Finance

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FIN 4324 Assignment 3

Name:

1. You have a portfolio of two branches, Branch A and Branch B and 75 percent

of your total assets are invested in Branch A. The following information is

given:

Expected return, E(𝑅𝐴)𝑎𝑛𝑑 𝐸(𝑅𝐵 ) Branch A B

Expected return 20% 12%

Covariance matrix

Branch A B

A 625 120

B 120 196 Note: 𝜎 2(𝑅𝐴)=625, 120= Cov(𝑅𝐴, 𝑅𝐵 )), 𝜎

2(𝑅𝐵 )=196

A. Calculate the expected return of the portfolio.

B. Compute portfolio standard deviation of return.

2. Discuss the differences of balance sheets of commercial banks and nonfinancial firms.

3. What are the principal accounts that appear on a bank’s balance sheet (Report of Condition)?

4. Discuss three main characteristics of banks’ balance sheets.

5. What are core deposits and why are they so important as a funding source for commercial

banks?

6. What factors influence the stock price of a financial-service corporation?

7. Suppose that a bank paying an annual dividend of $4 per share on its stock in the current

period and dividends are expected to grow 5% a year every year, and the minimum required

return-to-equity capital based on the bank’s perceived level of risk is 10%. Can you

estimate the current value of the bank’s stock?

8. What is return on equity capital, and what aspect of performance is it supposed to measure?

Can you see how this performance measure might be useful to the managers of financial

firms?

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9. UMB has the following balance sheet and income state information.

Assets Liabilities and Equity

Cash 2,600 Deposits 13,800

Securities 7,000 Fed funds purchased

and repos 1,584

Fed funds sold and

reverse repos 87 Other borrowed funds 5

Loans 6,400 All other liabilities 91

Fixed assets 217 Common Stock 21

Other assets 339 Retained Earnings 1,142

Total assets 16,643 Total liabilities and

equity 16,643

Selected items on income state (in millions)

Interest income 350

Interest expense 15

Provision for loan losses 18

Noninterest income 249

Noninterest expense 463

Taxes 24

(1) Calculate return on equity (ROE).

(2) Calculate return on assets (ROA).

(3) Calculate return on sales.

10. Suppose a bank reports that its net income for the current year is $51 million, its assets

total $1,144 million, and its liabilities amount to $926 million. What is its return on

equity capital? Is the ROE you have calculated good or bad? What information do you

need to answer this last question?

11. U.S. Treasury bills are available for purchase this week at the following prices

(based upon $100 par value) and with the indicated maturities:

a. $97.25, 182 days.

b. $95.75, 270 days.

Calculate the bank discount rate (DR) on each bill (a and b) if it is held to

maturity. What is the equivalent yield to maturity (sometimes called the bond-

equivalent or coupon-equivalent yield) on each of these Treasury Bills?

12. First National Bank of Bannerville has posted interest revenues of $63 million

and interest costs from all of its borrowings of $42 million. If this bank

possesses $700 million in total earning assets, what is First National’s net

interest margin? Suppose the bank’s interest revenues and interest costs double,

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while its earning assets increase by 50 percent. What will happen to its net

interest margin?

13. Commerce National Bank reports interest-sensitive assets of $870 million and

interest-sensitive liabilities of $625 million during the coming month. Is the

bank asset sensitive or liability sensitive? What is likely to happen to the

bank’s net interest margin if interest rates rise? If they fall?

14. A government bond is currently selling for $1,195 and pays $75 per year in

interest for 14 years when it matures. If the redemption value of this bond is

$1,000, what is its yield to maturity if purchased today for $1,195?

15. Florida bank has the following balance sheet:

Assets Million $ Liabilities and Equity Million $

Cash $35 Demand deposits $240

Short-term securities $200 Interest-bearing transaction deposits $260

Short-term loans $225 Fed funds borrowings $25

Long-term fixed-rate loans $250 Long-term fixed-rate borrowings $119

Total $710 Equity $66

Total $710

(1) Calculate the bank’s one-year re-pricing gap.

(2) Measure the impact on net income when there is a 1 percent increase in rates.

16. Discuss shortcomings of re-pricing gap.