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Taking final exam today for Financial Markets class

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Take my final exam for my financial market class. I need it today by 6pm. I will attach the word doc here. It has 5 questions and I need it done today.
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FIR 3720 FINANCIAL MARKETS Final Exam 4 December 2021 Professor: Ronald W. Spahr Name:___________________________ The Final exam is open book, open notes. You have until 7:00 pm on 7 December 2021 to upload the exam on eCourseware-Dropbox. (Total 150 points) (50 pts) 1. As an intern with the Bank of Milan, Tennessee, you have observed that this bank makes two types of loans, agriculture loans and consumer loans, and offers two types of deposits, demand deposits and time deposits. You have determined that your bank is not an asset management bank but is a liability management bank, where core deposits plus capital are less than demand for loans. Thus, your bank needs to acquire money market funds in the Eurodollar or Federal Funds markets at a cost of 3.15 percent. If your bank were an asset management bank, you would invest your excess funds in treasury securities that yield an annual rate of 3.00 percent. Your bank has $2,000 in capital. Using the Economics of Banking Handouts for this class. Part 1 of this problem, already worked for you, shows that, using Demand/Supply functions to formulate this bank’s pro-forma Balance Sheet, that this bank cannot operate as an Asset Management Bank. As an Asset Management Bank, you find that the demand for loans is greater than the supply of fund just from deposits and capital. Part 2 of this problem, since you find that your bank is a liability management bank and must acquire money market deposits, show what the pro-forma balance sheet and income statements will look like, assuming that rates, you determine are constant for all of 2022. Part 1, Assuming an Asset Management Bank Demand function for agriculture loans (LA) rA = 13.00% - .0005LA LA=$10,000_rA= _8.0%__ Demand for function for consumer loans (LC) rC = 9.00% - .0002LC LC=$15,000_rC= _6.00%_ Supply function for demand deposits (DD) rD = -4.00% + .0004375DD DD= $8,000 rD= -0.50% Supply function for time deposits (DT) rT = 0.00 + .00015DT DT= $10,000 rT= 1.50% Using the economics of banking theory covered in class, we show how the pro-forma balance sheet for the Bank of Milan, Tennessee would appear assuming an asset management bank, where, at the margin, you assume that you would invest excess funds in US Treasury Bills at a return of 3 percent. You will show that you have a problem that demand for assets (Loans) are greater than supply of deposits plus capital. Bank of Milan, Tennessee Statement of Financial Conditions (pro forma) January 1, 2022 Assuming an Asset Management Bank U.S. Treasury Securities $0 Demand Deposits $8,000.00_ Agriculture Loans $10.000.00 Time Deposits $10,000.00_ Consumer Loans $15,000.00 Capital 2,000.00 Total Assets $25,000.00 Total Liab & NW $20,000.00_ Therefore, since Total Assets are greater than Total Liabilities plus Capital, you need to start over assuming a liability management bank. Determine the new equilibrium balance sheet and proforma income statement, assuming that you will acquire money market funds that have a cost/return of 3.15%. Part 2, Assuming a Liability Management Bank Demand function for agriculture loans (LA) rA = 13.00% - .0005LA LA=$__________ rA= ________% Demand for function for consumer loans (LC) rC = 9.00% - .0002LC LC=$___________ rC= ________% Supply function for demand deposits (DD) rD = -4.00% + .0004375DD DD= $_________ rD=____________% Supply function for time deposits (DT) rT = 0.00 + .00015DT DT= $__________ rT= ________% Bank of Milan, Tennessee Statement of Financial Conditions (pro forma) January 1, 2021 Assuming an Liability Management Bank U.S. Treasury Securities $0______ Demand Deposits $_________ Agriculture Loans $_________ Time Deposits $________ EuroDollars $ _________ Consumer Loans $_________ Capital 2,000.00 Total Assets $__________ Total Liab & NW $_________ Bank of Milan, Tennessee