semi-annually. (a)
What is the cash price of the bond? (b) What is the accrued interest? (c) What is the quoted
price? (d) Use TI BAII PLUS calculator to ve
A convertible bond has the following features. What is its conversion premium?
Coupon .................................................................. 5.25%
Maturity ........................................................ June 15, 2025 Market price of
bond .................................................. $77.50
According to the Black-Scholes formula, what will be the hedge ratio (delta) of a call option as
the stock price becomes infinitely large? Explain briefly.
On August 10, 2016, Allison purchased two bond certificates with a face value of $5000 each
issued by Enbridge Pipeline Corp. Bonds from this company currently in the market have a semi-
annual coupon rate of 6.5 percent and mature on June 11, 2029. The required market rate for a
bond of this type is 4.44 percent. Calcu
Suppose the total bond issue by Telus Corp. was $155 000 000 and they set up a sinking fund on
issue date at July 23, 1995 for 25 years. Sinking funds are accounts that companies establish to
ensure certain amounts of money will be available at a given future date (refer to 14.5 for
information about sinking funds). If
What are some differences between a unit investment trust and a closed-end fund?
Consider the following table, which gives a security analyst's expected return on two stocks for
two particular market returns: a. What are the betas of the two stocks? b. What is the expected
rate of return on each stock if the market return is equally likely to be 5% or 20%? c. If the T-bill
rate is 8%, and the ma
Sandra Kapple presents Maria VanHusen with a description, given in the following exhibit, of
the bond portfolio held by the Star Hospital Pension Plan. All securities in the bond portfolio are
non-callable U.S. Treasury securities. Star Hospital Pension Plan Bond Portfolio a. Calculate the
effective duration of each
A pension plan is obligated to make disbursements of $1 million, $2 million, and $1 million at

the end of each of the next three years, respectively. Find the duration of the plan's obligations if
the interest rate is 10% annually?
The information in the following table comes from the 2014 financial statements of QuickBrush
Company and SmileWhite Corporation: Determine which company has the higher quality of
earnings by discussing each of the three notes?
When estimating a Sharpe ratio, would it make sense to use the average excess real return that
accounts for inflation?
You hedged your thrift institutionâ€™s exposure to declining interest rates by buying one
December call on Eurodollar deposit futures at the premium quoted earlier on April 15 (see
Exhibit 8-4). a. How much did you pay for the call in dollars if you chose the strike price of
972500? b. If December arrives and Eurodoll
What is an option on a futures contract?
A bond currently sells for $950 based on a par value of $1,000 and promises $100 in interest for
three years before being retired. Yields to maturity on comparable-quality securities are currently
at 12 percent. What is the bondâ€™s duration? Suppose interest rates in the market fall to 10
percent. What will be the app
Suppose a firm has two business options to choose from and has asked you - a Business
Mathematics student - to help them make a decision. Option "A" requires an immediate cost of
$20 000 along with "upgrade costs" of $15 000 in year 3 and $17 500 in year 6. The returns from
these investments begin in year 2 and are est
The current yield curve for default-free zero-coupon bonds is as follows: Maturity (years)
___________ YTM 1 .................................... 10% 2 ...................................... 11
3 ...................................... 12 a. What are the implied one-year forward rates? b. Assume that the
pure exp
What are standby credit letters? Why have they grown so rapidly in recent years?
How can the yield curve and duration help an investments officer choose which securities to
acquire or sell?
How is the expected yield on most bonds determined?
How can a lending institution mitigate the risks inherent in issuing standby credit letters?
Of what use are credit-linked notes?
A savings bankâ€™s weighted average asset duration is 8 years. Its total liabilities amount to
$925 million, while its assets total 1.25 billion dollars. What is the dollar-weighted duration of
the bankâ€™s liability portfolio if it has a zero leverage-adjusted duration gap?
New Comers State Bank has recorded the following financial data for the past three years
(dollars in millions): What has been happening to the bankâ€™s net interest margin? What do
you think caused the changes you have observed? Do you have any recommendations for New
Comersâ€™ managementteam?
What information do T-bond and Eurodollar futures option quotes contain?
First Security National Bank has been approached by a long-standing customer, United Safeco
Industries, for a $30 million term loan for five years to purchase new stamping machines that
would further automate the companyâ€™s assembly line in the manufacture of metal toys and
containers. The company also plans to use at
When is a credit default swap useful? Why?
Why do depository institutions face pledging requirements when they accept government
deposits?
What maturity strategies do financial firms employ in managing their portfolios?
How can financial futures help financial service firms deal with interest rate risk?
Explain what is involved in a put option.
How can financial-service providers make use of interest-rate caps, floors, and collars to
generate revenue and help manage interest rate risk?
What is a long hedge in financial futures? A short hedge?
You hedged your financial firmâ€™s exposure to declining interest rates by buying one
September call on Treasury bond futures at the premium quoted on April 15 as referenced in
Exhibit 8-4. a. How much did you pay for the call in dollars if you chose the strike price of
11000? (Remember that option premiums are quoted
What are Collateralized Debt Obligations (CDOs)? How do they differ from other credit
derivatives?
The First National Bank of Dogsville finds that its asset and liability portfolio contains the
following distribution of maturities and repricing opportunities: When and by how much is the
bank exposed to interest rate risk? For each maturity or repricing interval, what changes in
interest rates will be beneficial a
What advantages does securitization offer to the lending institutions?

