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Questions and Answers of Banking

Based on economists’ forecasts and analysis, one-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows:1R1 = 5.65%E (2r1) = 6.75% ...... L2 = 0.05%E
What is the difference between a required rate of return and an expected rate of return?
What is the relation between the expected rate of return and the required rate of return as they pertain to the fair market price and the current market price of a security?
What is the difference between a zero- coupon bond and a coupon bond?
How does equity valuation differ from bond valuation?
What happens to the fair present value of a bond when the required rate of return on the bond increases?
How is duration related to the price elasticity of a fixed-income security? What is the relationship between duration and the price of a fixed- income security?
What is the relation between the coupon rate on a bond and its duration?
Which has the longest duration: a 30-year, 8 percent yield to maturity, 5 percent coupon bond or a 30- year, 10 percent yield to maturity, 5 percent coupon bond?
For each of the following situations, identify whether a bond would be considered a premium bond, a discount bond, or a par bond. a. A bond’s current market price is greater than its face value. b.
What is the economic meaning of duration?
You bought a bond five years ago for $ 935 per bond. The bond is now selling for $ 980. It also paid $ 75 in interest per year, which you reinvested in the bond. Calculate the realized rate of return
Refer again to the bond information in Problem 1. You expect to hold the bond for three more years then sell it for $ 990. If the bond is expected to continue paying $ 75 per year over the next three
Johnson Motors’s bonds have 10 years remaining to maturity. Interest is paid annually, the bonds have a $ 1,000 par value, and the coupon rate is 8 percent. The bonds have a yield to maturity of 9
A 10-year, 12 percent semiannual coupon bond, with a par value of $ 1,000 sells for $ 1,100. What is the bond’s yield to maturity?
BSW Corporation has a bond issue outstanding with an annual coupon rate of 7 percent paid quarterly and four years remaining until maturity. The par value of the bond is $ 1,000. Determine the fair
You have just been offered a bond for $ 863.73. The coupon rate is 8 percent payable annually, and the yield to maturity on new issues with the same degree of risk are 10 percent. You want to know
A $ 1,000 par value bond with seven years left to maturity has a 9 percent coupon rate (paid semiannually) and is selling for $ 945.80. What is its yield to maturity?
You are considering the purchase of a stock that is currently selling at $ 64 per share. You expect the stock to pay $ 4.50 in dividends next year. a. If dividends are expected to grow at a constant
A bond you are evaluating has a 10 percent coupon rate (compounded semiannually), a $ 1,000 face value, and is 10 years from maturity.a. If the required rate of return on the bond is 6 percent, what
Calculate the fair present values of the following bonds, all of which pay interest semiannually, have a face value of $ 1,000, have 12 years remaining to maturity, and have a required rate of
Repeat parts (a) through (c) of Problem using a required rate of return on the bond of 8 percent. What do your calculations imply about the relation between the coupon rates and bond price
Calculate the fair present value of the following bonds, all of which have a 10 percent coupon rate (paid semiannually), face value of $ 1,000, and a required rate of return of 8 percent.a. The bond
Repeat parts (a) through (c) of Problem using a required rate of return on the bond of 11 percent. What do your calculations imply about the relation between time to maturity and bond price
A $ 1,000 par value bond with five years left to maturity pays an interest payment semiannually with a 6 percent coupon rate and is priced to have a 5 percent yield to maturity. If interest rates
Two bonds are available for purchase in the financial markets. The first bond is a two-year, $ 1,000 bond that pays an annual coupon of 10 percent. The second bond is a two- year, $ 1,000,
What is the duration of a five-year, $ 1,000 Treasury bond with a 10 percent semiannual coupon selling at par? Selling with a yield to maturity of 12 percent? 14 percent? What can you conclude about
Consider a 12-year, 12 percent annual coupon bond with a required rate of return of 10 percent. The bond has a face value of $ 1,000. a. What is the fair present value of the bond? b. If the
Consider a five- year, 15 percent annual coupon bond with a face value of $ 1,000. The bond is trading at a rate of 12 percent.a. What is the price of the bond? b. If the rate of interest increases
Consider the following. a. What is the duration of a five-year Treasury bond with a 10 percent semiannual coupon selling at par? b. What is the duration of the above bond if the yield to maturity
Consider the following. a. What is the duration of a four-year Treasury bond with a 10 percent semiannual coupon selling at par?b. What is the duration of a three-year Treasury bond with a 10 percent
Suppose that you purchase a bond that matures in five years and pays a 13.76 percent coupon rate. The bond is priced to yield 10 percent. a. Show that the duration is equal to four years. b. Show
An insurance company is analyzing the following three bonds, each with five years to maturity, and is using duration as its measure of interest rate risk: a. $ 10,000 par value, coupon rate = 8%, rb
MLK Bank has an asset portfolio that consists of $ 100 million of 30-year, 8 percent coupon, $ 1,000 bonds that sell at par.a. What will be the bonds’ new prices if market yields change immediately
Consider the following two banks: Bank 1 has assets composed solely of a 10-year, 12 percent coupon, $ 1 million loan with a 12 percent yield to maturity. It is financed with a 10-year, 10 percent
Describe the functions performed by Federal Reserve Banks.