Income Statement (pro forma) January 1, 2022 – December 31, 2022 Assume all rates and balances remain constant for the next year Revenues Interest on Treasury Securities $_0____________________________ Interest on Agriculture Loans $______________________________ Interest on Consumer Loans $______________________________ Total Interest Revenue $______________________________ Interest Expense Interest on Demand Deposits $_____________________________ Interest on Time Deposits $_____________________________ Interest on EuroDollars $____________________________ Total Interest Expense $_____________________________ Net Interest Revenue $_____________________________ (20 points) 2. As the Assistant to the V.P. of Commercial Loans at Moscow Tennessee’s Buzzard's Breath Bank you have been approached by Boley Brewery (BB) for a line of credit. It is expected that BB will have a maximum credit line of $10 million and its average draw down (loan balance) will be $6 million. For services rendered BB will pay the bank $40,000 a year; however, it is estimated that it will cost the bank $50,000 to provide these services. The compensating balance requirement is 2% and 3% (2% on total line of credit plus 3 percent on the amount of loan outstanding.) The annual fixed service fee on the loan will be .008 or .8%. A before tax return on equity capital allocated to this line of credit of .25 or 25% is required, and it is expected that the amount of capital allocated per $1 of loan is $.10 (10% of the loan amount). The current rate paid on commercial transaction (demand deposit) accounts is 0 percent and the reserve requirement as of March 2021 is 0 percent. The bank’s “cost of funds” which is a combination of deposits (except for demand deposits) and acquired funds averages 4.85 percent. The reserve requirement on non-transaction accounts that fund the major proportion of the loan also is 0 percent. Using the following model, developed in class, what nominal interest rate would you quote BB for their line of credit? COMMERCIAL LOAN PORTFOLIO LOAN PRICING FORMULA RLi = RKi k - Fi + RDi dT + RT[1 – (1 - rD)dT – k)/(1 - rT)] – [FRi - Si]/Li Where, RLi= The interest rate to be charged on the loan. RKi= Bank’s required before-tax return on capital. = The annual fixed service fee charged on average loan amount (ie. .008). = The interest rate paid on demand deposits. RT = The bank’s average “cost of funds” including interest rate paid on acquired funds necessary to fund the loan. d = Compensation balance required on total line of credit. = Additional compensating balance on average loan outstanding. Li = Average loan amount outstanding. dT = [d(total line of credit) + (Li)]/(Li) or average total compensating balance. rD = Reserve requirement on demand deposits (Currently 0). rT = Reserve requirement on acquired funds (Currently 0). k = Allocation of capital to the loan amount (ie. .10) = Total fee revenue earned by bank on the line of credit ($40,000). = Cost of services provided by the bank for line of credit ($50,000). RLi = RKi k - Fi + RDi dT + RT[1 – (1 - rD)dT – k)/(1 - rT)] – [FRi - Si]/Li However, since rD and rT are both zero subsequent to March 2021, the above formula may be written as: RLi = RKi k - Fi + RDi dT + RT[1 – dT - k] – [FRi - Si]/Li RLi = Where: dT = [d(total line of credit) + (Li)]/(Li) (20 points) 3. You have the opportunity to buy a zero coupon municipal bond that will pay you $1000 in three years and nothing else. The current market yield to maturity on this bond is 4.7%. What price should you pay for the bond today? What will the bond be worth a year from today assuming the yield to maturity remains at 4.7%? Given that you are in the 26 percent combined federal and state tax rate, what is your tax-equivalent yield on the bond? In other words, what rate would a zero-coupon taxable bond need to yield before taxes if it were to have a 4.7 percent after-tax yield? Price today = $______________ Price year from today = $___________ Tax equivalent Yield = ____________% (30 points) 4. First National Bank of Memphis issued $100 million of one-year CDs in the United States at a rate of 2.50 percent. It invested $50 million in