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Financial Markets And Institutions 7th Edition Frederic S. Mishkin, Stanley G. Eakins - Solutions
A 10-year, $1,000 par value bond with a 5% annual coupon is trading to yield 6%. What is the current yield?
A $1,000 par bond with an annual coupon has only one year until maturity. Its current yield is 6.713%, and its yield to maturity is 10%. What is the price of the bond?
A one-year discount bond with a face value of $1,000 was purchased for $900. What is the yield to maturity? What is the yield on a discount basis?
A seven-year, $1,000 par bond has an 8% annual coupon and is currently yielding 7.5%. The bond can be called in two years at a call price of $1,010. What is the bond yielding, assuming it will be called (known as the yield to call)?
A 20-year $1,000 par value bond has a 7% annual coupon. The bond is callable after the 10th year for a call premium of $1,025. If the bond is trading with a yield to call of 6.25%, what is the bond’s yield to maturity?
A 10-year $1,000 par value bond has a 9% semiannual coupon and a nominal yield to maturity of 8.8%. What is the price of the bond?
Your company owns the following bonds:If general interest rates rise from 8% to 8.5%, what is the approximate change in the value of theportfolio?
What basic principle of finance can be applied to the valuation of any investment asset?
Discuss the features that differentiate organized exchanges from the over-the-counter market.
What is the National Association of Securities Dealers Automated Quotation System (NASDAQ)?
What distinguishes stocks from bonds?
If the investment bankers retained $1.26 per share as fees, what were the net proceeds to eBay? What was the market capitalization of the new shares of eBay?eBay, Inc., went public in September of 1998. The following information on shares outstanding was listed in the final prospectus filed with
Two common statistics in IPOs are underpricing and money left on the table. Underpricing is defined as percentage change between the offering price and the first day closing price. Money left on the table is the difference between the first day closing price and the offering price, multiplied by
The shares of Misheak, Inc., are expected to generate the following possible returns over the next 12 months: Return (%) Probability–5 ....... .105 ....... .2510 ....... .3015 ....... .2525 ........ .10If the stock is currently trading at $25 per share, what is the expected price in one year?
Suppose Microsoft, Inc., is trading at $27.29 per share. It pays an annual dividend of $0.32 per share, and analysts have set a one-year target price around $33.30 per share. What is the expected return of this stock?eBay, Inc., went public in September of 1998. The following information on shares
LaserAce is selling at $22.00 per share. The most recent annual dividend paid was $0.80. Using the Gordon growth model, if the market requires a return of 11%, what is the expected dividend growth rate for LaserAce?eBay, Inc., went public in September of 1998. The following information on shares
Huskie Motors just paid an annual dividend of $1.00 per share. Management has promised shareholders to increase dividends at a constant rate of 5%. If the required return is 12%, what is the current price per share?eBay, Inc., went public in September of 1998. The following information on shares
Suppose Microsoft, Inc. is trading at $27.29 per share. It pays an annual dividend of $0.32 per share, which is double last year’s dividend of $0.16 per share. If this trend is expected to continue, what is the required return on Microsoft?eBay, Inc., went public in September of 1998. The
Gordon & Co.’s stock has just paid its annual dividend of $1.10 per share. Analysts believe that Gordon will maintain its historic dividend growth rate of 3%. If the required return is 8%, what is the expected price of the stock next year?eBay, Inc., went public in September of 1998. The
Macro Systems just paid an annual dividend of $0.32 per share. Its dividend is expected to double for the next four years (D1 through D4), after which it will grow at a more modest pace of 1% per year. If the required return is 13%, what is the current price?eBay, Inc., went public in September of
Nat-T-Cat Industries just went public. As a growing firm, it is not expected to pay a dividend for the first five years. After that, investors expect Nat-T-Cat to pay an annual dividend of $1.00 per share (i.e., D6 = 1.00), with no growth. If the required return is 10%, what is the current stock
Consider the following security information for four securities making up an index:What is the change in the value of the index from Time = 0 to Time = 1 if the index is calculated using a value-weighted arithmetic mean?eBay, Inc., went public in September of 1998. The following information on
An index had an average (geometric) mean return over 20 years of 3.8861%. If the beginning index value was 100, what was the final index value after 20 years?eBay, Inc., went public in September of 1998. The following information on shares outstanding was listed in the final prospectus filed with
Most mortgage loans once had balloon payments; now most current mortgage loans fully amortize. What is the difference between a balloon loan and an amortizing loan?
