LNP is a company with a liability of $110 million,which is due in 10 years. The company’s lone asset is $70 million held in cash. The only assumption is that term structure of interest rates remains flat at 5%. (a) Determine the present value of the company’s liability. (b) Without any calculations,briefly explain why holding all its assets in cash is problematic for LNP from an interest rate risk management perspective.
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LNP is a company with a liability of $110 million,which is due in 10 years. The company’s lone asset is $70 million held in cash. The only assumption is that term structure of interest rates remains flat at 5%.
(a) Determine the present value of the company’s liability.
(b) Without any calculations,briefly explain why holding all its assets in cash is problematic for LNP from an interest rate risk management perspective.
Two bonds, A and B, are currently trading. Bond A is a 3-year coupon bond with a face value of $100, selling for $113.616; coupons are paid annually. Bond B is a perpetuity with an initial cash flow of $1 in one year’s time, with
(c) Caluclate Bond A’s coupon rate and the pricing of Bond B.
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- Assume that Riverbed Inc. invests in a bond for $120,000. The bond was purchased at par and is accounted for using amortized cost. At year end, management has determined that there is no significant increase in credit risk, but that there is a 4% chance that the company will not collect 14% of the face value of the bond (which also represents the present value of the bond) in the next 12 months. The expected loss model is used.Prepare the required year-end journal entry. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Account Titles and Explanation Debit CreditA commercial bank invests in a loan with a current market value of $600,000 and a maturity of 3 years. The bank partially funds the loan by issuing a zero coupon bond with a maturity (principal) value of $450,000 and a duration of 3 years. The current market rate is 7% and interest rates are expected to increase by 1%. Which of the following statements is true? (a) The current equity value of the position is $150,000 and if interest rates increase the equity value will increase. (b) The current equity value of the position is $232,666 and if interest rates increase the equity value will increase. (c) The current equity value of the position is $232,666 and if interest rates increase the equity value will decrease. (d) The current equity value of the position is $150,000 and if interest rates increase the equity value will remain the same. (e) None of the given answers. The current equity value of the position is $232,666 and if interest rates increase the equity value will remain the…If a company issues $15,000,00 worth of bonds with a face interest rate equal to the market interest rate, the bonds will sell at an amount Group of answer choices A)less than $15,000,000. b)equal to $15,000,000. C)greater than $15,000,000. D)that can’t be determined from the information provided in the problem.
- Kitwe Corporation has invested R50m in bonds issued by Mochudi Minerals Exploration. Kitwe is somehow worried that Mochudi Minerals Exploration may be facing a financial crisis. Therefore, Kitwe buys R50m worth of CDS protection on Mochudi Minerals Exploration debt for two years from Peoples Bank at a premium of 200 bps (2%) per annum. Explain scenarios of default and no default.Give typing answer with explanation and conclusion Consider the following two banks: • Bank A has assets composed solely of a 10-year, 9%, zero-coupon bond a maturity value of $1,800,000 (calculate its current value). It is financed by a 12-year, 8% coupon, $1,000,000 face value bond to yield 9.5% return. • Bank B has assets composed solely of a 9-year, 10% coupon, $1.7 million bond with a 11% yield to maturity. It is financed with a 8%, 16-year, zero-coupon bond with a maturity value of $3,100,000. All securities, accept the zero-coupon bond, pay interest semi-annually and the zero-coupon bond has semi-annual compounding period. Suppose that interest rates are expected to rise by 100bps Show me the change in the values of the asset and the liabilities for each bank.East Bank securitises a $50 million pool of its business loans. The asset backed securities (ABS) issued, as a result, come in 3 tranches of bonds: one $10 million tranche with an AAA rating bought by an insurance company fund, a $25 million tranche with a BB rating bought by a superannuation fund and one tranche $15 million with a CCC rating sold to a managed fund. b) Conclude whether East Bank has less credit risk and more funds, as a result of securitization. Explain your answers in details.