one-year loans to U.S. corporations at an annual rate of 4.5 percent. The remaining $50 million was loaned, with one-year maturity, to a corporation in Chile yielding 6 percent on Chilean Pesos (CLP). All proceeds of loans, both U.S. and Chile, will be received at the end of the year. The exchange rate at the time the Chilean loans were made was $0.0011900/Chilean Peso (CLP) or CLP 840.336/$. a. What will be the net return (Return on Loan interest minus cost of funds for the $100 million of one-year CDs) if the exchange rate between the Chilean Peso and the U.S. dollar remains the same? (This is calculated for you.) Cost of funds = 0.025 x $100 million = $2,500,000 Return on U.S. loan = 0.045 x $50 million = $ 2,250,000 Return on Chilean Loan = .06xCLP42,016.8millionx$0.0011900/CLP = $ 3,000,000 Total interest earned = $2,750,000 Net return on investment = $2,750,000/$100 million = 2.75 percent. b. What will be the net return on this $100 million investment if the exchange rate changes to CLP 900.000/$? Cost of funds = _______________________ = $_________ Return on U.S. loan = ______________________ = $_________ Return on Chilean Loan =____________________ = $ _________ Total interest earned = $__________ Net return on investment = $________________ = ___________percent. (30 points) 5. Your bank purchased a $10,000 T-bond with a settlement date of January 1, 2022 that matures on December 31, 2051, thus the T-bond has exactly 30-years to maturity on the settlement date; where, the next coupon payment will be on June 1, 2022. The coupon rate on the T-note is 1.80% and the market determined YTM is 1.77%. a. Since the bond pays interest semi-annually, what is the bond’s price (both clean and dirty) on 1/1/22, the settlement date? Use both the formula and the Excel Price function: =Price(settlement,maturity,rate,yld,redemption,frequence,basis) to show that your formula determined price and the Excel determined price are the same. (This part is done for you.) Vb = (0.0180/2) {[1-((1 + 0.0177/2)-2(30))]/0.0177/2} + 100%(1 + 0.0177/2)-2(30) Vb = (0.0090) {[1-((1 + 0.00885)-60)]/0.00885} + 1(1 + 0.00885)-60 = Vb = 0.417568 + 0.589392 = 1.006959 or = 100.6959% Clean and Dirty PRICE ON 1/1/2022 using Excel PRICE(settlement,maturity,rate,yld, redemption,frequence,basis) 100.6959461 Settlement date 1/1/2022 Maturity date 1/1/2052 Annual Coupon rate 1.80% Annual Yield 1.77% Redemption amount per $100 face value 100 Number of coupon payments per year 2 Day Count basis 0 Thus, using either the formula or Excel, the Clean and Dirty T-bond price is 100.6959% of par value. b. Three months later, (April 1, 2022), what is the dirty and clean price of the T-bond if the market yield (YTM), because of the FED’s “Tapering”, increases to 2.10%? Remember, you have held the bond for 89 days or 0.243836 years and the T-note has 29.756164 years or 59.512329 semi-annual periods remaining to maturity. (assume there are184 days during each semi-annual period). Calculate the Clean Price for the T-Bond using both the formula and Excel, as above: Clean Price Vb = Clean PRICE ON 4/1/2022 PRICE(settlement,maturity,rate,yld, redemption,frequence,basis) Settlement date 4/1/2022 Maturity date 1/1/2052 Annual Coupon rate 1.80% Annual Yield 2.10% Redemption amount per $100 face value 100 Number of coupon payments per year 2 Day Count basis 0 c. To calculate the Dirty Price, please calculate the accrued interest on the T-Note given that you have held it for 89 days? (Assume there are184 days during each semi-annual period). Accrued interest over the 89 days is calculated as: d. Given that Clean price + Accrued interest = Dirty price, what is the Dirty price in both percent and in dollar price of the T-bond on April 1, 2022? Dirty Price = Clean Price + Accrued Interest = Or Dollar price = $____________ 2 0002 . 00 . 9 C C C C L L rL TR - = = 00 . 3 0004 . 00 . 9 = - = C C C L dL dTR 2 0004375 . 00 . 4 D D D D D D rD TC + - = = % 00 . 3 000875 . 00 . 4 = + - = D D D D dL dTC 2 00015 . 00 . 0 T T T T D D rD TC + = = 00 . 3 0003 . 00 . 0 = + = D T T D dL dTC % 15 . 3 001 . 00 . 13 = - = A A A L dL dTR % 15 . 3 0004 . 00 . 9 = - = C C C L dL dTR % 15 . 3 000875 . 00 . 