Problem #4 - Scenario B You are given the following balance sheet values of a hypothetical bank (OUR Bank) at t=0. The OUR Bank uses a hurdle rate (cost of capital) of 13.7606% per annum, continuously compounded for computing the future and present values for the cash flows of its loans, which we also call it the market interest (borrowing and lending) rate. Balance sheet as on t=0 (Now) Amount Liabilities/Equity Amount One-year commercial loan of $200 to be repaid in four equal quarterly installments; the interest payment is on the outstanding balance at an annual rate of 14% per annum. $200 One-year Certificate of Deposit at 14% per annum simple interest; balloon payment of principal $200 $0 Equity Total Total $200 $200 What will be the net interest income or net cash flow or equity at the end of year 1 (end of quarter 4) if the market interest rate for OUR Bank decreases to 11.7606% per annum, continuously compounded throughout this one-year? In other words, all the the intermittent cash flows from the loan are reinvested at the reinvestment rate equal to 11.7606% per annum, continuously compounded. You can imagine that immediately after making the loan, within the first quarter, the market interest rate has declined to 200 basis points. [Hint: Your first step is to carefully compute the cash flows of a loan. It has four equal installments of $50. The outstanding loan amount for the first quarter is $200. What is the simple interest for quarter 1? It will be $200 x 0.14 * (1/4). Therefore, OUR Bank will receive the first payment of $57 at the end of first quarter. Now, what will be the outstanding principal balance of the loan at the beginning of second quarter? It will be $150. You can convince yourself that the OUR Bank will receive the second payment of $55.25 at the end of second quarter.] (Round off your final answer to at least four decimal places, to obtain as accurate answer as possible on Canvas.) (If your final is say a loss of $12.345, then type your answer as -12.345.) Problem #4 - Scenario B You are given the following balance sheet values of a hypothetical bank (OUR Bank) at t=0. The OUR Bank uses a hurdle rate (cost of capital) of 13.7606% per annum, continuously compounded for computing the future and present values for the cash flows of its loans, which we also call it the market interest (borrowing and lending) rate. Balance sheet as on t=0 (Now) Amount Liabilities/Equity Amount One-year commercial loan of $200 to be repaid in four equal quarterly installments; the interest payment is on the outstanding balance at an annual rate of 14% per annum. $200 One-year Certificate of Deposit at 14% per annum simple interest; balloon payment of principal $200 $0 Equity Total Total $200 $200 What will be the net interest income or net cash flow or equity at the end of year 1 (end of quarter 4) if the market interest rate for OUR Bank decreases to 11.7606% per annum, continuously compounded throughout this one-year? In other words, all the the intermittent cash flows from the loan are reinvested at the reinvestment rate equal to 11.7606% per annum, continuously compounded. You can imagine that immediately after making the loan, within the first quarter, the market interest rate has declined to 200 basis points. [Hint: Your first step is to carefully compute the cash flows of a loan. It has four equal installments of $50. The outstanding loan amount for the first quarter is $200. What is the simple interest for quarter 1? It will be $200 x 0.14 * (1/4). Therefore, OUR Bank will receive the first payment of $57 at the end of first quarter. Now, what will be the outstanding principal balance of the loan at the beginning of second quarter? It will be $150. You can convince yourself that the OUR Bank will receive the second payment of $55.25 at the end of second quarter.] (Round off your final answer to at least four decimal places, to obtain as accurate answer as possible on Canvas.) (If your final is say a loss of $12.345, then type your answer as -12.345.)