Describe the structure of the Board of Governors of the Federal Reserve System.
What are the primary responsibilities of the Federal Reserve Board?
What are the primary responsibilities of the Federal Open Market Committee?
What are the major liabilities of the Federal Reserve System? Describe each.
Why did reserve deposits increase to the point that this account represented the largest liability account on the Federal Reserve’s balance sheet in the late 2000s?
What are the major assets of the Federal Reserve System? Describe each.
Why did U.S. government agency securities go from nothing to being the largest asset account on the Federal Reserve’s balance sheet in the late 2000s?
What are the tools used by the Federal Reserve to implement monetary policy?
Explain how a decrease in the discount rate affects credit availability and the money supply.
Why does the Federal Reserve rarely use the discount rate to implement its monetary policy?
What changes did the Fed implement to its discount window lending policy in the early 2000s? In the late 2000s?
Which of the monetary tools available to the Federal Reserve is most often used? Why?
Describe how expansionary activities conducted by the Federal Reserve impact the money supply, credit availability, interest rates, and security prices. Do the same for contractionary activities.
Summarize the monetary policy measures taken by central banks to address the worldwide financial crisis.
Define the discount rate and the discount window.
Suppose the Federal Reserve instructs the Trading Desk to purchase $ 1 billion of securities. Show the result of this transaction on the balance sheets of the Federal Reserve System and commercial
Suppose the Federal Reserve instructs the Trading Desk to sell $ 850 million of securities. Show the result of this transaction on the balance sheets of the Federal Reserve System and commercial
Bank Three currently has $ 600 million in transaction deposits on its balance sheet. The Federal Reserve has currently set the reserve requirement at 10 percent of transaction deposits.a. If the
BSW Bank currently has $ 150 million in transaction deposits on its balance sheet. The Federal Reserve has currently set the reserve requirement at 10 percent of transaction deposits.a. If the
National Bank currently has $ 500 million in transaction deposits on its balance sheet. The current reserve requirement is 10 percent, but the Federal Reserve is decreasing this requirement to 8
MHM Bank currently has $ 250 million in transaction deposits on its balance sheet. The current reserve requirement 10 percent, but the Federal Reserve is increasing this requirement to 12 percent.a.
The FOMC has instructed the FRBNY Trading Desk to purchase $ 500 million in U.S. Treasury securities. The Federal Reserve has currently set the reserve requirement at 5 percent of transaction
The FOMC has instructed the FRBNY Trading Desk to purchase $ 750 million in U. S. Treasury securities. The Federal Reserve has currently set the reserve requirement at 10 percent of transaction
What are the three characteristics common to money market securities?
What is the difference between a discount yield and a bond equivalent yield? Which yield is used for Treasury bill quotes?
Why can discount yields not generally be compared to yields on other (nondiscount) securities?
Describe the T-bill auction process.
What is the difference between a competitive bid and a non-competitive bid in a T-bill auction?
How are T-bills traded in secondary markets?
Describe the two types of fed funds transactions.
