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Financial Markets

1. Answer the following questions.

a. (10 points) The following balance sheet accounts (in millions of dollars) have been taken
from the annual report for a U.S. bank. Arrange the accounts in balance sheet order and
determine the value of total assets.

Other assets $3,100 Net loans $87,915
Checkable deposits 46,000 Short-term borrowing 1,845
Savings deposits 9,955 Jumbo CDs 12,000
Cash 7,800 Federal funds sold 925
Investment Securities 15,670 Small-denomination time deposits
(<100,000) 27,000 Other liabilities 575 Intangible assets 1,500 Bank Capital 19,535 b. (6 points) The income statement for this bank is shown below: Income Statement Interest income $4,168 Interest expense 137 Provision for loan losses 518 Noninterest income 1,190 Noninterest expense 1,700 Taxes 980   For this bank, calculate   (1) Return on assets (ROA), (2) Return on equity (ROE), and (3) Net interest margin (NIM) as a percentage of total assets.   2. An investment bank agrees to underwrite an issue of 5 million shares of stock for NetChoice, Inc.   a. (8 points) If the investment bank underwrites the stock on a firm commitment basis, it agrees to pay $31.50 per share to NetChoice, Inc. for the 5 million shares of stock. (1) It then sells those shares to the public for $30.00 per share. How much money does NetChoice, Inc. receive? What is the profit (loss) to the investment bank? (2) If the investment bank can sell the shares for $34, how much money does NetChoice, Inc. receive? What is the profit to the investment bank?   b. (12 points) Suppose, instead, that the investment bank agrees to underwrite the 5 million shares on a best-efforts basis. (1) The investment bank is able to sell 4.5 million shares for $31.00 per share, and it charges NetChoice, Inc. $0.375 per share sold. How much money does NetChoice, Inc. receive? What is the profit to the investment bank? (2) If the investment bank can sell the shares for only $29.00, how much money does Net Choice,Inc. receive? What is the profit to the investment bank? (3) If the investment bank were able to sell all 5 million shares for $35, how much money would NetChoice, Inc. receive? What is the profit to the investment banker if all 5 million shares were sold for $35 per share?   3. In a Treasury auction of $2.3 billion 91-day T-bills, the following bids were submitted   Bidder Price Bid Per $100 Quantity Bid   A $99.42 $580 million B 99.09 870 million C 99.26 600 million D 99.11 1.2 billion E 99.35 1.1 billion   a. (8 points) In a single-price auction, which bids are accepted, in what quantity, and what prices are paid by each bidder?   b. (8 points) If the Treasury also received $500 million in non-competitive bids, who will receive T-bills, in what quantity, and at what price?   4. An open-end fund holds the following stocks   Stock Shares Stock Price   A 4,000 $68 B 9,000 32 C 6,500 44 D 8,400 56 E 7,300 38 F 8,600 57 cash n.a. 20,840 Suppose there are 50,000 shares of this mutual fund.   a. (4 points) What is the current NAV of the fund?   b. (3 points) Stock C announces record earnings, and the price of stock C jumps to $50 in after-market trading. If the fund (illegally) allows investors to buy at the current NAV, how many shares will $30,000 buy?   c. (3 points) If the fund waits until the price adjusts, how many shares can be purchased? (Assuming only the price of stock C changes)   d. (5 points) What is the gain to the late trading?   You can read more about our case study assignment help services here.

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5. Consider the following balance sheet for MMC Bancorp (in millions of dollars)

Assets Liabilities and Equity

1. Cash $ 6.25 1. Equity capital (fixed) $25.00
2. Short-term consumer loans 62.50
(one-year maturity) 2. Demand deposits 50.00
3. Long-term consumer loans 31.25
(two-year maturity) 3. Passbook savings 37.50
4. Three-month T-bills 37.50 4. Three-month CDs 50.00
5. Six-month T-notes 43.75 5. Three-month banker’s
acceptances 25.00
6. Three-year T-bonds 75.00 6. Six-month commercial paper 75.00
7. 10-year, fixed-rate mortgages 25.00 7. One-year time deposits 25.00
8. 30-year, floating-rate
mortgages 50.00 8. Two-year time deposits 50.00
9. Premises 6.25

a. (8 points) Calculate the value of MMC’s one-year rate-sensitive assets, rate-sensitive
liabilities, repricing gap and gap ratio.

b. (5 points) Calculate the expected change in the net interest income for the bank (1) if
interest rates rise by 1 percent on both RSAs and RSLs, and (2) if interest rates fall by 1.2
percent on both RSAs and RSLs.

c. (5 points) Calculate the expected change in the net interest income for the bank (1) if
interest rates rise by 1.2 percent on RSAs and by 1 percent on RSLs, and (2) if interest
rates fall by 1.25 percent on RSAs and by 1.30 percent on RSLs.

6. (15 points) An insurance company collected $3.6 million in premiums and disbursed $1.96
million in losses. Expenses are $237,600 and dividends paid to policyholders totaled $43,200.
The total income generated from the company’s investments of its premiums was $170,000.
Calculate the loss ratio, expense ratio, dividend ratio, combined ratio, investment ratio,
operating ratio, and overall profitability ratio?
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