Imagine a bank that has raised $600M in funds (total funding raised) and invested these funds...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Imagine a bank that has raised $600M in funds (total funding raised) and invested these funds in a moderate-risk strategy. In this strategy, the assets (loans) generate a return equal to 6% with probability 95% and there is a 5% chance that the assets generate a return equal to -25%. For simplicity, there is only two dates in this example (today and tomorrow). The lender invests its funds today and the return on this strategy is delivered tomorrow (cash flows only take place tomorrow). Both the lender and the government do not discount tomorrow's cash flows (independently of their risk). Regulators collected the following additional information on the bank: .89 percent of the funds raised by the lender are deposits paying no interest. • 50 percent of the deposits are insured by the deposit insurance fund, the remaining 50 percent of deposits are uninsured and not protected by the deposit insurance fund. The government wants to eliminate any subsidy created by deposit insurance to the bank and is charging the bank a deposit insurance premium tollay. Calculate the (dollar) value of the deposit insurance premium today that would achieve this goal. Imagine a bank that has raised $600M in funds (total funding raised) and invested these funds in a moderate-risk strategy. In this strategy, the assets (loans) generate a return equal to 6% with probability 95% and there is a 5% chance that the assets generate a return equal to -25%. For simplicity, there is only two dates in this example (today and tomorrow). The lender invests its funds today and the return on this strategy is delivered tomorrow (cash flows only take place tomorrow). Both the lender and the government do not discount tomorrow's cash flows (independently of their risk). Regulators collected the following additional information on the bank: .89 percent of the funds raised by the lender are deposits paying no interest. • 50 percent of the deposits are insured by the deposit insurance fund, the remaining 50 percent of deposits are uninsured and not protected by the deposit insurance fund. The government wants to eliminate any subsidy created by deposit insurance to the bank and is charging the bank a deposit insurance premium tollay. Calculate the (dollar) value of the deposit insurance premium today that would achieve this goal.
Expert Answer:
Answer rating: 100% (QA)
To eliminate any subsidy created by deposit insurance to the bank the deposit insurance premium toda... View the full answer
Related Book For
Posted Date:
Students also viewed these accounting questions
-
The Crazy Eddie fraud may appear smaller and gentler than the massive billion-dollar frauds exposed in recent times, such as Bernie Madoffs Ponzi scheme, frauds in the subprime mortgage market, the...
-
KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...
-
Read the case study "Southwest Airlines," found in Part 2 of your textbook. Review the "Guide to Case Analysis" found on pp. CA1 - CA11 of your textbook. (This guide follows the last case in the...
-
The following auditors report was drafted by a staff accountant of Turner & Turner, CPAs, at the completion of the audit of the financial statements of Lyon Computers, Inc. (a non-public company) for...
-
A layer of ice having parallel sides floats on water. If light is incident on the upper surface of the ice at an angle of incidence of 30.0, what is the angle of refraction in the water?
-
As the bookkeeper of Bishop Manufacturing, you are to record the following transactions in the general journal for the month of November: 1. Raw materials of $72,000 were issued from the storeroom....
-
In a review engagement, the independent accountant's procedures include: a. Examining bank reconciliations. b. Confirming accounts receivable with debtors. c. Reading the financial statements to...
-
The I. Kruger Paint and Wallpaper Store is a large retail distributor of the Supertrex brand of vinyl wall-coverings. Kruger will enhance its citywide image in Miami if it can outsell other local...
-
Southwest Milling Company purchased a front-end loader to move stacks of lumber. The loader had a list price of $124,960. The seller agreed to allow a 5.00 percent discount because Southwest Milling...
-
(Note: Although this question is based on the Skates 'n' Surf business the accounts, amounts and transactions involved may differ between questions. Please read each question separately.) Skate n...
-
Calculate the amount of air required to completely burn 1 kg of Octane (C8H18). If the amount of air is increased by 25%, calculate the equivalence ratio and the gravimetric analysis of the products.
-
_______________variables can take on any value in some interval. In Exercises 510, fill in each blank with the appropriate word or phrase.
-
A sample that is not drawn by a well-defined random method is called a _______. In Exercises 712, fill in each blank with the appropriate word or phrase.
-
In a _________________study, a group of subjects is studied to determine whether various factors of interest are associated with an outcome. In Exercises 510, fill in each blank with the appropriate...
-
Qualitative variables describe how much or how many of something there is. In Exercises 1114, determine whether the statement is true or false. If the statement is false, rewrite it as a true...
-
In a study, 200 patients with skin cancer are randomly divided into two groups. One group receives an experimental drug and the other group receives a placebo. Is this a randomized experiment or an...
-
Lee Hall opened Wildhorse's Window Washing on July 1, 2024. In July, the following transactions were completed: July 1 1 1 5 12 18 25 28 31 31 Invested $42,000 cash in the business. Purchased a used...
-
Suppose you won a financial literacy competition and are given FJS10000 to invest, with the condition that investment can be done either in, i) Invest in Unit trust of Fiji or Invest in Fijian...
-
Determine the following probabilities: a. P (B or C) b. P (B or D) c. P (A or E) d. P (A or B) Event A Event B Event C Event D Event E 21
-
The Transportation Security Administration would like to compare the average amount of time it takes passengers to pass through airport security at Philadelphia versus Orlando during peak times. A...
-
The following table shows the annual salaries, in thousands of dollars, earned by individuals who graduated with MBAs in 2012 and 2013. These data can also be found in the Excel file graduate...
-
What steps are needed to show that entrepreneurial finance is beneficial to the economy at large?
-
What are the main challenges that entrepreneurs and investors face at the four steps of the funding cycle, as described in the FIRE framework?
-
Entrepreneurship involves resource gathering, uncertainty, and experimentation. How does this affect the investors?
Study smarter with the SolutionInn App