the following balance sheet of an FI to answer questions 1 - 10. The numbers provided are in millions of U.S. dollars unless otherwise noted and reflect market values:
|
Cash
|
20
|
Demand Deposits
|
200
|
|
Commercial Loans
( mature in 9.0 years) (amortize quarterly at 7%)
|
300
|
Certificates of Deposit
(mature in 6 months)
(4.5% NAR, semi-annual compounding, interest paid at maturity)
|
150
|
|
Zero Coupon Bonds
(mature in 6.0 years)
(par value= $343.8148)
|
200
|
Short-term Debt
(mature in 4 years; par = 150)
(interest paid annually at 5.0%)
|
150
|
|
MortgageLoans - Fixed Rate
(mature in 30 years) (amortize monthly at 6.5%)
|
260
|
Long-term Debt
(mature in 15 years; par = 200)
(interest paid annually at 6.25%)
|
200
|
|
€ Denominated Bonds (par = €36.6569) (currently $13641€) (mature in 15 years)
(10% semi-annual coupon)
|
50
|
Equity
|
130
|
|
TOTAL ASSETS
|
830
|
TOTAL LIABILITY & EQUITY
|
830
|
Now assume that market interest rates increase instantaneously by 75 basis points for all affected assets and liabilities and that the FX exchange rate changes to $1.25/€.
1. What is the new market value of demand deposits?
a. $180
b. $200
c. $195
d. $205
e. Unable to determine.
2. What is the new market value of commercial loans?
a. $290.6583
b. $287.6438
c. $291.0010
d. $289.7289
e. $288.6293
3. What is the new market value of the zero coupon bonds?
a. $191.0272
b. $190.3723
c. $193.4853
d. $195.6528
e. $191.9707
4. What is the new market value of the mortgage loans?
a. $240.9021
b. $239.3765
c. $240.9856
d. $239.9972
e. $241.8658
5. What is the capital loss of the € denominated bond associated with only interest rate risk?
a. -13.42%
b. - 7.89%
c. - 5.53%
d. - 10.25%
e. - 9.39%
6. What is the new market value of the CDs?
a. $147.7528
b. $148.9311
c. $149.4519
d. $148.2281
e. $147.2765
7. What is the capital loss of the € denominated bond associated with only FX risk?
a. -13.42%
b. - 7.89%
c. - 5.53%
d. - 10.25%
e. - 9.39%
8. Which of the following statements is most correct?
a. The FI is net short in the € and risks that the € will appreciate in value.
b. The FI is net long in the € and risks that the € will appreciate in value.
c. The FI is net long in the € and risks that the € will depreciate in value.
d. The FI is net long in the € and risks that the U.S. $ will appreciate in value.
e. Both c and d are correct.
9. What is the new market value of liabilities?
a. $685.8932
b. $695.8293
c. $702.1198
d. $681.8693
e. $700.4238
10. What is the new market value of equity?
a. $108.3209
b. $105.2926
c. $115.2893
d. $108.2265
e. None of the above.
Use the following information to answer questions 11-13.A bank has liabilities of $4 million with an average maturity of two years paying interest rates of 4 percent annually. It has assets of $5 million with an average maturity of 5 years earning interest rates of 6 percent annually.
11. To what risk is it exposed?
a. Reinvestment risk
b. Refinancing risk
c. Interest rate risk
d. Answers a and c
e. Answers b and c
12. What is its net interest income in dollars in year 3, if it refinances its liabilities at a rate of 8 percent?
a. -$20,000
b. -$10,000
c. -$15,000
d. +$20,000
e. +$10,000
13. What is the maximum interest rate that it can refinance its $4 million liability and still break even on its net interest income in dollars?
a. 6.5 percent
b. 7.0 percent
c. 7.5 percent
d. 8.0 percent
e. 8.5 percent
14. As commercial banks move from their traditional banking activities of deposit taking and lending and shift more of their activities to trading, they are subject more to
a. credit risk.
b. market risk.
c. political risk.
d. sovereign risk.
e. liquidity risk.
15. Suppose an individual invests $5,000 in a load mutual fund for two years. The load fee entails an up-front commission charge of 5.75 percent of the amount invested and is deducted from the original funds invested. In addition, 12b-1 fees are 0.25 percent and annual operating expenses are 1.29 percent. The fund also charges a deferred sales load of 2.65 percent on the total out-of-pocket investment at t=0 ; the fund calculates the amount of a back-end sales load based on the lesser of the value of the shareholder's initial investment or the value of the shareholder's investment at redemption. Investments in the fund return 5 percent each year paid on the last day of the year. If the investor reinvests the annual returns paid on the investment, calculate the annual return on the mutual fund over the two year investment period.
a. + 0.4041 percent
b. - 0.9243 percent
c. + 3.4215 percent
d. - 2.2682 percent
16. If interest rate are ____________ zero, a dollar received today is worth ____________ than a dollar received one year from today.
a. equal to; the same
b. less than; more
c. greater than; more
d. both a and c are correct.
e. both b and c are correct.
Use the following information to answer questions 17-19. Eveningstar open-end fund has 1,000 shares outstanding and has the following assets in its portfolio: 100 shares of Procter & Gamble (P&G) priced at $30.00, 300 shares of Intel priced at $50.00 and 200 shares of Microsoft priced at $60.00. The Morningstar closed-end fund has the following stocks in its portfolio: 300 shares of P&G and 300 shares of Microsoft. It has a total of 500 shares outstanding.
17. What is the NAV of both funds?
a. $30.33; $13.50
b. $60.00; $27.00
c. $30.00; $54.00
d. $60.00; $27.00
e. $15.00; $54.00
18. If Eveningstar issues another 250 shares and purchases 150 shares of Intel, what is its new NAV?
a. $39.20
b. $55.20
c. $34.40
d. $30.00
e. $34.00
19. To what level should the price of Microsoft shares decline in order for the NAV of Morningstar fund to remain constant if the price of P&G rises to $40?
a. $60
b. $55
c. $50
d. $45
e. $40
20. Higher uncertainty of losses forces property-casualty firms to
a. invest in more short-term assets than life insurance firms.
b. invest in more long-term assets than life insurance firms.
c. hold a larger percentage of capital and reserves than life insurance firms.
d. answers a and b.
e. answers a and c.
21. Losses are higher for lines that are exposed to
a. long tails and low inflation.
b. long tails and high inflation.
c. short tails and low inflation.
d. short tails and high inflation.
e. short tails and no inflation.
22. An insurance company collected $31.0 million in premiums and disbursed $28 million in losses. Loss adjustment expenses amounted to $5.0 million. The firm is profitable
a. if dividends paid to policy holders is $4 million and income generated on investments is $4 million.
b. if dividends paid to policy holders is $10 million and income generated on investments is $14 million.
c. if dividends paid to policy holders is $6 million and income generated on investments is $2 million.
d. if dividends paid to policy holders is $10 million and income generated on investments is $4 million.
e. if dividends paid to policy holders is $4 million and income generated on investments is $2 million.