SBSC bank currently pays 1.75% p.a. on 12-month term deposits and expects to be able to attract
Question:
SBSC bank currently pays 1.75% p.a. on 12-month term deposits and expects to be able to attract similar funds in 12 months' time at a cost of 1.5%. Accordingly, it has priced a fixed two-year loan of $4,500,000 at 1.0% over the expected cost of funds with interest paid annually. The day following the issue of the loan, the yield on both one- year and two-year maturity government bonds (indicators of market rates) decreased by 0.25% p.a.
(i)Ignoring all other assets and liabilities calculate the present value of the expected interest margin.
((ii) How does the free-rider problem make adverse selection and moral hazard problems worse in financial markets? Did free-rider problem contribute/exacerbate the global financial crisis?
Intermediate Accounting
ISBN: 978-0176509736
10th Canadian Edition, Volume 1
Authors: Donald Kieso, Jerry Weygandt, Terry Warfield, Nicola Young,