What are discount points, and why do some mortgage borrowers choose to pay them?
What is the purpose of requiring that a borrower make a down payment before receiving a loan?
Lenders tend not to be as flexible about the qualifications required of mortgage customers as they can be for other types of bank loans. Why is this so?
Distinguish between conventional mortgage loans and insured mortgage loans.
Interpret what is meant when a lender quotes the terms on a loan as “floating with the T-bill plus 2 with caps of 2 and 6.”
The monthly payments on both graduated-payment loans and growing-equity loans increase over time. Despite this similarity, the two types of loans have different purposes. What is the motivation behind each type of loan?
Compute the required monthly payment on an $80,000 30-year fixed-rate mortgage with a nominal interest rate of 5.80%. How much of the payment goes toward principal and interest during the first year?
Compute the face value of a 30-year fixed-rate mortgage with a monthly payment of $1,100, assuming a nominal interest rate of 9%. If the mortgage requires 5% down, what is the maximum house price?
Consider a 30-year fixed-rate mortgage for $100,000 at a nominal rate of 9%. If the borrower wants to pay off the remaining balance on the mortgage after making the 12th payment, what is the remaining balance on the mortgage?
Consider a 30-year fixed-rate mortgage for $100,000 at a nominal rate of 9%. If the borrower pays an additional $100 with each payment, how fast will the mortgage be paid off?
Consider a 30-year fixed-rate mortgage for $100,000 at a nominal rate of 9%. An S&L issues this mortgage on April 1 and retains the mortgage in its portfolio. However, by April 2 mortgage rates have increased to a 9.5% nominal rate. By how much has the value of the mortgage fallen?
Consider a 30-year fixed-rate mortgage of $100,000 at a nominal rate of 9%. What is the duration of the loan? If interest rates increase to 9.5% immediately after the mortgage is made, how much is the loan worth to the lender?
Consider a 5-year balloon loan for $100,000. The bank requires a monthly payment equal to that of a 30-year fixed-rate loan with a nominal annual rate of 5.5%. How much will the borrower owe when the balloon payment is due?
A 30-year variable-rate mortgage offers a first-year teaser rate of 2%. After that, the rate starts at 4.5%, adjusted based on actual interest rates. The maximum rate over the life of the loan is 10.5%, and the rate can increase by no more than 200 basis points a year. If the mortgage is for
Consider a 30-year fixed-rate mortgage for $500,000 at a nominal rate of 6%. What is the difference in required payments between a monthly payment and a bimonthly payment (payments made twice a month)?
Consider the following options available to a mortgage borrower:What is the effective annual rate for eachoption?
Two mortgage options are available: a 15-year fixed-rate loan at 6% with no discount points, and a 15-year fixed-rate loan at 5.75% with 1 discount point. Assuming you will not pay off the loan early, which alternative is best for you? Assume a $100,000 mortgage.
Two mortgage options are available: a 30-year fixed-rate loan at 6% with no discount points, and a 30-year fixed-rate loan at 5.75% with 1 discount point. How long do you have to stay in the house for the mortgage with points to be a better option? Assume a $100,000 mortgage.
Two mortgage options are available: a 30-year fixed-rate loan at 6% with no discount points, and a 30-year fixed-rate loan at 5.75% with points. If you are planning on living in the house for 12 years, what is the most you are willing to pay in points for the 5.75% mortgage? Assume a $100,000
A mortgage on a house worth $350,000 requires what down payment to avoid PMI insurance?
