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Explain why banks are inherently unstable. What is there about “making loans and taking deposits” that makes bank runs possible at almost any time without government back-up?
Suppose that a 1-year interest rate cap has a cap rate of 8% and a notional amount of $10 million. The frequency of settlement is quarterly and the reference rate is 3-month LIBOR. Assume that 3-month LIBOR for the next four quarters is as shown belo..
The price of a stock is $36 and the price of a three-month call option on the stock with a $36 strike is $3.60. Suppose a trader has $3,600 to invest and is trying to choose between buying 1,000 options (10 contracts) or 100 shares of stock. How high..
Right now, the Chicago Board Options Exchange website shows that there is a European call option on Ford Motor Company stock that matures in exactly 120 days. The option has an exercise price of $25. Using the Black-Scholes formula, calculate the pri..
Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 12 percent, and that the maximum allowable payback and discounted payba..
A private equity fund is considering investing in a company, which wants to produce a new product. The variable cost per unit is estimated at $9.51, the sales price would be set at $19.45, and fixed costs are estimated at $1202.28. The private equity..
WACC Estimation On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $15 million in new projects. Assuming there is sufficient cash flow such that Tysseland can maintain..
One of your customers is delinquent on his accounts payable balance. You’ve mutually agreed to a repayment schedule of $500 per month. You will charge 1.3 percent per month interest on the overdue balance.
At what interest rate would this be a fair deal?
Another option for financing is to call in the outstanding bonds you have issued and obtain a loan with more favorable terms than the bonds you would issue. Presently, the company has a 6% coupon bond that matures in 11 years.
The Falling Snow Company is considering production of a lighted world globe that the company would price at a markup of 0.25 above full cost. Management estimates that the variable cost of the globe will be $66 per unit and fixed costs per year will ..
A bond has 5 years to maturity and has a YTM of 8%. Its par value is $1,000. Its semi annual coupons are $50. What is the bonds current market price?
Describe how the financial intermediary is an “asset transformer.”
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