Why do banks and other institutions choose to devote a significant portion of their assets to
investment securities?
A savings and loanâ€™s credit rating has just slipped, and half of its assets are long term
mortgages. It offers to swap interest payments with a money center bank in a $100 million deal.
The bank can borrow short term at LIBOR (3 percent) and long term at 3.95 percent. The S&L
must pay LIBOR plus 1.5 percent on short
What is a call option?
Suppose that Gwynnâ€™s Island Savings Association has recently granted a loan of $2 million
to Oyster Farms at prime plus 0.5 percent for six months. In return for granting Oyster Farms an
interest-rate cap of 6.5 percent on its loan, this thrift has received from this customer a floor rate
on the loan of 5 percent. Su
Bacone National Bank has structured its investment portfolio, which extends out to four-year
maturities, so that it holds about $11 million each in one-year, two-year, three-year, and four-
year securities. In contrast, Dunham National Bank and Trust holds $36 million in one- and two-
year securities and about $30 millio
Morning View National Bank reports that its assets have a duration of 7 years and its liabilities
average 1.75 years in duration. To hedge this duration gap, management plans to employ
Treasury bond futures, which are currently quoted at 112-170 and have a duration of 10.36 years.
Morning Viewâ€™s latest financial repo
What are the principal money market and capital market instruments available to institutions
today? What are their most important characteristics?
Refer to the information given for problem 9. You hedged your financial firmâ€™s exposure to
increasing interest rates by buying one September put on Treasury bond futures at the premium
quoted for April 15 of the same year (see Exhibit 8-4). a. How much did you pay for the put in
dollars if you chose the strike price
What type of credit derivatives contract would you recommend for each of the following
situations: a. A bank plans to issue a group of bonds backed by a pool of credit card loans but
fears that the default rate on these credit card loans will rise well above 6 percent of the portfolio
â€“ the default rate it has projec
What forms of risk affect investments?

