financeal institution test

FIN4760

PRACTICE EXAM 2B

FALL 2008

1. County Bank has the following market value balance sheet (in millions, annual rates). All securities are selling at par equal to book value.

Assets Liabilities and Equity

Cash $20 Demand deposits $100

15-year commercial loan @ 10% 5-year CDs @ 6% interest,

interest, balloon payment $160 balloon payment $210

30-year Mortgages @ 8% interest, 20-year debentures @ 7% interest $120

balloon payment $300 Equity $50

Total Assets $480 Total Liabilities & Equity $480

Assume all interest rates increase by 100 basis points. Calculate the new market value of equity.

2. Sun Bank USA purchased a 16 million one-year Swiss franc loan that pays 12 percent interest annually. The spot rate for Swiss francs is SF1.60/$. Sun Bank has funded this loan by accepting a British pound (£)-denominated deposit for the equivalent amount and maturity at an annual rate of 10 percent. The current spot rate of the British pound is $1.60/£.

What is the net interest income earned in dollars on this one-year transaction if the spot rates at the end of the year are SF1.70/$ and $1.85/£?

Assets

Loan SF16,000,000 principal ($1.00/SF1.60) = $10,000,000

Liabilities

Deposit £6,250,000 principal ($1.60/£1.00) = $10,000,000

Equity

= $0

Interest Income (cash inflow from assets)

SF16,000,000 * 0.12 = SF1,920,000 interest ($1.00/SF1.70) = $1,129,411.76

Interest Expense (cash outflow from liabilities)

£6,250,000 * 0.10 = £625,000 interest ($1.85/£1.00) = $1,156,250.00

NET INTEREST INCOME (NII) = - $ 26,838.24

NET INTEREST MARGIN (- $26,838.24 / $10,000,000) = - 0.2684%

Note: Net Interest Margin is the net return on investment = NII / assets earning interest