If a bank is falling short of meeting its capital requirements by $1 million, what three things can it do to rectify the situation?

1. Explain the tradeoff between ROE and ROA when deciding upon the optimal capital structure of a bank.

2. A bank determines that its VaR (Value-at-Risk) is $100 million, for 1-day holding period, at a 99% confidence level. Assuming that the bank manages its assets and liabilities such that VaR is nearly constant over the long run, about how many days would you expect the bank to lose more than $100 million of value during a three year period? For simplicity, assume there are 300 trading days in a year.

3. Why might a bank use interest rate swaps? If a bank swaps a fixed rate for a floating rate (i.e. selling fixed and buying float), then how might that affect its CAMELS rating?

4. Who defines the framework for capital requirements that is generally adopted by bank regulators in the world's major economies, including the US.

P6. A bank estimates that demand deposits are, on average, $100 million with a standard deviation of $5 million. The bank wants to maintain a minimum of 8% of deposits in reserves at all times. What is the highest expected level of deposits during the month? What reserves to they need to maintain? Use a 99% confidence level.

Mutual Funds

Q3. Considering the discussion of market efficiency from Chapter 6, discuss whether you should be willing to pay high fees to mutual fund investment managers.

Q6. How does an index fund differ from an actively managed fund?

Q9. What distinguishes a hedge fund from other types of mutual funds?

Q11. What do 12b-1 fees pay and what is the maximum amount these fees can be?

P1. On January 1, the shares and prices for a mutual fund at 4PM are as follows:

Stock 3 announces record earnings, and the price of stock 3 jumps to $32.44 in after-market trading. If the fund (illegally) allows investors to buy at the current NAV, how many shares will $25,000 buy? If the fund waits until the price adjusts, how many shares can be purchased? What is the gain to such illegal trades? Assume 5,000 shares are outstanding.

P2. A mutual fund charges a 5% upfront load plus reports an expense ratio of 1.34%. If the investor plans on holding a fund for 30 years, what is the average annual fee, as a percent paid by the investors?

P5. A $1 million fund is charging a back-end load of 1%, 12b-1 fees of 1% and an expense ratio of 1.9%. Prior to deducting expenses, what must the fund value be at the end of the year for investors to break even?

P6. On January 1, a mutual fund has the following assets and prices at 4PM. Calculate the Net Asset Value (NAV) for the fund. Assume that 8,000 shares are outstanding.