Consider an FI with the following off-balance-sheet items: A two-year loan commitment with a face value of $120 million, a standby letter of credit with a face value of $20 million and trade-related letters of credit with a face value of $70 million. All counterparties have a credit rating of BBB. Assuming a required capital ratio of 8%, what is the capital amount the FI needs to hold against these exposures? ANSWER MUST BE 7.52 million

Consider an FI with the following off-balance-sheet items: A two-year loan commitment with a face value of $120 million, a standby letter of credit with a face value of $20 million and trade-related letters of credit with a face value of $70 million. All counterparties have a credit rating of BBB. Assuming a required capital ratio of 8%, what is the capital amount the FI needs to hold against these exposures? ANSWER MUST BE 7.52 million

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter11: Determining The Cost Of Capital

Section: Chapter Questions

Problem 16P

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Consider an FI with the following off-balance-sheet items: A two-year loan commitment with a face value of $120 million, a standby letter of credit with a face value of $20 million and trade-related letters of credit with a face value of $70 million. 1). What is the total credit equivalent amount? 2). All counterparties have a credit rating of BBB. What is the capital amount of the FI needs to hold against these exposures assuming CAR of 10.5%?
Consider an FI with the following off-balance-sheet items: A two-year loan commitment with a face value of $120 million, a standby letter of credit with a face value of $20 million and trade-related letters of credit with a face value of $70 million. All counterparties have a credit rating of BBB. What is the total capital amount the FI needs to hold against these exposures? (Assume data obtained from 2020 FI records) Select one: A. $5.04 million B. $9.87 million C. $8.4 million D. $7.52 million
Company A and B have been offered the following rates per annum on a £50 million, 10 - year loan. Company A borrows at a fixed rate of 6% and floating rate of (LIBOR + 0.4)%. Company B borrows at a fixed rate of 7% and a floating rate of (LIBOR + 0.6)%. a) Company A requires a floating rate loan, whereas company B requires a fixed rate loan. In which market does company A have a comparative advantage? Design at least two different swaps that will give a bank, acting as an intermediary 0.6% p.a. and that will appear equally attractive to both companies. Explain how to achieve this, using diagrams and text. b) Design a Swap that is the most beneficial to company A. Explain using text and diagram. c) Suppose that company A has an asset worth £10 million yielding an interest of 7%. Suppose that A is a company based in Japan. Explain how it can use a currency swap to transform the asset to an asset paying Yen (currency in Japan).
a) A commercial bank is planning to give a loan of $3,000,000 to a firm. The bank expects to charge an up-front fee of 0.15% and a service fee of 0.04%. The loan has a maturity of 10 years. The cost of funds (and the RAROC benchmark) for the commercial bank is 12%. The commercial bank has estimated the risk premium on the loan to be approximately 0.20%, based on three years of historical data. The current market interest rate for loans in this sector is 12.15%. The 99th (extreme case) loss rate for borrowers of this type has historically run at 4%, and the dollar proportion of loans of this type that cannot be recaptured on default has historically been 85%. The 'bank's Return on Equity (ROE) ratio is 13%. Using the risk-adjusted return on capital (RAROC) model, should the commercial bank make the loan? Please show each step of your calculation.
A commercial bank is planning to give a loan of $3,000,000 to a firm. The bank expects to charge an up-front fee of 0.15% and a service fee of 0.04%. The loan has a maturity of 10 years. The cost of funds (and the RAROC benchmark) for the commercial bank is 12%. The commercial bank has estimated the risk premium on the loan to be approximately 0.20%, based on three years of historical data. The current market interest rate for loans in this sector is 12.15%. The 99th (extreme case) loss rate for borrowers of this type has historically run at 4%, and the dollar proportion of loans of this type that cannot be recaptured on default has historically been 85%. The 'bank's Return on Equity (ROE) ratio is 13%. Using the risk-adjusted return on capital (RAROC) model, should the commercial bank make the loan?
Suppose two firms want to borrow money from a bank for a period of 10 years. Firm A has excellent credit and can borrow at the prime rate, whereas Firm B's credit standing is prime rate plus 2 percent. The current prime rate is 5.75 percent, the 30-year Treasury bond yield is 4.35 percent, the three-month Treasury bill yield is 3.54 percent, and the 10-year Treasury note yield is 4.24 percent. What are the appropriate loan rates for both the firms? 6.45% for Firm A, 7.75% for Firm B 6.45% for Firm A, 8.45% for Firm B 5.75% for Firm A, 8.45% for Firm B None of the above
City Bank has made a 10-year, $2 million loan that pays annual interest of 10 percent per year. The principal is expected at maturity. (LG 24-2) a. What should it expect to receive from the sale of this loan if the current market rate on loans is 12 percent? b. The prices of loans of this risk are currently being quoted in the secondary market at bid-offer prices of 88-89 cents (on each dollar). Translate these quotes into actual prices for the above loan. c. Do these prices reflect a distressed or nondistressed loan? Explain.
Suppose a bank enters a repurchase agreement in which it agrees to buy Treasury securities from a correspondent bank at a price of $25,950,000, with the promise to buy them back at a price of $26,000,000. a. Calculate the yield on the repo if it has a 5-day maturity. b. Calculate the yield on the repo if it has a 15-day maturit
A bank offers a corporate client a choice between borrowing cash at 9% per annum and borrowing Bitcoin at -5% per annum. The risk-free interest rate is 3% per annum, and storage costs are 7% per annum. The interest rates on the two loans are expressed with annual compounding. The risk-free interest rate and storage costs are expressed with continuous compounding. Suppose that the price of Bitcoin is $58,000 and the corporate client wants to borrow $1,160,000. Discuss whether the rate of interest on the Bitcoin loan is too high or too low in relation to the rate of interest on the cash loan. What is the correct rate of interest for Bitcoin loan?
Suppose two firms want to borrow money from a bank for a period of 10 years. Firm A has excellent credit and can borrow at the prime rate, whereas Firm B's credit standing is prime rate plus 2%. The current prime rate is 3.75%, the 30-year Treasury bond yield is 3.54%, the three-month Treasury bill yield is 0.54%, and the 10-year Treasury note yield is 2.24%. What are the appropriate loan rates for both the firms? A. 2.24% for Firm A, 4.24% for Firm B B. 5.45% for Firm A, 7.45% for Firm B C. 3.75% for Firm A, 5.75% for Firm B D. 6.75% for Firm A, 8.75% for Firm B
A company is due to receive €2,500,000 two-months from today and wishes to save the funds for three months. Money market interest rate spreads for short-term euro transactions are presented in the table below. Money Market Euro Interest Rate Spreads (%) 1 month 2 months 3 months 4 months 5 months 6 months 0.20 - 0.25 0.28– 0.33 0.35 – 0.40 0.45 – 0.56 0.60 – 0.67 0.75 – 0.83 A bank is willing to offer the company a forward rate agreement (FRA), incorporating a forward rate fixed at the level calculated in part a). When the money is received, the €LIBOR rate is 0.35%. Calculate and explain the terms on which the FRA is settled.
A sovereign borrower is considering a $100 million loan for a 4-year maturity. It will be an amortizing loan, meaning that the interest and principal payments will total, annually, to a constant amount over the maturity of the loan. There is, however, a debate over the appropriate interest rate. The borrower believes the appropriate rate for its current credit standing in the market today is 10%, but a number of international banks with which it is negotiating are arguing that is most likely 13%, at the minimum 10% What impact do these different interest rates have on the prospective annual payments? the annual payment if the interest was 10% is _____? Please answer fast I give you upvote