Question A DI has the following assets in its portfolio: $30 million in T-bills, and $50 million in mortgage loans. If it needs to dispose of its assets at short notice, it will receive only 92 percent of the fair market value of the T-bills and 93 percent of the fair market value of its mortgage loans. If the DI waits one month to liquidate these assets, it would receive the full fair market value for each security. a) Calculate the one-month liquidity index using the previous information. b) Why would this DI be forced to sell the assets at fire sale prices? c) Explain liquidity index as a measure of liquidity risk.

Question A DI has the following assets in its portfolio: $30 million in T-bills, and $50 million in mortgage loans. If it needs to dispose of its assets at short notice, it will receive only 92 percent of the fair market value of the T-bills and 93 percent of the fair market value of its mortgage loans. If the DI waits one month to liquidate these assets, it would receive the full fair market value for each security. a) Calculate the one-month liquidity index using the previous information. b) Why would this DI be forced to sell the assets at fire sale prices? c) Explain liquidity index as a measure of liquidity risk.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 1P

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