4 = + - = D D D D dL dTC % 15 . 3 0003 . 00 . 0 = + = D T T D dL dTC i F i D R i d i d i FR i S 2 0005 . 13 A A A L L rL TR - = = 00 . 3 001 . 00 . 13 = - = A A A L dL dTR FIR 372 0 FINANCIAL MARKETS F inal Exam 4 December 2021 Professor: Ronald W. Spahr Name:___________________________ The Final exam is open book, open notes. You have until 7:00 pm on 7 December 2021 to upload the exam on eCourseware - Dropbox. (Total 15 0 points) (5 0 pts) 1. As an intern with the Bank of Milan, Tennessee, you have observed that this bank makes two types of loans, agriculture loans and consumer loans , and offers two types of deposits, demand deposits and time deposits . You have determined that your bank is not an asset management bank but is a liability management bank , where core deposits plus capital are less than demand for loans. Thus, your bank needs to acquire money market funds in the Eur odollar or Federal Funds markets at a cost of 3.15 percent . If your bank were an asset management bank, you would invest your excess fund s in treasury securities that yield an annual rate of 3 .00 percent . Your bank has $2,000 in capital. Using the Economics of Bank ing Handouts for this class. Part 1 of this problem , already worked for you, shows that , using Demand/S upply functions to formulate this bank ’ s pro - forma Balance Sheet , that this bank cannot operate as an Asset Management Bank. As an Asset Management Bank, you find that the demand for loans is greater than the supply of fund just from deposits and capital. Part 2 of this problem, s ince you find that your bank is a liability management bank and must acquire money market deposits, show what the pro - forma balanc e sheet and income statements will look like, assuming that rates , you determine are constant for all of 2022 . Part 1, Assuming an Asset Management Bank Demand function for agriculture loans (L A ) r A = 13.00% - .0005L A 2 0005 . 13 A A A L L rL TR - = = 00 . 3 001 . 00 . 13 = - = A A A L dL dTR L A =$10,000 _r A = _8.0% __ Demand for function for consumer loans (L C ) r C = 9.00% - .0002L C 2 0002 . 00 . 9 C C C C L L rL TR - = = 00 . 3 0004 . 00 . 9 = - = C C C L dL dTR L C =$15,000 _r C = _6.00% _ FIR 3720 FINANCIAL MARKETS Final Exam 4 December 2021 Professor: Ronald W. Spahr Name:___________________________ The Final exam is open book, open notes. You have until 7:00 pm on 7 December 2021 to upload the exam on eCourseware-Dropbox. (Total 150 points) (50 pts) 1. As an intern with the Bank of Milan, Tennessee, you have observed that this bank makes two types of loans, agriculture loans and consumer loans, and offers two types of deposits, demand deposits and time deposits. You have determined that your bank is not an asset management bank but is a liability management bank, where core deposits plus capital are less than demand for loans. Thus, your bank needs to acquire money market funds in the Eurodollar or Federal Funds markets at a cost of 3.15 percent. If your bank were an asset management bank, you would invest your excess funds in treasury securities that yield an annual rate of 3.00 percent. Your bank has $2,000 in capital. Using the Economics of Banking Handouts for this class. Part 1 of this problem, already worked for you, shows that, using Demand/Supply functions to formulate this bank’s pro-forma Balance Sheet, that this bank cannot operate as an Asset Management Bank. As an Asset Management Bank, you find that the demand for loans is greater than the supply of fund just from deposits and capital. Part 2 of this problem, since you find that your bank is a liability management bank and must acquire money market deposits, show what the pro-forma balance sheet and income statements will look like, assuming that rates, you determine are constant for all of 2022. Part 1, Assuming an Asset Management Bank Demand function for agriculture loans (L A ) r A = 13.00% - .0005L A 2 0005.13 AAA LLrLTR 00.3001.00.13 A A A L dL dTR L A =$10,000_r A = _8.0%__ Demand for function for consumer loans (L C ) r C = 9.00% - .0002L C 2 0002.00.9 CCCC LLrLTR 00.30004.00.9 C C C L dL dTR L C =$15,000_r C = _6.00%_
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