Financial Math Answers

Q3) A bank is planning to make a loan of $5,000,000 to a firm in the steel industry. It expects to charge a servicing fee of 50 basis points. The loan has a maturity of 8 years with a duration of 7.5 years. The cost of funds (the RAROC benchmark) for the bank is 10 percent. The bank has estimated the maximum change in the risk premium on the steel manufacturing sector to be approximately 4.2 percent, based on two years of historical data. The current market interest rate for loans in this sector is 12 percent.

Using the RAROC model, determine whether the bank should make the loan?

Q2) You can obtain a loan of $100,000 at a rate of 10 percent for two years. You have a choice of i) paying the interest (10 percent) each year and the total principal at the end of the second year or ii) amortizing the loan, that is, paying interest (10 percent) and principal in equal payments each year. The loan is priced at par.


a. What is the duration of the loan under both methods of payment?


b. Explain the difference in the two results?

Q1) Two banks are being examined by regulators to determine the interest rate sensitivity of their balance sheets. Bank A has assets composed solely of a 10-year $1 million loan with a coupon rate and yield of 12 percent. The loan is financed with a 10-year $1 million CD with a coupon rate and yield of 10 percent. Bank B has assets composed solely of a 7-year, 12 percent zero-coupon bond with a current (market) value of $894,006.20 and a maturity (principal) value of $1,976,362.88. The bond is financed with a 10-year, 8.275 percent coupon $1,000,000 face value CD with a yield to maturity of 10 percent. The loan and the CDs pay interest annually, with principal due at maturity.

If market interest rates increase 1 percent (100 basis points), how do the market values of the assets and liabilities of each bank change? That is, what will be the net affect on the market value of the equity for each bank? ( Use the duration)

Consider two Tanzanian Banks, A and B, with the following quotes which are expressed as Ksh/Tsh.

Bank A Bank B
Tsh quote Bid Ask Bid Ask
Ksh0.06 Ksh.0.07 Ksh 0.08 Ksh0.09
Required
Compute the gain from locational arbitrage to a Tanzanian investor with Kshs.30 million to invest (5 marks)
b) A 90 days treasury bill with a par value of Kshs 200 and auctioned at Kshs 194. Find the discount rate and then investment yield or rate. (2 marks
a) If the price level as measured by the CPI was 150 in 2018 and the project price level for 2019 is 120. Calculate the expected inflation rate between 2018 and 2019. (1 marks)

Consider two Tanzanian Banks, A and B, with the following quotes which are expressed as Ksh/Tsh.

Bank A Bank B
Tsh quote Bid Ask Bid Ask
Ksh0.06 Ksh.0.07 Ksh 0.08 Ksh0.09
Required
Compute the gain from locational arbitrage to a Tanzanian investor with Kshs.30 million to invest (5 marks)

Consider two Tanzanian Banks, A and B, with the following quotes which are expressed as Ksh/Tsh.

Bank A Bank B
Tsh quote Bid Ask Bid Ask
Ksh0.06 Ksh.0.07 Ksh 0.08 Ksh0.09
Required
Compute the gain from locational arbitrage to a Tanzanian investor with Kshs.30 million to invest (5 marks)

Why is looking at cash flow an important step in a good financial plan?

Rasool lent equal sums of money on simple interest for 4 years to Payal at 9% per annum and to Maihar at 8% per annum find the sum lent to each if the interest paid by Maihar is 600 rupees less than that paid by Payal

Two equal sums of money are learnt to A and B for 3 years at 4% and 6% simple interest respectively if B paid 468 rupees more than A find the sum lent each

a has given loan to b of 52000 @15% rate of interest per annum for 3 years ,find the value of interest and the total amount b has to give back to a