- Suppose the Federal Reserve sells a $3000 bond, and the reserve ratio maintained by all private banks is 20%. Assume that all loans are fully redeposited (zero “cash drains”) and that all deposits are checkable deposits. Determine the effect of the bond sale on total loans and deposits in the private banks. Explain in detail how these changes would occur. Illustrate the total result of the effects in part (1) using balance sheets for the consolidated private banks and the Federal Reserve, respectively. Discuss how the effects in part (1) would be different if: (i) the reserve ratio was 25% instead of 20%; (ii) a certain portion of loans were held as cash outside banks instead of being redeposited in the banks.Assume a bank can invest in a government bonds at a risk-free rate of 5.6%. Alternatively, it can invest in a corporate bond with a default probability of 6.5%. If the issuer defaults, the bank expects to recover 28.3% of the investment. A risk-averse bank that requires an additional premium of 2.9% as a result of risk aversion would be indifferent between investing in the government bond and the corporate bond if the corporate bond offers a rate of __________. Calculate the answer by read surrounding text. %. Round to the nearest 0.01%, drop the % symbol. E.g., if your answer is 0.10245 or 10.245%, record it as 10.25.Consider a bank with the following balance sheet (M means million): Assets Value Duration of the Asset Convexity of the Asset $550M 12.026 Syr bond bought at a yield of 3.4% (lending money) 4.562 12yr bond bought at a yield of 4% $800M 9.453 53.565 (lending money) Value Duration of the Liability Convexity of the Liability Liabilities Zyr bond sold at a yield of 2.4% $300M 1.941 2.384 (borrowing money) 4yr bond sold at a yield of 2.8% (borrowing money) $500M 3.759 8.206 a) Calculate the equity (total asset - total liability) to asset ratio of the bank (Hint: equity to asset ratio = total equity/total asset) ( b) Calculate the duration and convexity of the both asset and liability sides; c) If the interest rates go up by 1%, using the duration and convexity rule to determine the net worth of the bank and the equity to asset ratio; d) Inc's scenario, to maintain the equity to asset ratio at 40% which is required by the regulation, the bank decides to raise cash (zero duration and zero…
- Consider a bank with the following balance sheet (M means million): Assets Value Duration of the Asset Convexity of the Asset5yr bond bought at a yield of 3.4% (lending money) $550M 4.56212.02612yr bond bought at a yield of 4% (lending money) $800M 9.45353.565 Liabilities Value Duration of the Liability Convexity of the Liability2yr bond sold at a yield of 2.4% (borrowing money) $300M 1.941 2.3844yr bond sold at a yield of 2.8% (borrowing money) $500M 3.759 8.206 If the interest rates go up by 1%, using the duration and convexity rule to determine the net worth of the bank and the equity to asset ratio In c)’s scenario, to maintain the equity to asset ratio at 40% which is required by the regulation, the bank decides to raise cash (zero duration and zero convexity) from the equity holders. How much cash does the bank need to raise?Consider the following two banks: Bank 1 has assets composed solely of a 10-year, 13.25 percent coupon, $2.7 million loan with a 13.25 percent yield to maturity. It is financed with a 10-year, 10 percent coupon, $2.7 million CD with a 10 percent yield to maturity. Bank 2 has assets composed solely of a 7-year, 13.25 percent, zero-coupon bond with a current value of $2,285,241.72 and a maturity value of $5,460,087.71. It is financed by a 10-year, 7.50 percent coupon, $2,700,000 face value CD with a yield to maturity of 10 percent. All securities except the zero-coupon bond pay interest annually. a. If interest rates rise by 1 percent (100 basis points), what is the difference in the value of the assets and llabilities of each bank? (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Enter the answers in dollars, not millions of dollars. Round your answers to 2 decimal places. (e.g., 32.16)) Bank 1 Bank 2 Before Interest Rise Asset Value After…Consider a bank with the following balance sheet (M means million): Assets Value Duration of the Asset Convexity of the Asset Syr bond bought at a yield of 3.4% $55OM (lending money) 4.562 12.026 12yr bond bought at a yield of 4% (lending money) $80OM 9.453 53.565 Liabilities Value Duration of the Liability Convexity of the Liability Zyr bond sold at a yield of 2.4% (borrowing money) 4yr bond sold at a yield of 2.8% (borrowing money) $300M 1.941 2.384 $500M 3.759 8.206 a) Calculate the equity (total asset- total liability) to asset ratio of the bank (Hint: equity to asset ratio = total equity/total asset) b) Calculate the duration and convexity of the both asset and liability sides; ( c) If the interest rates go up by 1%, using the duration and convexity rule to determine the net worth of the bank and the equity to asset ratic d) Incys scenario, to maintain the equity to asset ratio at 40% which is required by the regulation, the bank decides to raise cash (zero duration and zero…