Finance 3505 Essay

3572 words - 15 pages

Management of Financial Institutions 3505. Sample M1 Fall 2014

Practice Questions (NOTE: The exam may be more challenging)

(Present the formulas you are using and show the details of your work. Write legibly).

1. The Mellon open-end fund, with 1,000,000 shares outstanding, has the following assets in its portfolio: 200,000 shares of P&G currently priced at $75, and 250,000 shares of Intel currently prices at $95, and 300,000 shares of Microsoft currently priced at $80. The Carnegie closed-end fund has the following stocks in its portfolio: 200,000 shares of REITs priced at $5 and $1B of real estate and 30-year mortgages. It has a total of 500,000 shares ...view middle of the document...

Mellon is an open-ended fund. It can issue new shares and the price of each share will equal NAV/share.

Carnegie is a close-ended fund. It has a fixed # shares which are traded in the market. The share price may differ from NAV/share depending on the forces of demand and supply of the shares.

Mellon is a smaller fund with a smaller share price.

• Mellon is a stock fund, Carnegie is a sector fund (real estate)

2. The ABC bank has $100M assets consisting of $45M 1-year 7% coupon bonds and $55M of 10 year, 12% loans. Its liabilities include $75M 1 year 5% IR CDs, $20M 2-year 6% IR CDs, and $5M equity (all figures are in market values).

a. What is the weighted average maturity of the assets?
b. What is the weighted average maturity of the liabilities?
c. What is the FI’s maturity gap
d. Draw a diagram showing how the equity value of ABC will react to changes in interest rate. Suppose a competitor bank BCD has a maturity gap of 15 years. Show the sensitivity of the equity value of the BCD Bank to the interest rate in the same diagram. Label the axes.
e. Will ABC benefit or suffer losses if interest rates decline unexpectedly? Explain.
f. How can ABC reduce its exposure to interest rate risk by changing the maturity of its assets? What are the drawbacks of this strategy?

2. a. MA = .45 x 1 + .55 x 10 = 5.95

b. ML = (75/95) x 1 + (20/95) x 2 = 1.21

c. MGAP = 5.95 - 1.21 = 4.74

d. See diagram. This is the case of borrowing short and lending long.

If maturity gap is 15 years (much wider than this bank), the line will be much steeper.

If IR rise, ABC will suffer because it borrows short and lends long.

ABC can reduce its exposure by narrowing its maturity gap; increase its RSA and decrease its RSL. The difficulty is to actually achieve these goals as the customers of the banks may want the opposite.

3. Use the following information about a hypothetical government securities dealer to answer the questions below:

Assets (market values) Liabilities (market values)

$150 million 30 day TB $575 million 14 day repos
$275 million 91 day TB $290 million 1 year commercial paper
$350 million 2 year Treasury notes
$90 million 180 day municipal notes


a. Calculate the dealer’s maturity gap. Assume 360 days in a year.
b. How can the dealer reduce the interest rate exposure of its portfolio? Be specific.

MA = (1/865) [150 x30 + 275 x 91 + 350 x 720 + 90 x 180]/360 = .96

• ML = (1/865) [575 x 14 + 290 x 360]/ 360 = 8050/311400 + 290/865 = .025 + .333 = .36

• Mgap = MA – ML =.96 - .36 = .60

b. increase RSA (hold shorter term and variable rate assets) and reduce RSL (hold longer term and fixed rate liabilities).

Multiple Choice: Key




Other Essays Like Finance 3505

Comparing The Moral Virtues Of Antony And Julian The Apostate

1103 words - 5 pages Roman emperor Julian the Apostate and Christian leader Antony both exhibited many qualities of character during their existence. Both of them led very distinctive lives although shared several ethical values. Book 25 of “The Later Roman Empire” and the book “Early Christian Lives” show concrete evidence of this. In the following essay, I will argue how both leaders’ lives were devoted to their religious beliefs and their mutual cardinal virtues

Living In A Cashless Society Essay

1637 words - 7 pages Money in a traditional sense no longer exists. Money is becoming much of a concept than a physical material, and most ordinary bitter have not see the reality of the switch. People today are using credit and debit cards on a regular basis and in everyday situations such as meal purchased at fast food, highway tolls, clothing, groceries, gas stations, etc. all of these means of systems could be regarded as a cashless society or world. The question

The French And Indian War: The "Real" First World War

1955 words - 8 pages The Seven Years War, or more commonly referred to as “The French and Indian War”, has been called the true First World War. In this book The French and Indian War: Deciding the Fate of North America, the author and historian Walter R. Borneman paints a detailed and elaborate picture that justifies the claim of it being the first true war of global proportions. If ever there truly was a climax to the never ending feud of the European powers

Is The Use Of Animals In Medical Research A Necessary Measure?

