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- Due date: Friday November 20, 2015Too Big to FailAmerican International Group, INC (AIG) caseIntroductionAIG is the story of a company, and its network of financial partners, who tookunprecedented risk and fell because of it. To prevent global economic disaster, the U.S.government came to its rescue. This has resulted in the biggest taxpayer bailout of a privatecompany in American history.BackgroundAmerican International Group, Inc. – also known as AIG – is an Americanmultinational insurance corporation with more than 88 million customers in 130 countries. AIGcompanies employ over 64,000 people in 90 countries. The company operates through three corebusinesses: AIG Property Casualty, AIG Life and Retirement and United Guaranty Corporation(UGC). AIG Property Casualty provides insurance products for commercial, institutional andindividual customers. AIG Life and Retirement provides life insurance and retirement services inthe United States. And UGC focus…QUESTION ONE (1) Assume that an officer of ZED Bank wants to execute a transaction with the following characteristics using the risk-adjusted return on capital (RAROC) model: ▪ Probability of default (PD) = 45 basis points ▪ Loss given default (LGD) = 50% ▪ Exposure at default (EAD) = US$ 2.0 million ▪ The risk-free rate of return is 6% This is a loan to an agricultural company and the bank’s economic capital (EC) model delivers the following charge for the firm:EC of exposure = 5% of EAD, which is US$ 100,000. Assume that the bank has set a RAROC hurdle rate of 15% and this transaction has a net profit of US$ 12,000 before other adjustments. Required: Compute the bank’s risk-adjusted rate of return on the loan to an agricultural company? Now assume that the bank could also have made a loan for the same amount and net profit of US$ 12,000 before other adjustments to a chemical manufacturing firm, and that the EC = 2.5% in this case. Which loan between the two should the bank…4-4The federal government (1) encouraged the development of the savings and loanindustry, (2) virtually forced the S&L industry to make long-term, fixed-interest-rate mortgages, and (3) forced S&Ls to obtain most of their capital asdeposits that are withdrawable on demand. a.Would the S&Ls be better off if rates are expected to increase or to decreasein the future? b.Would the S&L industry be better off if the individual institutions sold theirmortgages to federal agencies and then collected servicing fees or if theinstitutions held the mortgages that they originated?
- In financial economics, __________ is a concept that refers to the reduction in investment risk that can be achieved by combining various financial assets in a portfolio. It is a fundamental element of modern portfolio theory. A) DiversificationB) ArbitrageC) LeverageD) SpeculationAssume that Annovo Financial and Bennovo Financial were banks with the same financial condition, except that Annovo Financial had bought fewer CDSs that provided insurance against defaults on mortgages. (Note: Assuming that the companies are almost identical isolates the impact of the one difference.) If many homeowners began to default on their mortgages, Annovo Financial's financial condition would become better/worse than Bennovo Financial's condition. If most financial institutions were like Annovo Financial, financial institutions could be less/more confident in lending to each other, and a tight credit market would be less/more likely.P b. Show (by changing demand curves accordingly) in the following graphs what happens in the financial markets when the default risk is high. D1 S1 Treasury bond P D1 S1 Corporate bond
- Question 2: Assume that the risk-free rate, RF, is currently 8%, the market return, RM, is 12%, and asset A has a beta, of 1.10. (could be done on word document or excel). Draw the security market line (SML) Use the CAPM to calculate the required return, on asset A. Assume that as a result of recent economic events, inflationary expectations have declined by 3%, lowering RF and RM to 5% and 9%, respectively. Draw the new SML on the axes in part a, and calculate and show the new required return for asset A. Assume that as a result of recent events, investors have become more risk averse, causing the market return to rise by 2%, to be14%. Ignoring the shift in part c, draw the new SML on the same set of axes that you used before, and calculate and show the new required return for asset A. From the previous changes, what conclusions can be drawn about the impact of (1) decreased inflationary expectations and (2) increased risk aversion on the required returns of risky assets?Explore the assertion regarding the state ofFinancial Markets, both globally and within the Caribbean region, evaluating whether they arecharacterized by market perfection or imperfection. Argue in favorthat markets are perfect , allowing for a comprehensive examination ofthe topic. To enhance the analysis of key points in the subject argument, it is imperative to employrelevant finance theories or concepts which either validate or refute the EMH. These concepts serveas a robust framework for understanding financial phenomena. By leveraging established concepts,one can systematically evaluate the evidence presented, thereby bolstering the argument'scredibility and depth.Which one of the following is not an effect of an increase in leverage A. Managers have fewer free cash flows at their disposal because of increased interest payments B. Expected bankruptcy costs increase C. The firm's cost of equity increases D. The firm's tax bill increases
- E3 The demand curve and supply curve for one-year discount bonds were estimated using the following equations: Bd Price=-2/5Quantity+990 Bs Price=Quantity+500 As the stock market continued to rise, the Federal Reserve felt the need to increase the interest rates. As a result, the new market interest rate increased to 19.65%, but the equilibrium quantity remained unchanged. What are the new demand and supply equations? Assume parallel shifts in the equationsPlease answer the both questions I will give you Upvote 1) Why is a financial crisis likely to lead to a contraction in economic activity? a. None of the above are correct. b. Those that borrow funds to finance productive investment opportunities will have a greater opportunity to obtain financing. c. A disruption in the financial system diminishes the flow of funds from savers to borrowers. d. Disruptions in the financial system decreases asymmetric information, thereby decreasing the associated problems of adverse selection and moral hazard. 2) Suppose the Federal Reserve is selling $10 million of bonds to First National Bank. What is the impact on reserves and the monetary base? a. Reserves fall by $4 million and the Monetary Base falls by $4 million. b. Reserves rise by $2 million and the Monetary Base rises by $2 million. c. Reserves fall by $2 million and the Monetary Base rises by $2 million. d. Reserves fall by $2 million and the Monetary Base falls by $2 million.Although its application continues to spark vigorous debate, modern financial theory is now applied as a matter of course to investment management. CAPM, the capital asset pricing model, is a theoretical representation of the behavior of financial markets and can be employed in estimating a company’s cost of equity capital. Despite limitations, the model can be a useful addition to the financial manager’s analytical tool kit. The expanding work on the theory and application of CAPM has produced many sophisticated, often highly complex extensions of the simple model. Discuss the assumptions that the modern financial theory and CAPM rest on. Discuss whether assumptions that they depend on are realistic or unrealistic. Discuss how the concept of risk is defined or calculated in financial theory and CAPM.
