1. Suppose that the First United Bank of America has two loans. Each is due to be repaid one periodhence and has independent and identically distributed cash flows. Each loan will repay $300 with aprobability of 0.8 and $150 with a probability of 0.2. However, while the bank knows this, theinvestors cannot distinguish this loan from that of the Third TransAmerica Bank, which has thesame number of loans, but will pay $300 with a probability of 0.5 and $150 with a probability of0.5. There is a prior belief of 0.5 that the First United Bank of America has the higher-valuedportfolio. Suppose that the First United wished to securitize these loans, and if it does so without acredit enhancement, the cost of communicating the true value is 7.5% of the true value. Assumethat the discount rate is zero and that everybody is risk-neutral. Consider the followingsecuritization scenario. The First United can create two classes of bondholders in a senior-subordinated structure or junior-senior structure. Class A bondholders will receive the first trancheand are entitled to $300 in aggregate. After they are paid off, class B bondholders are entitled toreceive $300 or the residual cash flow, whichever is smaller. Suppose First United can find a creditenhancer. With credit enhancement, class B bondholders can be guaranteed to receive $300. Themarket for credit enhancement is competitive. Ignoring the possibility of default by the creditenhancer, how much will the First United have to pay the credit enhancer?$122$68$60$75

A company's credit risk profile can be strenthened by credit enhancement, it is usually to get…

Bank of America has two loans. Each is due to be repaid one per hence and has independent and identically distributed cash flows. Each loan will repay $300 w probability of 0.8 and $150 with a probability of 0.2. However, while the bank knows this, the investors cannot distinguish this loan from that of the Third TransAmerica Bank, which has the same number of loans, but will pay $300 with a probability of 0.5 and $150 with a probability c 0.5. There is a prior belief of 0.5 that the First United Bank of America has the higher-valued portfolio. Suppose that the First United wished to securitize these loans, and if it does so witho credit enhancement, the cost of communicating the true value is 7.5% of the true value. Assum that the discount rate is zero and that everybody is risk-neutral. Consider the following securitization scenario. The First United can create two classes of bondholders in a senior- subordinated structure or junior-senior structure. Class A bondholders will receive the first tran and are entitled to $300 in aggregate. After they are paid off, class B bondholders are entitled receive $300 or the residual cash flow, whichever is smaller. Suppose First United can find a cre enhancer With credit onl

Bank of America has two loans. Each is due to be repaid one per hence and has independent and identically distributed cash flows. Each loan will repay $300 w probability of 0.8 and $150 with a probability of 0.2. However, while the bank knows this, the investors cannot distinguish this loan from that of the Third TransAmerica Bank, which has the same number of loans, but will pay $300 with a probability of 0.5 and $150 with a probability c 0.5. There is a prior belief of 0.5 that the First United Bank of America has the higher-valued portfolio. Suppose that the First United wished to securitize these loans, and if it does so witho credit enhancement, the cost of communicating the true value is 7.5% of the true value. Assum that the discount rate is zero and that everybody is risk-neutral. Consider the following securitization scenario. The First United can create two classes of bondholders in a senior- subordinated structure or junior-senior structure. Class A bondholders will receive the first tran and are entitled to $300 in aggregate. After they are paid off, class B bondholders are entitled receive $300 or the residual cash flow, whichever is smaller. Suppose First United can find a cre enhancer With credit onl

