1) You are considering an investment in AA rated, 30-year bonds issued by Xerta Corporation. The one-year T-bills are currently selling at a yield of 1.5%. Your analysts provide you with the following information:
Real interest rate = 1%
Default risk premium on AA bonds = 0.5%
Liquidity risk premium = 1.25%
Maturity risk premium = 1.50%
a. What is the inflation premium?
b. What is the fair interest rate on the Xerta AA bonds?
2) Suppose that the current one-year rate (spot) and expected one-year T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows:
1R1= 4%, E[2r1] = 3.5%, E[3r1] = 3.25%, E[4r1] = 3.15%,
Using the unbiased expectation theory, calculate the current (long-term) rate for one-, two-, three- and four-year maturity Treasury securities. Plot the resulting yield curve.
3)
a. What is the discount yield, bond equivalent yield and effective annual return on a $1 million Treasury Bill that currently sells for 99:08 and is 181 days from maturity
b. If the overnight fed funds rate is quoted as 1.2 percent, what is the bond equivalent rate?
4) Suppose a bank enters a repurchase agreement in which it agrees to buy Treasury securities from a correspondent bank at a price of $19,750,000, with a promise to back them back at a price of $20,000,000. Calculate the yield on repo if it has a 7 days maturity.
5) You can buy commercial paper of a major U.S. corporation for $985,000. The paper has a face value of $1,000,000 and is 215 days from maturity. Calculate the discount yield and bond equivalent yield on the commercial paper.
6) On October 20, 2013 you purchase a $10,000 T-note that matures on July 1, 2016. The coupon rate on the T-note is 6% and the price at which you buy is 102:24. The last coupon payment on the note occurred on July 1, 2013, and the next payment will be made on January 1, 2014. Suppose settlement occurs immediately.
a. Calculate the accrued interest due to the seller from the buyer at the time of purchase
b. Calculate the dirty price for the T-Note.
7) A $1000 face value corporate bond with a 8% coupon (paid semi-annually) has 6 years to maturity. I has a credit rating of AA with a yield to maturity of 4%. The firm is likely to lose its rating and drop to an "A". The appropriate yield corresponding to an 'A' rating would be 6%. What will be the change in the bond price in dollars and percentage terms?
8) You plan to purchase a $500,000 house using a 20 year mortgage from a local bank at 5%. You'll make a down payment of 20% of the purchase price.
a. Calculate your monthly payment on this mortgage.
b. Construct the amortization schedule for the first six months.
9) You plan to purchase a home for $500,000 and finance it with a 30 year mortgage at 6% interest rate with zero points. You'll make 20% down payment, and monthly payments. Your bank offers you the following two options:
a. Option 1: mortgage rate of 5% a 1 point.
b. Option 2: mortgage rate of 4.5% and 2 points.
Which option you should choose, if you plan to keep the house for 7 years?
10. Consider the following financial statements for Bank of A and compute the following ratios.
|
Balance Sheet ($ millions) Assets
|
Liabilities & Equity
|
|
|
|
|
|
Cash
Securities Loans Other Total
|
850
2,950
5,400
975
|
Deposits Other
borrowing
Equity
|
6,475
2,670
1,030
|
|
|
10,175
|
Total
|
10,175
|
|
|
|
|
|
Income Statement
Interest Income on Loans 450
Interest Income on Securities 295
Interest expense 246
Non-Interest Income 78
Non-Interest expense 112
Provision for loan loss 35
Taxes 115
Net Income 315
a) The bank's ROA is:
b) The bank's ROE is:
c) The bank's profit margin is:
d) The bank's asset utilization ratio is:
e) The bank's average net interest margin is:
f) The bank has an overhead efficiency ratio of :