What is the primary risk of trading in the fed funds markets? How did this risk come into play during the financial crisis of 2008–2009?
What is the difference between a repurchase agreement and a reverse repurchase agreement?
Describe the trading process for repurchase agreements.
Why do commercial paper issuers almost always obtain a rating of their issues?
What factors caused the amount of outstanding commercial paper to increase from 1992 through 2000 and in the mid-2000s? What factors caused the amount of outstanding commercial paper to decrease from
What is the process through which negotiable CDs are issued?
Describe the process by which a banker’s acceptance is created.
Who are the major issuers of and investors in money market securities?
Describe the issues regarding the validity of the LIBOR rate before and during the financial crisis.
What are Eurodollar CDs and Euro commercial paper?
What is the difference between a single-payment yield and a bond equivalent yield?
What are federal funds? How are they recorded on the balance sheets of commercial banks?
Why do commercial paper issues have an original maturity of 270 days or less?
What is the discount yield, bond equivalent yield, and effective annual return on a $ 1 million Treasury bill that currently sells at 97.375 percent of its face value and is 65 days from maturity?
What is the discount yield, bond equivalent yield, and effective annual return on a $ 5 million commercial paper issue that currently sells at 98.625 percent of its face value and is 136 days from
Calculate the bond equivalent yield and effective annual return on a negotiable CD that is 115 days from maturity and has a quoted nominal yield of 6.56 percent.
Calculate the bond equivalent yield and effective annual return on fed funds that are 3 days from maturity and have a quoted yield of 0.25 percent.
Suppose you purchase a T-bill that is 125 days from maturity for $ 9,765. The T-bill has a face value of $ 10,000.a. Calculate the T-bill’s quoted discount yield.b. Calculate the T-bill’s bond
Refer to Table 5–5. a. Calculate the ask price of the T-bill maturing on October 3, 2013, as of June 21, 2013. b. Calculate the bid price of the T-bill maturing on December 19, 2013, as of June 21,
The overnight fed funds rate on October 1, 2008, was 0.97 percent. Compute the bond equivalent rate and the effective annual return on the fed funds as of October 1, 2008.
Suppose a bank enters a repurchase agreement in which it agrees to buy Treasury securities from a correspondent bank at a price of $ 24,950,000, with the promise to buy them back at a price of $
Calculate the bond equivalent yields and the equivalent annual returns for the repurchase agreements described in Problem 14.a. Calculate the yield on the repo if it has a 7-day maturity. b.
You can buy commercial paper of a major U.S. corporation for $ 495,000. The paper has a face value of $ 500,000 and is 45 days from maturity. Calculate the discount yield and bond equivalent yield
You can purchase a T-bill that is 95 days from maturity for $ 9,965. The T-bill has a face value of $ 10,000. a. Calculate the T-bill’s quoted yield.b. Calculate the T-bill’s bond equivalent
A T-bill that is 225 days from maturity is selling for $ 95,850. The T-bill has a face value of $ 100,000. a. Calculate the discount yield, bond equivalent yield, and EAR on the T-bill. b. Calculate
Suppose an investor purchases 125-day commercial paper with a par value of $ 1,000,000 for a price of $ 995,235. Calculate the discount yield, bond equivalent yield, and the equivalent annual
A bank has issued a six- month, $ 2 million negotiable CD with a 0.52 percent quoted annual interest rate (i CD, sp ). a. Calculate the bond equivalent yield and the EAR on the CD. b. How much will
A bank has issued a six-month, $ 5 million negotiable CD with a 0.35 percent quoted annual interest rate (i CD, sp ). a. Calculate the bond equivalent yield and the EAR on the CD. b. How much will
You have just purchased a three- month, $ 500,000 negotiable CD, which will pay a 5.5 percent annual interest rate. a. If the market rate on the CD rises to 6 percent, what is its current market
What are capital markets, and how do bond markets fit into the definition of capital markets?
What is a STRIP? Who would invest in a STRIP?
What are the advantages and disadvantages of investing in TIPS bonds?
Describe the process through which T-notes and T-bonds are issued in the primary markets.
What is the difference between general obligation bonds and revenue bonds?

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