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A bank with a 2-year horizon has issued a 1-year certificate of deposit for $50 million at an interest rate of 2%. With the proceeds, the bank has purchased a 2-year Treasury note that pays 4% interest. What risk does the bank face in entering into these transactions?
The bank faces the risk that the short-term interest rate will _______ before the seconde year, _________ the amount of interest the bank has to pay on the CD, but leaving the interest income that the bank receives from the Treasury note unchanged. With an interest rate of 2% for the CD and 4% for the Treasury note, the bank's annual interest income is $______ and the bank's annual interest espenses are $______. The bank makes a profit of $_________.
If the interest rate rises 1%, the bank's profit in the second year falls to $________.
Consider two perfectly negatively correlated risky securities, A and B. Security A has an expected rate of return of 16% and a standard deviation of return of 20%. B has an expected rate of return of 10% and a standard deviation of return of 30%. The..
Miller Mfg. is analyzing a proposed project. The company expects to sell 11,000 units, give or take 4 percent. The expected variable cost per unit is $7.00 and the expected fixed cost is $35,000. The fixed and variable cost estimates are considered a..
The WeLoveBondValuation Company needs to estimate the cost of debt in their WACC calculation. The 10-year bond issue would have $1,000 par value, 5% coupon rate, and pay interest semiannually. what is the after-tax cost of debt to be used in the WACC..
Suppose that the risk free rate is 4 percent and the market rate of return is 12 percent. For a health care firm with a market beta of 1.3, what is the expected return on its publicly traded stock?
Use the Black-Scholes formula to value the following options:
You have just purchased an investment that generates the following cash flows for the next four years. You are able to reinvest these cash flows at 8.4 percent, compounded annually.
What is the future value of $500 a year for nine years compounded annually at 11%? How much will the future value of $900 for nine years compounded annually at 11% be?
The net cash flow from the sale of an asset will exceed the asset's sale price when a firm has positive taxable income and the asset's book value exceeds its market value.
A 7.10 percent coupon bond with 26 years left to maturity can be called in nine years. The call premium is one year of coupon payments. It is offered for sale at $1,086.35. What is the yield to call of the bond? (Assume interest payments are semiannu..
With a start-up cost of $2, benefits of $5 per year for one year and an internal rate of return of 150.00%. With a capital budget of $9 and a company wide return on assets of 10%, which of these projects would you undertake? What would your answer be..
A share of stock with a beta of .80 now sells for $55. Investors expect the stock to pay a year-end dividend of $3. The T-bill rate is 3%, and the market risk premium is 6%. If the stock is perceived to be fairly priced today, what must be investors'..
Orca, Inc. announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $1.2 a share. The following dividends will be $1.26, $1.31, and $2.52 a share annually for the following three years, re..
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