Solutions for End-of-Chapter Questions and Problems: Chapter Twenty by mu80rArl


									4. A financial intermediary has the following balance sheet (in millions) with all assets and
   liabilities in market values:

     Assets                                           Liabilities and Equity
     6 percent semiannual 4-year                      5 percent 2-year subordinated debt
         Treasury notes (par = $12)          $10          (par = $25)                        $20
     7 percent annual 3-year
         AA-rated bonds (par=$15)             15
     9 percent annual 5-year
         BBB rated bonds (par=$15)            15      Equity capital                          20
     Total assets                            $40      Total liabilities & equity             $40

     a. Under FASB Statement No. 115, what would be the effect on equity capital (net worth)
        if interest rates increase by 30 basis points? The T-notes are held for trading purposes;
        the rest are all classified as held to maturity. Only assets that are classified for trading
        purposes or available-for-sale are to be reported at market values. Those classified as
        held-to-maturity are reported at book values.

     b. Under FASB Statement No. 115, how are the changes in the market value of assets
        adjusted in the income statements and balance sheets of FIs?

6.   State Bank has the following year-end balance sheet (in millions):

     Assets                           Liabilities and Equity
     Cash                 $10         Deposits                     $90
     Loans                 90         Equity                        10
      Total assets       $100          Total liabilities & equity $100

     The loans primarily are fixed-rate, medium-term loans, while the deposits are either short-
     term or variable-rate deposits. Rising interest rates have caused the failure of a key
     industrial company, and as a result, 3 percent of the loans are considered uncollectable and
     thus have no economic value. One-third of these uncollectable loans will be charged off.
     Further, the increase in interest rates has caused a 5 percent decrease in the market value of
     the remaining loans.

     a. What is the impact on the balance sheet after the necessary adjustments are made
        according to book value accounting? According to market value accounting?

     b. What is the new market to book value ratio if State Bank has 1 million shares

18.   National Bank has the following balance sheet (in millions) and has no off-balance-sheet
      Assets                                Liabilities and Equity
      Cash                           $20    Deposits                             $980
      Treasury bills                  40    Subordinated debentures                 40
      Residential mortgages          600    Common stock                            40
      Business loans (BB+ rated)     430    Retained earnings                       30
          Total assets            $1,090        Total liabilities and equity   $1,090

      a. What is the leverage ratio?

      b. What is the Tier I capital ratio?

      c. What is the total risk-based capital ratio?

      d. In what capital risk category would the bank be placed?

19.   Onshore Bank has $20 million in assets, with risk-adjusted assets of $10 million. Tier I
      capital is $500,000, and Tier II capital is $400,000. How will each of the following
      transactions affect the value of the Tier I and total capital ratios? What will the new value
      of each ratio be? The current value of the Tier I ratio is 5 percent and the total ratio is 9

      a. The bank repurchases $100,000 of common stock with cash.

      b. The bank issues $2,000,000 of CDs and uses the proceeds to issue mortgage loans.

      c. The bank receives $500,000 in deposits and invests them in T-bills.

      d. The bank issues $800,000 in common stock and lends it to help finance a new shopping
         mall. The developer has an A- credit rating.

      e. The bank issues $1,000,000 in nonqualifying perpetual preferred stock and purchases
         general obligation municipal bonds.

      f. Homeowners pay back $4,000,000 of mortgages, and the bank uses the proceeds to
         build new ATMs.

24.   What is the contribution to the credit risk-adjusted asset base of the following items under
      Basel II requirements? Under the U.S. capital-assets ratio?
                                                                      Basel II       U.S.
      a. $10 million cash reserves.
      b. $50 million 91-day U.S. Treasury bills
      c. $25 million cash items in the process
         of collection.
      d. $5 million U.K. government bonds,

     AAA rated
e.   $5 million Australian short-term
     government bonds, A-rated.
f.   $1 million general obligation municipal
g.   $40 million repurchase agreements
     (against U.S. Treasuries)
h.   $500 million 1-to-4 family home mortgages
i.   $500 million commercial and industrial
     loans BBB-rated
j.   $100,000 performance-related standby
     letters of credit to a AAA rated corporation
k.   $100,000 performance-related standby
     letters of credit to a municipality issuing
     general obligation bonds


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