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Chelsea Bank (CB) is interested in assessing its interest rate risk by using the duration approach. Assume that CB has the following assets: consumer loans ($500; 2.84), commercial loans ($950; 4.33), and long-term corporate bonds ($550; 7.65). CB also has the following liabilities: demand deposits ($250; 0.32), NOW accounts ($450; 0.49), CDs ($600; 0.55), and federal funds purchased ($200; 0.28). All dollar amounts in parentheses are in thousands; the second number is the average duration in years for that particular item. 1. Determine the weighted average duration of CB’s assets. Check figure: DURAS = 4.87 years. 2. Determine the weighted average duration of CB’s liabilities. 3. Estimate CB’s duration gap. Note: Use the equation on p.529. 4. Given duration gap determined above, if CB expects interest rates to increase, should it consider hedging its interest rate risk? Why or why not?
National Business Machine Co. (NBM) has $3 million of extra cash after taxes have been paid. NBM has two choices to make use of this cash. One alternative is to invest the cash in financial assets. What is the total aftertax cash flow to shareholders..
what is the required rate of return on its stock?
Chris is considering buying a property that will generate a monthly net cash flow of $550 for the next 15 years.
Suppose that you will receive annual payments of $21,400 for a period of 22 years. The first payment will be made 7 years from now. If the interest rate is 7.50%, What is the value of the annuity in year 6, What is the current value of this stream of..
What is the yield to maturity on a $1,000 face value discount bond maturing in two years that sells for $800 today? What is the annual rate of return on a bond with an annual coupon rate of 10 percent, a face value of $100,000, and its price rises fr..
The president of Real Time Ltd has asked you to evaluate the proposed acquisition of a new computer system. The system's price is $39,000, and will be depreciated straight-line over a three year life. Purchase of the system would require an increase ..
what is this project’s equivalent annual cost, or EAC?
Security X has expected return of 12% and standard deviation of 20%. Security Y has expected return of 15% and standard deviation of 27%. If the two securities have a correlation coefficient of 0.7, what is their covariance?
You have 40 years left until retirement and want to retire with $5 million. Your salary is paid annually, and you will receive $50,000 at the end of the current year. Your salary will increase at 3 percent per year, and you can earn an annual return ..
x-1 corp's total assets at the end of last year were $405,000 and its ebit was 52,500. what was its basic earning power (bep) ratio?
Crosby Industries has a debt-equity ratio of 1.2. Its WACC is 13 percent, and its cost of debt is 4 percent. There is no corporate tax. What is Crosby’s cost of equity capital? What would the cost of equity be if the debt-equity ratio were 2? What wo..
Present Value for Various Compounding Periods. Find the present value of $775 due in the future under each of the following conditions. Round your answers to the nearest cent.
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