A financial institution has the following market value balance sheet structure: Cash Bond Total assets Assets...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
A financial institution has the following market value balance sheet structure: Cash Bond Total assets Assets $ 2,700 10,000 Liabilities and Equity Certificate of deposit Equity $ 12,700 Total liabilities and equity $ 11,700 1,000 $ 12,700 a. The bond has a 10-year maturity, a fixed-rate coupon of 9 percent paid at the end of each year, and a par value of $10,000. The certificate of deposit has a 1-year maturity and a 5 percent fixed rate of interest. The Fl expects no additional asset growth. What will be the net interest income (NII) at the end of the first year? (Note: Net interest income equals interest income minus interest expense.) b. If at the end of year 1 market interest rates have increased 100 basis points (1 percent), what will be the net interest income for the second year? Is the change in NII caused by reinvestment risk or refinancing risk? c. Assuming that market interest rates increase 1 percent, the bond will have a value of $9,424 at the end of year 1. What will be the market value of the equity for the FI? Assume that all of the NII in part (a) is used to cover operating expenses or is distributed as dividends. d. If market interest rates had decreased 100 basis points by the end of year 1, would the market value of equity be higher or lower than $1,000? e. What factor has caused the changes in operating performance and market value for this FI? Answer is not complete. Complete this question by entering your answers in the tabs below. Required A Required B Required C Required D Required E The bond has a 10-year maturity, a fixed-rate coupon of 9 percent paid at the end of each year, and a par value of $10,000. The certificate of deposit has a 1-year maturity and a 5 percent fixed rate of interest. The FI expects no additional asset growth. What will be the net interest income (NII) at the end of the first year? (Note: Net interest income equals interest income minus interest expense.) Net interest income (NII) $ 400 A financial institution has the following market value balance sheet structure: Cash Bond Total assets Assets $ 2,700 10,000 Liabilities and Equity Certificate of deposit Equity $ 12,700 Total liabilities and equity $ 11,700 1,000 $ 12,700 a. The bond has a 10-year maturity, a fixed-rate coupon of 9 percent paid at the end of each year, and a par value of $10,000. The certificate of deposit has a 1-year maturity and a 5 percent fixed rate of interest. The Fl expects no additional asset growth. What will be the net interest income (NII) at the end of the first year? (Note: Net interest income equals interest income minus interest expense.) b. If at the end of year 1 market interest rates have increased 100 basis points (1 percent), what will be the net interest income for the second year? Is the change in NII caused by reinvestment risk or refinancing risk? c. Assuming that market interest rates increase 1 percent, the bond will have a value of $9,424 at the end of year 1. What will be the market value of the equity for the FI? Assume that all of the NII in part (a) is used to cover operating expenses or is distributed as dividends. d. If market interest rates had decreased 100 basis points by the end of year 1, would the market value of equity be higher or lower than $1,000? e. What factor has caused the changes in operating performance and market value for this FI? Answer is not complete. Complete this question by entering your answers in the tabs below. Required A Required B Required C Required D Required E The bond has a 10-year maturity, a fixed-rate coupon of 9 percent paid at the end of each year, and a par value of $10,000. The certificate of deposit has a 1-year maturity and a 5 percent fixed rate of interest. The FI expects no additional asset growth. What will be the net interest income (NII) at the end of the first year? (Note: Net interest income equals interest income minus interest expense.) Net interest income (NII) $ 400
Expert Answer:
Related Book For
Financial Markets and Institutions
ISBN: 978-0077861667
6th edition
Authors: Anthony Saunders, Marcia Cornett
Posted Date:
Students also viewed these finance questions
-
A financial institution has the following market value balance sheet structure: a. The bond has a 10-year maturity, a fixed-rate coupon of 10 percent paid at the end of each year, and a par value of...
-
What can Key do to put in controls on inventory investments to make sure he is not over invested in inventory?
-
Calculate the dollar proceeds from the FIs loan portfolio at the end of the year, the return on the FIs loan portfolio, and the net interest margin for the FI if the spot foreign exchange rate has...
-
We know that a certain piece of equipment will cost $150,000 in 5 years. How much will it cost today using 10% interest?
-
(a) Let (X1,... , Xn) ~ multinomial (m, pi,..., pn). Consider testing H0: p1 = p2 versus H1: p1 p2. A test that is often used, called McNemar's Test, rejects H0 if Show that this test statistic has...
-
Check that node in Fig. 8.1 has l = 14/11 and therefore C 0.79 and that node has l = 26/11 and accordingly C 0.42. Figure 8.1 10
-
Consider the model of Bertrand competition with differentiated products from the text. Let the demand curves for firms A and B be given by Equation 12.10 and Equation 12.11, and let the firms'...
-
Determine whether each of the following transactions will be counted in the 2005 GDP of the United States. If the transaction is counted, identify which expenditure component (personal consumption,...
-
Consider the following series. For the work that follows, the root or ratio test will likely be convenient! n=1 (a) Determine the value(s) of r (if any) for which the series converges absolutely. (b)...
-
What is the risk when using evidence that is held by the client?
-
Explain completeness with respect to presentation and disclosure for investments.
-
Why is auditor independence so important?
-
Define the rights and obligations assertion with respect to investments.
-
What are the three board categories of corroborating evidence?
-
The landlord carries contents insurance that should cover the damage to the furnishings, equipment and to the computers, and the insurance company adjuster will come tomorrow to assess the...
-
Linda Lopez opened a beauty studio, Lindas Salon, on January 2, 2011. The salon also sells beauty supplies. In January 2012, Lopez realized she had never filed any tax reports for her business and...
-
How do you manage stress and emotions such as anger? What strategies do you have, if any, that work for you?
-
List two examples of information and communications technologies (IC Ts).
-
____________ is the nonsexual harassment of a coworker by a group of other workers or other members of an organization designed to secure the removal from the organization of the one who is targeted.
Study smarter with the SolutionInn App