East Bank securitises a $50 million pool of itsbusiness loans. The asset backed securities(ABS) issued, as a result, come in 3 tranches ofbonds: one $10 million tranche with an AAArating bought by an insurance company fund,a $25 million tranche with a BB rating boughtby a superannuation fund and one tranche$15 million with a CCC rating sold to amanaged fund.b) Conclude whether East Bank has less creditrisk and more funds, as a result ofsecuritization. Explain your answers in details.

Securitization is the financial practice in structured finance which involves pooling various types…

Answered: East Bank securitises a $50 million…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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The mutual funds Division has allocated $5.0M and is currently looking for investment opportunities to invest these funds, The financial analyst suggested that all new investments be made in the oil industry, steel industry or in government bonds. The analyst identified five investment opportunities:two from the oil industry, two from the steel and government bonds. Types of opportunities Returns ABC oil 0.095 XYZ oil 0.085 Mona Steel 0.04 TNT steel 0.05 Government Bonds 0.015 For the mutual Funds Division :a) Generate the objective function b) Generate the budget constraint c) The amount invested in oil should be at least three times the amount invested in the steel industry d) The investment in ABC oil cannot be more than 50 % of total oil industry e) The investment in TNT steel should be at most 40 % of the total investment in Government Bond f) The investment in XYZ oil should be at least 20 % of the total funds available but no more than 40%of total…
The Bank of Willaine, Inc. issued an obligation to depositors who agree to pay ten (10) percent failsafe for one year. With the funds it acquires, The Bank of Willaine, Inc. can invest in different financial assets like in the stock market. What is the risk if the bank uses the funds it acquired from the depositors to invest in common stock? What liability type does the bank has by issuing that obligation?
On January 1, 2020, Clarettes Inc. established a sinking fund of P2,000,000 under a trustee BDO Bank for payment of Bonds Payable which will mature on January 1, 2022. On December 31, 2020, the periodic trustee report shows that P1,000,000 was invested in securities and P500,000 in money market placement. On December 31, 2021, the periodic report from the trustee shows that the securities were sold for P1,300,000 and interest received on money market placement was P50,000. The trustee’s fees and administrative expenses during the year are P50,000 and P20,000 respectively. On January 1, 2022, Clarettes received a periodic report from the trustee that bonds payable of P2,000,000 and interest of P200,000 were paid. Required: 1. Prepare the entry for the preceding transaction 2. Based on the result of your audit, determine the following: A. Book value of bond sinking fund on December 31, 2020 B. Book value of bond sinking fund on December 31, 2021 C. Cash remitted to Clarettes from…
The Pretty Lake Bank Corp. has placed $100 million of GNMA-guaranteed securities in a trust account off the balance sheet. A CMO with four tranches has just been issued by Pretty Lake using the GNMAs as collateral. Each tranche has a face value of $25 million and makes monthly payments. The annual coupon rates are 4.5 percent for Tranche A, 5 percent for Tranche B, 5.5 percent for Tranche C, and 6.5 percent for Tranche D. Which tranche has the shortest maturity, and which tranche has the most prepayment protection?
The following information is also available: 1. Current assets include cash P3,800, accounts receivables P18,500, note receivables (maturity date is on July 1,2023) P10,000 and land P12,000. 2. Long term investments include a P4,600 investment in fair value though other comprehensive income securitiesthat is expected to be sold in 2022 and a P9,000 investment in AllDay company bonds that are expected to be helduntil their December 31, 2029 maturity date. 3. Property and equipment include buildings costing P63,400, inventories costing P30,500 and equipment costingP29,600. 4. Intangible assets include patents that cost P8,200 and on which P2,300 amortization have accumulated, andtreasury shares that costs P1,800. 5. Other assets include prepaid insurance (which expires on November 30, 2022) P2,900, sinking fund for bondretirement P7,000 and trademarks that cost P5,200 and on which P1,500 amortization has accumulated. 6. Current liabilities include accounts payable P19,400, bonds payable…