Carter National Bank holds $15 million in government bonds having a duration of 12 years. If
interest rates suddenly rise from 6 percent to 7 percent, what percentage change should occur in
the bondsâ€™ market price?
Conway Thrift Association reports an average asset duration of 7 years and an average liability
duration of 4 years. In its latest financial report, the association recorded total assets of $1.8
billion and total liabilities of $1.5 billion. If interest rates began at 5 percent and then suddenly
climbed to 6 percent,
If a government bond is expected to mature in two years and has a current price of $950, what is
the bond's YTM if it has a par value of $1,000 and a promised coupon rate of 10 percent?
Suppose this bond is sold one year after purchase for a price of $970. What would this investor's
holding period yield be?
Sunset Savings Bank currently has the following interest-sensitive assets and liabilities on its
balance sheet with the interest-rate sensitivity weights noted. What is the bankâ€™s current
interest-sensitive gap? Adjusting for these various interest rate sensitivity weights what is the
bankâ€™s weighted interest-se
Use the quotes of Eurodollar futures contracts traded on the Chicago Mercantile Exchange as
shown below to answer the following questions: a. What is the annualized discount yield based
on the â€œlowâ€ index price for the nearest March contract? b. If your financial firm took a
short position at the high price for
What are the principal advantages and disadvantages of interest-rate swaps?
Your financial firm needs to borrow $500 million by selling time deposits with 180-day
maturities. If interest rates on comparable deposits are currently at 3.5 percent, what is the cost of
issuing these deposits? Suppose interest rates rise to 4.5 percent. What then will be the cost of
these deposits? What position an
Suppose a bank wishes to sell $150 million in new deposits next month. Interest rates today on
comparable deposits stand at 8 percent but are expected to rise to 8.25 percent next month.
Concerned about the possible rise in borrowing costs, management wishes to use a futures
contract. What type of contract would you re
Suppose a bank enters into an agreement to make a $10 million, three-year floating-rate loan to
one of its best corporate customers at an initial rate of 8 percent. The bank and its customer agree
to a cap and a floor arrangement in which the customer reimburses the bank if the floating loan
rate drops below 6 percent
A bank is considering the use of options to deal with a serious funding cost problem. Deposit
interest rates have been rising for six months, currently averaging 5 percent, and are expected to
climb as high as 6.75 percent over the next 90 days. The bank plans to issue $60 million in new
money market deposits in about
What advantages do sales of loans have for lending institutions trying to raise funds?
If a credit unionâ€™s net interest margin, which was 2.50 percent, increases 10 percent and its
total assets, which stood originally at $575 million, rise by 20 percent, what change will occur in
the bank's net interest income?
U.S. Treasury bills are available for purchase this week at the following prices (based upon $100
par value) and with the indicated maturities: a. $97.25, 182 days. b. $95.75, 270 days. c. $98.75,
91 days. Calculate the bank discount rate (DR) on each bill if it is held to maturity. What is the
equivalent yield to mat
Why were credit derivatives developed? What advantages do they have over loan sales and
securitizations, if any?
What is the purpose of an interest-rate swap?
What special risks do securitized assets present to institutions investing in them?
What risks of securitization should the managers of lending institutions be aware of?
A government bond is currently selling for $1,195 and pays $75 per year in interest for 14 years
when it matures. If the redemption value of this bond is $1,000, what is its yield to maturity if
purchased today for $1,195?
In response to the above scenario, management sells 500, 90-day Eurodollar time deposits
futures contracts trading at an index price of 98. Interest rates rise as anticipated and your
financial firm offsets its position by buying 500 contracts at an index price of 96.98. What type
of hedge is this? What before-tax prof
Suppose market interest rates were expected to rise. What type of option would normally be
used?
What types of investment securities do banks seem to prefer the most? Can you explain why?
You hedged your bankâ€™s exposure to declining interest rates by buying one June Treasury
bond futures contract at the opening price on April 10, as presented in Exhibit 8-2. It is now
Tuesday, June 10, and you discover that on Monday, June 9, June T-bond futures opened at 115-
165 and settled at 114-300. a. What is the
You hedged your financial firmâ€™s exposure to increasing interest rates by buying one
December put on Eurodollar deposit futures at the premium quoted earlier on April 15 (see
Exhibit 8-4). a. How much did you pay for the put in dollars if you chose the strike price of
977500? b. If December arrives and Eurodollar d
What key roles do investments play in the management of a depository institution?
How has the tax exposure of various U.S. bank security investments changed in recent years?
What rules and regulations have recently been imposed on the use of futures, options, and other
derivatives? What does the Financial Accounting Standards Board (FASB) require publicly
traded firms to do in accounting for derivative transactions?
Snowman Bank, N.A., has a portfolio of loans and securities expected to generate cash inflows
for the bank as follows: Expected Cash Inflows of Principal and Interest Payments Annual
Period in Which Cash Receipts Are Expected $1,275,600.............. Current year 746,872...............
Two years from today 341,555...
A financial firm plans to borrow $100 million in the money market at a current interest rate of
4.5 percent. However, the borrowing rate will float with market conditions. To protect itself, the
firm has purchased an interest-rate cap of 5 percent to cover this borrowing. If money market
interest rates on these funds s
What risks do credit derivatives pose for financial institutions using them? In your opinion what
should regulators do about the recent rapid growth of this market, if anything?
What kind of futures or options hedges would be called for in the following situations? a. Market
interest rates are expected to increase and your financial firmâ€™s asset-liability managers
expect to liquidate a portion of their bond portfolio to meet customersâ€™ demands for funds in
the upcoming quarter. b. Your fi
What types of securities are used to meet collateralization requirements?