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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Suppose that the First United Bank of America has two loans. Each is due to be repaid one period hence and has independent and identically distributed cash flows. Each loan will repay $300 with a probability of 0.8 and $150 with a probability of 0.2. However, while the bank knows this, the investors cannot distinguish this loan from that of the Third TransAmerica Bank, which has the same number of loans, but will pay $300 with a probability of 0.5 and $150 with a probability of 0.5. There is a prior belief of 0.5 that the First United Bank of America has the higher-valued portfolio. Suppose that the First United wished to securitize these loans, and if it does so without a credit enhancement, the cost of communicating the true value is 7.5% of the true value. Assume that the discount rate is zero and that everybody is risk-neutral. Consider the following securitization scenario. The First United can create two classes of bondholders in a senior- subordinated structure or junior-senior…
3. Suppose you dopiest SR 5000 in currency into your checking account at a branch of Al-Rajhi Bank, which we will assume that the required reserve ration is %10. a. Use a T-account to show the initial effect of this transaction on Al-Rajhi's balance sheet. b. Suppose that Al-Rajhi Bank makes the maximum loan it can from the fund you deposited. Use a T-account to show the the initial effect of this transaction on Al- Rajhi's balance sheet. Also include in this T-account the transaction from part (a). c. Now suppose that whoever took out the loan in part (b) writes a check for this amount and that person receiving the check deposit in Alinma Bank. Use a T-account to show the the initial effect of this transaction on Alinma's balance sheet.
Two types of borrowers, type A and B, are requesting a loan in the amount of $44,000. Type A repays with prob. 1, while type B repays with prob. 0.76. If a bank cannot observe type, but believes that fraction 0.8 of the borrower pool is type A, then what is the competitive pooling rate the bank can offer these borrowers? 8.7% 7.7% 6.5% 5.0%
Bank A just received total deposit equal to $30,700,000.00. Required reserve ratio for the banking system is set at 2.1%, (or 0.021). a. How much of the total deposit can bank A lend out? In other words, what is bank A's excess reserve? $ b. By how much will total money supply change if bank A, and all subsequent banks, are able to lend out their entire excess reserves as the result of the initial $30,700,000.00 deposit in bank A? $
Assume that Bank M is the only commercial bank in the country with zero excess reserve and its legal cash requirement is 12%. Suppose that a customer, Mr. S, deposits RM5000 in the Bank M. a) Construct a balance sheet for Bank M b) Calculate the total deposits. c) Calculate the total reserves d) Calculate the total loans created
Consider a failing bank. If the FDIC uses the payoff method a deposit of $330,000 is worth a minimum of $enter your response here. (Round your response to the nearest whole number.)
Assume that a bank receives a deposit of $1,000 in cash, puts aside $200 as required reserves, and makes a loan of $800, these transactions imply that: the money multiplier is 10. the money multiplier is 5. the money multiplier is 4. the money multiplier is 2. the money multiplier is 2.
Assume that banks holds no excess reserves and the public holds no currency: A. If a bank receives a deposit inflow of $100,000 explain (using t-accounts) what happens to this bank and one additional round in the deposit creation process assuming the reserve requirement is 8%. B. How much do deposits and loans change for the banking system when the process is completed? Show computation and the entire banking system's final T-account. C. Suppose the Central Bank sells $5 billion to ABC Bank. Determine what happens to checkable deposits of the entire banking system after the sale and completion of the multiple deposit creation process. Determine the change in checkable deposit in the banking system and show the T-account of the banking system.
Consider two local banks. Bank A has 83 loans outstanding, each for $1.0 million, that it expects will be repaid today. Each loan has a 3% probability of default, in which case the bank is not repaid anything. The chance of default is independent across all the loans. Bank B has only one loan of $83 million outstanding, which it also expects will be repaid today. It also has a 3% probability of not being repaid. Which bank faces less risk? Why? (Select the best choice below.) O A. The expected payoff is higher for Bank A, but is riskier. I prefer Bank B. B. The expected payoffs are the same, but Bank A is less risky. I prefer Bank A. C. The expected payoffs are the same, but Bank A is riskier. I prefer Bank B. D. In both cases, the expected loan payoff is the same: $83 million x 0.97 = $80.5 million. Consequently, I don't care which bank I own.
Consider two local banks. Bank A has 87 loans outstanding, each for $1.0 million, that it expects will be repaid today. Each loan has a 3% probability of default, in which case the bank is not repaid anything. The chance of default is independent across all the loans. Bank B has only one loan of $87 million outstanding, which it also expects will be repaid today. It also has a 3% probability of not being repaid. Calculate the following: a. The expected overall payoff of each bank. b. The standard deviation of the overall payoff of each bank. a. The expected overall payoff of each bank. The expected overall payoff of Bank A is $ million. (Round to the nearest integer.)
Assume that there are 2 chartered banks and their T-accounts are below. Suppose that there are currently deposits of $850,000 in Bank A. Mohit borrows $100,000 from Bank A for a housing deposit to Cheng-Li. Cheng-Li takes that deposit and puts it into his bank, which is Bank B. The required reserve ratio is 18% for all banks. Assume that each bank will use the deposits to make loans and not save any for bank capital or bond purchases. You can use the following balance sheets, for Bank A and Bank B to help you answer the question: What are the reserves in Bank A before the money is borrowed from the bank? Bank A's Balance Sheet Reserves: Loans: Reserves: Loans: Answer: Assets Assets Liabilities Demand Deposits: Bank B's Balance Sheet Liabilities Demand Deposits:
Consider two local banks. Bank A has 81 loans outstanding, each for $1.0 million, that it expects will be repaid today. Each loan has a 3% probability of default, in which case the bank is not repaid anything. The chance of default is independent across all the loans. Bank B has only one loan of $81 million outstanding, which it also expects will be repaid today. It also has a 3% probability of not being repaid. Calculate the following: a. The expected overall payoff of each bank. b. The standard deviation of the overall payoff of each bank. a. The expected overall payoff of each bank. The expected overall payoff of Bank A is $ million. (Round to the nearest integer.) The expected overall payoff of Bank B is $ million. (Round to the nearest integer.) b. The standard deviation of the overall payoff of each bank. The standard deviation of the overall payoff of Bank A is (Round to two decimal places.) The standard deviation of the overall payoff of Bank B is (Round to two decimal places.)

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