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FIN 5540 Final Exam with all the correct answers

Final Exam Dr. Abraham FIN 5530 Answer all questions 1. The DEAR for a bank is $6,500. What is the VAR for an 8-day period? A 16-day period? Why is the VAR for a 16-day period not twice as much as that for a 8-day period? 2. Bank Y has an inventory of 14-year zero-coupon bonds with a face value of $400 million. The bonds currently are yielding 8.5 percent in the over-the-counter market. 3. X Inc., a publicly traded manufacturing firm in the United States, has provided the following financial information in its application for a loan. All numbers are in thousands of dollars. Assets Liabilities and Equity Cash $ 20 Accounts payable $ 30 Accounts receivables 87 Notes payable 90 Inventory 93 Accruals 30 Long-term debt 150 Plant and equipment 500 Equity (ret. earnings = $0) 400 Total assets $700 Total liabilities and equity $700 Also assume sales = $550,000, cost of goods sold = $360,000, taxes = $56,000, interest payments = $40,000, net income = $42,000, the dividend payout ratio is 50 percent, and the market value of equity is equal to the book value. a. What is the Altman discriminant function value for X Inc.? b. Should you approve X Inc.'s application to your bank for a $500,000 capital expansion loan? b. If sales for X were $300,000, the market value of equity was only half of book value, and the cost of goods sold, interest, and tax rate were unchanged, what would be the net income for X? Assume the tax credit can be used to offset other tax liabilities incurred by other divisions of the firm. Would your credit decision change? 4. A FI has issued a one-year loan commitment of $3 million for an up-front fee of 25 basis points. The back-end fee on the unused portion of the commitment is 10 basis points. The FI requires a compensating balance of 6 percent as demand deposits. The FI’s cost of funds is 7 percent, the interest rate on the loan is 11 percent, and reserve requirements on demand deposits are 8 percent. The customer is expected to draw down 80 percent of the commitment at the beginning of the year. a. What is the expected return on the loan without taking future values into consideration? b. What is the expected return using future values? That is, the net fee and interest income is evaluated at the end of the year when the loan is due? 5. C Bank holds a $100 million loan to Country X. The loans are being traded at bid-offer prices of 91-93 per 100 in the London secondary market. a. If C has an opportunity to sell this loan to an investment bank at a 4 percent discount, what are the savings after taxes compared with the revenue from selling the loan in the secondary market? Assume the tax rate is 40 percent. b. The investment bank in turn sells the debt at a 6 percent discount to a real estate company. What is the profit after taxes to the investment bank? 6. What are the components of the KMV Portfolio Manager Model? Overall the KMV portfolio manager model shows the correlation between systemic returns and risk components of loans in an FIs loan portfolio. The model uses default probability on each loan in a portfolio to identify the overall risk of a portfolio. It measures the following: The risk of the loan which reflects the volatility of the loans default rate around its expected value times the amount lost given default. The product of the volatility of the default rate and the amount lost given default results in the unexpected loss on the loan and measures the loans risk. The return of the loan which is measured by the annual all-in-spread which measures annual fees earned on the loan by the FI plus the annual spread between the loan rate paid by the borrower and the FIs cost of funds. Deducted from the expected default frequency times the amount lost by the FI if the borrower defaults. 7. Contrast debt repudiation with debt rescheduling. 8. Do you believe that capital adequacy requirements in the commercial banking and thrift industries have been strengthened over time? Why or why or not? 9. Contrast economies of scale with economies of scope. 10. Discuss the regulatory issues pertaining to technology and operational risks.

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