Hokie Savings wants to purchase a portfolio of home mortgage loans with an expected average
return of 6.5 percent. Management is concerned that interest rates will drop and the cost of the
portfolio will increase from the current price of $50 million. In six months when the funds
become available to purchase the loan p
The cumulative interest rate gap of Poquoson Savings Bank increases 60 percent from an initial
figure of $25 million. If market interest rates rise by 25 percent from an initial level of 3 percent,
what changes will occur in this thriftâ€™s net interest income?
How is a financial institutionâ€™s duration gap determined?
How do you interpret the quotes for financial futures in The Wall Street Journal?
How do credit options work? What circumstances result in the option contract paying off?
It is March and Cavalier Financial Services Corporation is concerned about what an increase in
interest rates will do to the value of its bond portfolio. The portfolio currently has a market value
of $101.1 million, and Cavalierâ€™s management intends to liquidate $1.1 million in bonds in
June to fund additional corpor
What are financial futures contracts? Which financial institutions use futures and other
derivatives for risk management?
What is a credit swap? For what kinds of situations was it developed?
Suppose the government bond described in problem 1 above is held for five years and then the
savings institution acquiring the bond decides to sell it at a price of $940. Can you figure out the
average annual yield the savings institution will have earned for its five-year investment in the
bond?
Sparkle Savings Association has interest-sensitive assets of $400 million, interest-sensitive

liabilities of $325 million, and total assets of $500 million. What is the bankâ€™s dollar interest-
sensitive gap? What is Sparkleâ€™s relative interest-sensitive gap? What is the value of its
interest-sensitivity ratio? Is it
A government bond currently carries a yield to maturity of 6 percent and a market price of
$1,168.49. If the bond promises to pay $100 in interest annually for five years, what is its current
duration?

If market interest rates were expected to fall, what type of option would a financial
institutionâ€™s manager be likely to employ?
Who are the principal parties to a standby credit agreement?
What risks accompany a standby credit letter for (a) the issuer and (b) the beneficiary?
How can you tell if you are fully hedged using duration gap analysis?
How can loan servicing be used to increase income?
Blue Moon National Bank holds assets and liabilities whose average durations and dollar
amounts are as shown in this table: What is the weighted average duration of Blue Moonâ€™s
asset portfolio and liability portfolio? What is the leverage-adjusted durationgap?
GoodLife National Bank placed a group of 10,000 consumer loans bearing an average expected
gross annual yield of 6 percent in a package to be securitized. The investment bank advising
GoodLife estimates that the securities will sell at a slight discount from par that results in a net
interest cost to the issuer of 4.0
What are structured notes and stripped securities? What unusual features do they contain?
Jasper Corporation is requesting a loan for repair of some assembly-line equipment in the
amount of $10.25 million. The nine-month loan is priced by Farmers Financial Corporation at a
6.5 percent rate of interest. However, the finance company tells Jasper that if it obtains a suitable
credit guarantee the loan will be
Given the cash inflow and outflow figures in Problem 11 for Snowman Bank, N.A., suppose that
interest rates began at a level of 4.25 percent and then suddenly rise to 4.75 percent. If the bank
has total assets of $20 billion and total liabilities of $18 billion, by how much would the value of
Snowmanâ€™s net worth cha
The Pretty Lake Bank Corp. has placed $100 million of GNMA-guaranteed securities in a trust
account off the balance sheet. A CMO with four tranches has just been issued by Pretty Lake
using the GNMAs as collateral. Each tranche has a face value of $25 million and makes monthly
payments. The annual coupon rates are 4.5
What kind of futures hedge would be appropriate in each of the following situations?