1513 words - 7 pages Throughout history, animals have been used in experiments to test product safety and obtain medical knowledge that benefits both humans and animals alike. Every year there are numerous medical breakthroughs, such as medications and surgical instruments, which are tested on animals to insure their safety before they are deemed acceptable for human use. Even though the results of the experiments saved millions of human lives, they are also

Education And The Evolving Job Market

2363 words - 10 pages The lives of students today are changing. They are preparing for lives and jobs that have never before existed. If teachers hope to have a significant and worthwhile impact on these quickly changing lives, they must change the way they think, prepare, and instruct our future generations. Children cannot afford to have teachers who remain stagnant in their methods and ideals. Students crave instructors that are willing to allow them to tap

Young And Relentless

1737 words - 7 pages There are numerous influences that can be responsible of teenager’s behaviors and attitude as they develop. One factor that is important to these behaviors is parental figures being over involved or uninvolved in their children’s lives. Many of these effects include illegal substance abuse, rising sexual activity, underage alcohol consumption, and tobacco use. Studies show parental participation plays a key role in the characteristics developed

The Natural Law Theory

1231 words - 5 pages Obeying by the natural law theory is the only true and moral way to live life; especially a life lived in God’s image. God’s presence is a guiding factor to obtaining a moral and virtuous life, which can only be obtained by following the natural law theory. God created a set of laws as a supreme guide for humans to live life, like any law these laws were created to ensure wellbeing for everyone. The laws he created are the civil law, the natural

Resolved: Presidential Signing Statements Threaten To Undermine The Rule Of Law And The Separation Of Powers

1811 words - 8 pages The subject of signing statements has created much debate among the houses of Congress, government officials, and the public alike. These signing statements fall under the categories of constitutional and legislative history signing statements. Constitutional signing statements are those in which the president deems certain provisions of the legislation as unconstitutional, therefore they should not be enforced (Bradley & Posner, 2006

Oppressive Systems Of Government In Egypt And Animal Farm

1529 words - 7 pages As in Egypt, Orwell demonstrates through his allegorical novel “Animal Farm” that leaders are able to establish and maintain power over a people, and in turn create an oppressive and corrupt government system. Orwell shows the significant difference in the education and levels of knowledge in the animals, and how the government takes advantage of this difference. The split between the levels of intelligence is portrayed in the first chapter when

The Pathway To Psychosis

1415 words - 6 pages “How all occasions do inform against me” is a line from act IIII, scene IIII of William Shakespeare’s Hamlet. This line, spoken by Hamlet, expresses his emotional state as he is currently overwhelmed by the death of his father, the king of Denmark, and the situation surrounding it. After Hamlet learns of his father’s death he finds out that his mother has married Claudius, Hamlet’s uncle. On top of all of that, Hamlet soon after

Rated “M” For “More Censorship Not Needed”

1241 words - 5 pages Since the moment video games became a commercial success there have been people who have pushed for unfair amounts of censorship to be placed upon the content of the games and its availability to children. These groups push for increased regulations on content but there is already an appointed group to handle this issue, the ESRB. Even though there has been an increase in mature content in the video game industry, increased censorship is not

Related Papers

Aaabbbccc1 Essay

1665 words - 7 pages :20 INSTRUCTOR Wade, S. Paisley, C. Paisley, C. Teruel, F. Burns, M. Heineke, J. Heineke, J. Kevane, M. Kevane, M. ROOM OTHER CLASS MEETING DATES Sept. Oct. Nov. Dec. MBA CONC. FA, IB, DBIC 12473 12435 12453 12436 FNCE 3452 FNCE 3452 FNCE 2453 FNCE 3453 FNCE 2455 FNCE 3455 FNCE 3459 FNCE 3464 FNCE 3696 FNCE 3696 FNCE 3718 Financial Management (4 units) Financial Management (4 units) Corporate Finance Corporate Finance

Guaranteed Income Scheme Essay

3648 words - 15 pages Income Guarantee Schemes Amir Hasanat ECON 3505 - Critique of Capitalism Abstract Canada and the United States grapple with situations that necessitate income guarantee schemes but have not implemented the schemes. Income guarantee schemes are social welfare provisions in which governments offer incomes to the citizens to enable them meet their needs as long as they meet established conditions. The origin of this scheme lies in

The Separation Of Capital Ownership And Control

1577 words - 7 pages The argument of whether the separation of capital ownership and control is an efficient form of organization has constantly been a controversial issue. The criticism whether the controllers’ act is in the best interest of the owners’ wills never end as long as hired managers operate management. As the number of public companies has been increasing over the course of this century, meanwhile the American style of contact based corporation has

The Versatility And Flexibility Of Oled's

1014 words - 5 pages In April 1, 2002, organic light emitting diodes gain rise in the scientific community with their published, more practical form at Ames Laboratory. “Scientists at the U.S. Department of Energy's Ames Laboratory, in collaboration with scientists at the University of Michigan, Ann Arbor, have developed and demonstrated a novel, fluorescence-based chemical sensor that is more compact, versatile and less expensive than existing technology of its