MONEY BANKNG FINANCE

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Bank Balance Sheet

all figures are in millions Compare 2016 Balance Sheet for Bofa, GS and Citigroup
New policy dictates a 16% reserve ratio Assets Liabilities loans Debt sec
Assets Liabilities If you fail to meet this requirement you will be fined 1% of deposits all figures are in millions 2016 loans debt securities Deposits deposits deposits
Reserves 70 Deposits 400 BofA p 23 ERROR:#DIV/0!
Loans 530 Bank capital GS p 67 295,952 124,098
Citigroup p 12 353,304
total 600 400 For Commercial/Investment Banks deposits are
For Commercial/Investment Banks loans and debt securities are
Which firm has smallest deposits?
a. have you met your minimum required reserve ? Which firm has largest amount of loans outstanding?
b. what is your bank capital value ? Which firm smallest amount of loans outstanding?
c. if you failed to meet min required reserve _______ loans / deposits is 66%
what is the amount in dollars Which bank has the largest debt securities / deposits ?
If your bank suffers a deposit outflow of $10 million with a required reserve ratio on deposits of 16%..
Fill in your bank balance sheet
Required reserve ratio 16%
Depositor withdraws 10M
Assets Liabilities
Reserves Deposits
Loans 530 Bank capital 530
total 530 530
Can you still manage to meet required reserve?
how much is required to meet requirement,
in other words what is the size of your short fall?
Which option will you choose to correct the shortfall ?
a. borrow from the Fed at a most recent discount rate
b. selling $2M worth in loans to another bank
c. borrow from the fed funds market at July 2017 rate
d. buy $2.4M worth corporate bonds with coupon of 3%.
July 2017 Fed Fund Rate
Most recent Discount Rate
http://media.corporate-ir.net/media_files/IROL/71/71595/BOAML_AR2016.pdf http://www.goldmansachs.com/investor-relations/financials/current/annual-reports/2016-annual-report/annual-report-2016.pdf http://www.citigroup.com/citi/investor/quarterly/2017/ar16_en.pdf?ieNocache=307 https://fred.stlouisfed.org/series/FEDFUNDS https://fred.stlouisfed.org/series/INTDSRUSM193N

Bonds and Yield

You are tasked with investing your Bank's excessive reserves
a. You can use funds to invest in a 3 year US Treasury note. The coupon you receive on the US T note is $300 per year for three years and a final payment of $1,000.
b. You can use funds to invest into a new startup, buy the startup firm's bond. You will receive $1400 on this investment in the third year and nothing in the first two years.
If your interest rate(yield) is 1.95%, what should you pay for each of these investments? Find the PV of these investments
PV #1 = + + i= 0.0195
1.0195 (1.0195)2 (1.0195)3
PV #2 = + +
1.0195 (1.0195)2 (1.0195)3
Which of these investments is a zero coupon bond
If you were a Bank regulator which of these investments would you weight to have more risk?
Compare the following
a. 20 year bond selling for $950 with annual coupon of 3% and face value of $1,000
b. a 1 year bond selling for $950 with annual coupon of 1% face value of $1,000
Bond A Bond B
20 yr 1 yr
price 950 950
coupon 30
par value 1000 1000
n 20 1
YTM
current y
These bonds are selling at , discount, premium or par?
Which $1,000 face value bond has higher yield to maturity ?
Current yield is a better approximation for the 1 yr bond YTM than
for the 20 year bond YTM?
If interest rates are expected to increase which bond has
more risk ?
If the 1 year bond price drops to $500 it's YTM > 20 yr priced at $950 YTM?
If interest rates decreased which bond would you prefer ?
If the 20 year bond price increased to $2000, the YTM is
positive, negative,zero?
Do you think current yield can ever be negative ?
If you buy the 20 year bond today for $950 and sell it next
year for $1,200 what is the return?
this return on the bond equals YTM?

Treasury YC

Date 1 Mo 3 Mo 6 Mo 1 Yr 2 Yr 3 Yr 5 Yr 7 Yr 10 Yr 20 Yr 30 Yr Create another plot
10/2/06 4.67 4.88 5.02 4.9 4.66 4.59 4.56 4.57 4.62 4.83 4.76
10/2/07
10/2/08
10/2/09
10/1/10
10/3/11
10/2/12
10/2/13
10/2/14
10/2/15
10/3/16
10/3/17 1.01 1.07 1.21 1.32 1.47 1.62 1.92 2.15 2.33 2.63 2.87
decay rate -0.7837259101 -0.7807377049 -0.7589641434 -0.7306122449 -0.6845493562 -0.6470588235 -0.5789473684 -0.5295404814 -0.4956709957 -0.4554865424 -0.3970588235
Years Rate
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 T/F
0.0833333333 5 1.02 Prior to 2008, Oct yield curves were normal shaped
0.25 5.11 1.13 Oct 2012 30 yr yield was greater than 2011 30 yr yield
0.5 5.21 1.14 Oct 5 yr yields have strickly decreased since 2006
1 5.16 1.23 In 2015 QE stopped and all short term yields increased from 2015-2016
2 5.06 1.36 All 2017 term yields are higher than 2016 term yields
3 5.02 1.5 Overall Short term rates decayed most from 2006 - 2017
5 4.99 1.83
7 5 2.09 Short Term 1 year or less
10 5.04 2.29 Medium Term 2-7 years
20 5.22 2.65 Long Term 10,20,30 year
30 5.1 2.89

July mid 2006-2011

2006 8.3333333333333329E-2 0.25 0.5 1 2 3 5 7 10 20 30 5 5.1100000000000003 5.21 5.16 5.0599999999999 996 5.0199999999999996 4.99 5 5.04 5.22 5.0999999999999996 2007 8.3333333333333329E-2 0.25 0.5 1 2 3 5 7 10 20 30 2008 8.3333333333333329E-2 0.25 0.5 1 2 3 5 7 10 20 30 2009 8.3333333333333329E-2 0.25 0.5 1 2 3 5 7 10 20 30 2010 8.3333333333333329E-2 0.25 0.5 1 2 3 5 7 10 20 30 2011 8.3333333333333329E-2 0.25 0.5 1 2 3 5 7 10 20 30

TTM

YTM

Extra

Tulipmania https://www.youtube.com/watch?v=nrUknL2P8zw
South Sea Bubble https://www.youtube.com/watch?v=rfZ4OZNhAJ8
https://www.youtube.com/watch?v=nrUknL2P8zw https://www.youtube.com/watch?v=nrUknL2P8zw https://www.youtube.com/watch?v=rfZ4OZNhAJ8 https://www.youtube.com/watch?v=rfZ4OZNhAJ8