The following information is also available: 1. Current assets include cash P3,800, accounts receivables P18,500, note receivables (maturity date is on July 1,2023) P10,000 and land P12,000. 2. Long term investments include a P4,600 investment in fair value though other comprehensive income securitiesthat is expected to be sold in 2022 and a P9,000 investment in AllDay company bonds that are expected to be helduntil their December 31, 2029 maturity date. 3. Property and equipment include buildings costing P63,400, inventories costing P30,500 and equipment costingP29,600. 4. Intangible assets include patents that cost P8,200 and on which P2,300 amortization have accumulated, andtreasury shares that costs P1,800. 5. Other assets include prepaid insurance (which expires on November 30, 2022) P2,900, sinking fund for bondretirement P7,000 and trademarks that cost P5,200 and on which P1,500 amortization has accumulated. 6. Current liabilities include accounts payable P19,400, bonds payable…
Njenge Bank has the following balance sheet (in millions) with the risk weights in parentheses.                  Assets                                                                Liabilities and Equity          Cash                                      (0%) K20            Deposits                                   K175          OECD Interbank deposits (20%) K25            Subordinated debt (2.5 years)     K3          Mortgage loans                  (50%) K70            Cumulative preferred stock        K5          Consumer loans                (100%) K70            Equity                                          K2             Total Assets                               K185                  Total Liabilities & Equity    K185          In addition, the bank has K30 million in performance-related standby letters of credit (SLCs), and K300 million in six-year interest rate swaps. Credit conversion factors follow:          Performance-related standby LCs             50%…
Njenge Bank has the following balance sheet (in millions) with the risk weights in parentheses: Assets Liabilities and Equity          Cash                                      (0%) K20 Deposits                                     K175          OECD Interbank deposits (20%) K25 Subordinated debt (2.5 years) K3          Mortgage loans (50%) K70 Cumulative preferred stock K5          Consumer loans (100%) K70 Equity K2 Total Assets                               K185 Total Liabilities & Equity K185 In addition, the bank has K30 million in performance-related standby letters of credit (SLCs), and K300 million in six-year interest rate swaps.…
Njenge Bank has the following balance sheet (in millions) with the risk weights in parentheses.                  Assets                                                                Liabilities and Equity          Cash                                      (0%) K20            Deposits                                   K175          OECD Interbank deposits (20%) K25            Subordinated debt (2.5 years)     K3          Mortgage loans                  (50%) K70            Cumulative preferred stock        K5          Consumer loans                (100%) K70            Equity                                          K2             Total Assets                               K185                  Total Liabilities & Equity    K185          In addition, the bank has K30 million in performance-related standby letters of credit (SLCs), and K300 million in six-year interest rate swaps. Credit conversion factors follow:          Performance-related standby LCs             50%…
ABC and DEF are subsidiaries to a holding corporation and both need to borrow P10,000,000 for one year. ABC Corporation has the option to borrow at a fixed rate of 13% or at a variable rate of treasury bond rate plus 4%. On the other hand, DEF Corporation has the option to borrow at a fixed rate of 12% or at a variable rate of treasury bonds rate plus 6%. ABC prefers fixed-rate borrowing while DEF prefers a variable-rate one. As the financial adviser, you would recommend an interest rate swap. 1. How much would the effective cost of the borrowing to ABC after the swap?2. Assuming that the treasury bond rate is 6%, how much is the annual interest expense of DEF?3. How much is the total cost savings to the holding corporation because of the interest rate swap?
Calculate the amount of liquidity a bank can generate from selling its AFS portfolio using the following information:USTs held in AFS = $92,053,000Securities held in HTM = $13,500,000Loans = $69,680,000Settlement occurs on T+2Maturing on T+1 = $16,000,000Haircut = 5%USTs in AFS used as collateral for RP liabilities (i.e./ "encumbered") = $19,740,000 $56,313,000 $53,497,350 $52,697,350 $51,710,350
City Slicker Corporation pays $55,000 into a bond sinking fund each year for the future redemption of bonds. During the first year, the fund earns $1,475. When the bonds mature, there is a sinking fund balance of $612,000, and $600,000 is needed to redeem the bonds. Required:Prepare the following general journal entries. a. The initial sinking fund deposit. b. The first year's earnings. c. The redemption of the bonds. d. The return of excess cash to the corporation.

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