[Solution] FIN 564 Week 5 Homework Assignment -All Chapters

  • Chapter 22 Problem 10 – Use the following balance sheet information to answer this question……

    • What^is the average duration of all the assets?
    • What.is the average duration of all the liabilities?
    • What-is the FI’s leverage-adjusted duration gap? What is the FI’s interest rate risk exposure
    • If the entire yield curve shifted upward 0.5 percent (i.e., ΔR/(1 + R) = .0050), what is the impact on the FI’s market value of equity?

    If the entire yield curve shifted downward 0.25 percent (i.e., ΔR/(1 + R) = −.0025), what is the impact on the FI’s market value of equity?

    Chapter.23 Problem 4 – The duration of the assets is six years and the duration of the liabilities is four years. The.bank is expecting interest rates to fall from 10 percent to 9 percent over the next year.

    • What,is the duration gap for Hedge Row Bank?
    • What is the expected change in net worth for Hedge Row Bank if the forecast is accurate?
    • What-will be the effect on net worth if interest rates increase 100 basis points?
    • If the existing interest rate on the liabilities is 6 percent, what will be the effect on net worth of a 1 percent increase in interest rates?

    Chapter 23 Problem 15 – An insurance company owns $50 million of floating-rate bonds yielding LIBOR plus 1 percent. These loans are financed by $50 million of fixed-rate guaranteed investment contracts (GICs) costing 10 percent. A finance company has $50 million of auto loans with a fixed rate of 14 percent. They are financed by $50 million of debt with a variable rate of LIBOR plus 4 percent. If the finance company is going to be the swap buyer and the insurance company the swap seller, what is an example of a feasible swap?

    Chapter 24 Problem 8 – Consider a GNMA mortgage pool with principal of $20 million. The maturity is 30 years with a monthly mortgage payment of 10 percent per year. Assume no prepayments. 

    • What is the monthly mortgage payment (100 percent amortizing) on the pool of mortgages?
    • If the GNMA insurance fee is 6 basis points and the servicing fee is 44 basis points, what is the yield on the GNMA pass-through?
    • What is the monthly payment on the GNMA in part (b)?
    • Calculate the first monthly servicing fee paid to the originating Fis

    Calculate the first monthly insurance fee paid to GNMA.

SOLUTION  

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