Consider a shared-appreciation mortgage (SAM) on a $250,000 mortgage with yearly payments. Current market mortgage rates are high, running at 13%, of which 10% is annual inflation. Under the terms of the SAM, a 15-year mortgage is offered at 5%. After 15 years, the house must be sold, and the bank
Consider a 30-year graduated-payment mortgage on a $250,000 mortgage with yearly payments. The stated interest rate on the mortgage is 6%, but the first annual payment is calculated assuming a 3% rate for the life of the loan. Thereafter, the annual payment will grow by 3.151222%. Develop an
Consider a growing equity mortgage on a $250,000 mortgage with yearly payments. The stated interest rate on the mortgage is 6%, but this only applies to the first annual payment. Thereafter, the annual payment will grow by 5.5797%. Develop an amortization table for this loan, assuming the initial
Rusty Nail owns his house free and clear, and it’s worth $400,000. To finance his retirement, he acquires a reverse annuity mortgage (RAM) from his bank. The RAM provides a fixed monthly payment over 15 years on 70% of the value of his home at 5%. The payments are made at the beginning of the
You are working with a pool of 1,000 mortgages. Each mortgage is for $100,000 and has a stated annual interest rate (nominal) of 6.00%. The mortgages are all 30-year fixed rate and fully amortizing. Mortgage servicing fees are currently 0.25% annually. Complete the following table.
An investor in England purchased a 91-day T-bill for $987.65. At that time, the exchange rate was $1.75 per pound. At maturity, the exchange rate was $1.83 per pound. What was the investor’s holding period return in pounds?
An investor in Canada purchased 100 shares of IBM on January 1 at $93.00 per share. IBM paid an annual dividend of $0.72 on December 31. The stock was sold that day as well for $100.25. The exchange rate was $0.68 per Canadian dollar on January 1 and $0.71 per Canadian dollar on December 31. What
The New Zealand dollar to U.S. dollar exchange rate is 1.36, and the British pound to U.S. dollar exchange rate is 0.62. If you find that the British pound to New Zealand dollar were trading at 0.49, what would you do to earn a riskless profit?
In 1999, the euro was trading at $0.90 per euro. If the euro is now trading at $1.16 per euro, what is the percentage change in the euro’s value? Is this an appreciation or depreciation?
The current exchange rate between the United States and Britain is $1.825 per pound. The six-month forward rate between the British pound and the U.S. dollar is $1.79 per pound. What is the percentage difference between current six-month U.S. and British interest rates?
The current exchange rate between the Japanese yen and the U.S. dollar is 120 yen per dollar. If the dollar is expected to depreciate by 10% relative to the yen, what is the new expected exchange rate?
Short-term interest rates are 2% in Japan and 4% in the United States. The current exchange rate is 120 yen per dollar. If you can enter into a forward exchange rate of 115 yen per dollar, how can you arbitrage the situation?
The interest rate in the United States is 4%, and the euro is trading at 1 euro per dollar. The euro is expected to depreciate to 1.1 euros per dollar. Calculate the interest rate in Germany.
In the mid- to late 1970s, the yen appreciated relative to the dollar even though Japan’s inflation rate was higher than America’s. How can this be explained by an improvement in the productivity of Japanese industry relative to American industry?
Under fixed exchange rates, if Britain becomes more productive relative to the United States, what foreign exchange intervention is necessary to maintain the fixed exchange rate between dollars and pounds? Which country undertakes this intervention?
“Balance-of-payments deficits always cause a country to lose international reserves.” Is this statement true, false, or uncertain? Explain your answer.
The Federal Reserve purchases $1,000,000 of foreign assets for $1,000,000. Show the effect of this open market operation using T-accounts.
Again, the Federal Reserve purchases $1,000,000 of foreign assets. However, to raise the funds, the trading desk sells $1,000,000 in T-bills. Show the effect of this open market operation using T-accounts.
If the interest rate is 4% on euro deposits and 2% on dollar deposits, while the euro is trading at $1.30 per euro, what does the market expect the exchange rate to be one year from now?
If the dollar begins trading at $1.30 per euro, with the same interest rates given in Problem 3, and the ECB raises interest rates so that the rate on euro deposits rises by 1 percentage point, what will happen to the exchange rate (assuming that the expected future exchange rate is unchanged)?
If the president of a bank told you that the bank was so well run that it has never had to call in loans, sell securities, or borrow as a result of a deposit outflow, would you be willing to buy stock in that bank? Why or why not?
If you are a banker and expect interest rates to rise in the future, would you want to make short-term or long-term loans?