By what amount will the market value of a Treasury bond futures contract change if interest rates
rise from 5 to 5.25 percent? The underlying Treasury bond has a duration of 10.48 years and the
Treasury bond futures contract is currently being quoted at 113-06. (Remember that Treasury
bonds are quoted in 32nds.)
What is duration?
Farmville Financial reports a net interest margin of 2.75 percent in its most recent financial
report, with total interest revenue of $95 million and total interest costs of $82 million. What
volume of earning assets must the bank hold? Suppose the bankâ€™s interest revenues rise by 5
percent and its interest costs and
What is a total return swap? What advantages does it offer the swap beneficiary institution?
What are securitized assets? Why have they grown so rapidly in recent years?
What is the net after-tax return on a qualified municipal security whose nominal gross return is 6
percent, the cost of borrowed funds is 5 percent, and the financial firm holding the bond is in the
35 percent tax bracket? What is the tax-equivalent yield (TEY) on this tax-exempt security?
A financial firm holds a bond in its investment portfolio whose duration is 15 years. Its current
market price is $975. While market interest rates are currently at 6 percent for comparable
quality securities, a decrease in interest rates to 5.75 percent is expected in the coming weeks.
What change (in percentage terms
What are the risks of using loan sales as a significant source of funding for banks and other
financial institutions?
Suppose that a bank securitizes a package of its loans that bears a gross annual interest yield of
13 percent. The securities issued against the loan package promise interested investors an
annualized yield of 8.25 percent. The expected default rate on the packaged loans is 3.5 percent.
The bank agrees to pay an annual
What does securitization of assets mean?
What is tax swapping? What is portfolio shifting? Give an example of each.
Suppose a corporate bond an investments officer would like to purchase for her bank has a
before-tax yield of 8.98 percent and the bank is in the 35 percent federal income tax bracket.
What is the bond's after-tax gross yield? What after-tax rate of return must a prospective loan
generate to be competitive with the cor
For what kinds of funding situations are Federal funds best suited?
What steps are needed to carry out the structure of funds approach to liquidity management?
Spiro Savings Bank currently holds a government bond valued on the day of its purchase at $5
million, with a promised interest yield of 6 percent, whose current market value is $3.9 million.
Comparable quality bonds are available today for a promised yield of 8 percent. What are the
advantages to Spiro Savings from sel
Suppose J.P. Morgan Chase Bank of New York discovers that projected new loan demand next
week should total $325 million and customers holding confirmed credit lines plan to draw down
$510 million in funds to cover their cash needs next week, while new deposits next week are
projected to equal $680 million The bank also
When is a financial firm asset sensitive? Liability sensitive?
Ocean View State Bank estimates that over the next 24 hours the following cash inflows and
outflows will occur (all figures in millions of dollars): What is this bankâ€™s projected net
liquidity position in the next 24 hours? From what sources can the bank cover its liquidityneeds?
Bridgewater Savings Association maintains a clearing account at the Federal Reserve Bank and
agrees to keep a minimum balance of $30 million in its clearing account. Over the two-week
reserve maintenance period ending today Sweetbriar managed to keep an average clearing
account balance of $33 million. If the Federal fu
What are the advantages of borrowing from the Federal Reserve banks or other central banks?
Are there any disadvantages? What is the difference between primary, secondary, and seasonal
credit? What is a Lombard rate and why might such a rate be useful in achieving monetary
policy goals?
Fine-Tuned Savings Association finds that it can attract the following amounts of deposits if it
offers new depositors and those rolling over their maturing CDs at the interest rates indicated
below: Expected Volume of New Deposits Rate of Interest Offered Depositors $10
million............... 2.00% 15 million........
Lakeway Thrift Savings and Trust is interested in doing some investment portfolio shifting. This
institution has had a good year thus far, with strong loan demand; its loan revenue has increased
by 16 percent over last yearâ€™s level. Lakeway is subject to the 35 percent corporate income
tax rate. The investments offic
What is liability management?
Suppose that the finance company affiliate of Citigroup issues $325 million in 90 day
commercial paper to interested investors and uses the proceeds to purchase loans from Citibank.
What accounting entries should be made on the balance sheets of Citibank and Citigroupâ€™s
finance company affiliate?
Forever Savings Bank regularly purchases municipal bonds issued by small rural school districts
in its region of the state. At the moment, the bank is considering purchasing an $8 million
general obligation issue from the York school district, the only bond issue that district plans this
year. The bonds, which mature i
What is commercial paper? What types of organizations issue such paper?
Parvis Bank and Trust Co. has calculated its daily average deposits and vault cash holdings for
the most recent two-week computation period as follows: Net transaction deposits.......... = $
90,000,000 Nonpersonal time deposits under 18 months to maturity .......... = $169,000,000
Eurocurrency liabilities..........
Rhinestone National Bank reports the following figures in its current Report of Condition: a.
Evaluate the funding mix of deposits and nondeposit sources of funds employed by Rhinestone.
Given the mix of its assets, do you see any potential problems? What changes would you like to
see management of this bank make?
First National Bank posts the following balance sheet entries on todayâ€™s date: Net loans and
leases, $3,502 million; cash and deposits held at other banks, $633 million; Federal funds sold,
$48 million; U.S. government securities, $185 million; Federal funds purchased, $62 million;
demand deposits, $988 million; time
How can the historical average cost and marginal cost of funds approaches be used to help select
assets (such as loans) that a depository institution might wish to acquire?
Arrington Hills Savings Bank, a $3.5 billion asset institution, holds the investment portfolio
outlined in the following table. This savings bank serves a rapidly growing money center into
which substantial numbers of businesses are relocating their corporate headquarters. Suburban
areas around the city are also growin
Chequers State Bank loans $50 million from its reserve account at the Federal Reserve Bank of
Philadelphia to First National Bank of Smithville, located in the New York Federal Reserve
Bank's district, for 24 hours, with the funds returned the next day. Can you show the correct
accounting entries for making this loan a
Forever Savings Bank also purchases municipal bonds issued by the city of Richmond. Currently
the bank is considering a nonqualified general obligation municipal issue. The bonds, which
mature in 15 years, provide a nominal annual rate of return of 9.75 percent. Forever Savings
Bank has the same cost of funds and tax r
New Day Bank plans to launch a new deposit campaign next week in hopes of bringing in from
$100 million to $600 million in new deposit money, which it expects to invest at a 4.25 percent
yield. Management believes that an offer rate on new deposits of 2 percent would attract $100
million in new deposits and rollover fu
Compare and contrast Fed funds transactions with RPs.
First National Bank of Belle Mead has forecast its checkable deposits, time and savings deposits,
and commercial and household loans over the next eight months. The resulting estimates (in
millions) are shown below. Use the sources and uses of funds approach to indicate which months
are likely to result in liquidity de