“Bank managers should always seek the highest return possible on their assets.” Is this statement true, false, or uncertain? Explain your answer.
“Banking has become a more dynamic industry because of more active liability management.” Is this statement true, false, or uncertain? Explain your answer.
Why has noninterest income been growing as a source of bank operating income?
Which components of operating expenses experience the greatest fluctuations? Why?
Why do equity holders care more about ROE than about ROA?
What does the net interest margin measure, and why is it important to bank managers?
What are the benefits and costs for a bank when it decides to increase the amount of its bank capital?
If a bank is falling short of meeting its capital requirements by $1 million, what three things can it do to rectify the situation?
X-Bank reported an ROE of 15% and an ROA of 1%. How well capitalized is this bank?
Wiggley S&L issues a standard 30-year fixed rate mortgage at 7.8% for $150,000. Thirty-six months later, mortgage rates jump to 13%. If the S&L sells the mortgage, how much of a loss is incurred?
Refer to the previous question. In 1981, Congress allowed S&Ls to sell mortgages at a loss and to amortize the loss over the remaining life of the mortgage. If this were used for the previous question, how would the transaction have been recorded? What would be the annual adjustment? When would
A bank estimates that demand deposits are, on average, $100 million with a standard deviation of $5 million. The bank wants to maintain a minimum of 8% of deposits in reserves at all times. What is the highest expected level of deposits during the month? What reserves do they need to maintain? Use
NewBank started its first day of operations with $6 million in capital. $100 million in checkable deposits is received. The bank issues a $25 million commercial loan and another $25 million in mortgages, with the following terms:● Mortgages: 100 standard 30-year fixed-rate mortgages with a
NewBank decides to invest $45 million in 30-day T-bills. The T-bills are currently trading at $4,986.70 (including commissions) for a $5,000 face value instrument. How many do they purchase? What does the balance sheet look like?
On the third day of operations, deposits fall by $5 million. What does the balance sheet look like? Are there any problems?
To meet any shortfall in the previous question, NewBank will borrow the cash in the federal funds market. Management decides to borrow the needed funds for the remainder of the month (now 29 days). The required yield on a discount basis is 2.9%. What does the balance sheet look like after this
The end of the month finally arrives for NewBank, and it receives all the required payments from its mortgages, commercial loans, and T-bills. How much cash was received? How are these transactions recorded?
NewBank also pays off its federal funds borrowed. How much cash is owed? How is this recorded?
What does the month-end balance sheet for NewBank look like? Calculate this before any income tax consideration.
Calculate NewBank’s ROA and NIM for its first month. Assume that net interest equals EBT, and that NewBank is in the 34% tax bracket.
Calculate NewBank’s ROE and final balance sheet, including its tax liabilities.
If NewBank were required to establish a loan loss reserve at 0.25% of the loan value for commercial loans, how would this be recorded? Recalculate NewBank’s ROE and final balance sheet, including its tax liabilities.
If NewBank’s target ROE is 4.5%, how much net fee income must it generate to meet this target?
After making payments for three years, one of the mortgage borrowers defaults on the mortgage. NewBank immediately takes possession of the house and sells it at auction for $175,000. Legal fees amount to $25,000. If no loan loss reserve was established for the mortgage loans, how is this event
What are the costs and benefits of a too-big-to-fail policy? Discuss.
What special problem do off-balance-sheet activities present to bank regulators, and what have they done about it?
Why does imposing bank capital requirements on banks help limit risk taking?
What forms does bank supervision take, and how does it help promote a safe and sound banking system?
What steps were taken in the FDICIA legislation of 1991 to improve the functioning of federal deposit insurance?
Why has the trend in bank supervision moved away from a focus on capital requirements to a focus on risk management?
How do disclosure requirements help limit excessive risk taking by banks?
Do you think that eliminating or limiting the amount of deposit insurance would be a good idea? Explain your answer.
How could market-value accounting for bank capital requirements benefit the economy? How difficult would it be to implement?
Consider a failing bank. A deposit of $150,000 is worth how much if the FDIC uses the payoff method? The purchase-and-assumption method? Which is more costly to taxpayers?
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