Accounting Textbook Solutions - 63

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Accounting Textbook Solutions - 63

Uploaded by

Copyright:

Available Formats

See Full Questions And Answers at solutionrank.

See Full Questions And Answers at solutionrank.com

See Full Questions And Answers at solutionrank.com

See Full Questions And Answers at solutionrank.com

How does investment banking differ from commercial banking?

See Full Questions And Answers at solutionrank.com

See Full Questions And Answers at solutionrank.com

See Full Questions And Answers at solutionrank.com

A portfolio of non-dividend-paying stocks earned a geometric mean return of 5% between

See Full Questions And Answers at solutionrank.com

See Full Questions And Answers at solutionrank.com

See Full Questions And Answers at solutionrank.com

What is the role of an underwriter? A prospectus?

See Full Questions And Answers at solutionrank.com

See Full Questions And Answers at solutionrank.com

See Full Questions And Answers at solutionrank.com

See Full Questions And Answers at solutionrank.com

See Full Questions And Answers at solutionrank.com

See Full Questions And Answers at solutionrank.com

A pension plan is obligated to make disbursements of $1 million, $2 million, and $1 million at

See Full Questions And Answers at solutionrank.com

What is an option on a futures contract?

See Full Questions And Answers at solutionrank.com

How is the expected yield on most bonds determined?

See Full Questions And Answers at solutionrank.com

Of what use are credit-linked notes?

What information do T-bond and Eurodollar futures option quotes contain?

See Full Questions And Answers at solutionrank.com

When is a credit default swap useful? Why?

What maturity strategies do financial firms employ in managing their portfolios?

See Full Questions And Answers at solutionrank.com

Explain what is involved in a put option.

What is a long hedge in financial futures? A short hedge?

See Full Questions And Answers at solutionrank.com

What advantages does securitization offer to the lending institutions?

What is a call option?

See Full Questions And Answers at solutionrank.com

See Full Questions And Answers at solutionrank.com

What forms of risk affect investments?

See Full Questions And Answers at solutionrank.com

What are the principal advantages and disadvantages of interest-rate swaps?

See Full Questions And Answers at solutionrank.com

See Full Questions And Answers at solutionrank.com

See Full Questions And Answers at solutionrank.com

What is the purpose of an interest-rate swap?

What special risks do securitized assets present to institutions investing in them?

See Full Questions And Answers at solutionrank.com

See Full Questions And Answers at solutionrank.com

What key roles do investments play in the management of a depository institution?

See Full Questions And Answers at solutionrank.com

See Full Questions And Answers at solutionrank.com

What types of securities are used to meet collateralization requirements?

How is a financial institutionâ€™s duration gap determined?

See Full Questions And Answers at solutionrank.com

See Full Questions And Answers at solutionrank.com

What is a credit swap? For what kinds of situations was it developed?

Sparkle Savings Association has interest-sensitive assets of $400 million, interest-sensitive

See Full Questions And Answers at solutionrank.com

Who are the principal parties to a standby credit agreement?

See Full Questions And Answers at solutionrank.com

How can loan servicing be used to increase income?

See Full Questions And Answers at solutionrank.com

See Full Questions And Answers at solutionrank.com