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1. A bank has a 5-year $10 million loan that pays annual payments of 7 percent and returns the principal at maturity. The bank can sell the loan with recourse at a price of $9 million and without recourse at a price of $8.9 million. If the probability of default (with no interest or principal being repaid) is 1.5 percent, should it sell the loan with or without recourse (assume risk neutrality)? Explain. [Note: the expected proceeds on the loan sale with recourse is the price times the probability that the loan will NOT default.]
2. Assume a bank originates a pool of short-term real estate loans worth $15 million with maturities of 5 years and with annual interest payments of 7 percent and return of principal at maturity. (These are called “balloon” loans.) If the loans are converted to pass-through securities and the bank charges 50 basis points servicing fee per year, what is the payment expected by the holders (purchasers) of the securities at the end of the first year if 10% of the mortgages are expected to be prepaid? Note: the servicing fee is based on the book value of the loans at the beginning of each year.
Bob needs to invest $5318 today in order for his savings to be worth $8000 in 6 years. Which term refers to $5318? You have $500 today and want to triple your money in 6 years. What interest rate must you earn if the interest is compounded annually?
Fama’s Llamas has a weighted average cost of capital of 10.6 percent. The company’s cost of equity is 14 percent, and its pretax cost of debt is 8.6 percent. The tax rate is 38 percent. What is the company’s target debt−equity ratio?
Draw the profit and payoff diagrams to this strategy as a function of the stock price in three months.
If you had just won $5,000,000 from a lottery, describe the advantages and disadvantages of receiving a lump sum today or a ten-year annuity. Discuss other factors that are relevant or needed to make this decision. No interest rate is given, however ..
Your client supplies water to a housing development. The company requires new customers to pay for the extension of the water lines to their homes. The water lines are the company's property. The client would like you to explain the tax consequences ..
uses this information to forecast the Japanese yen’s exchange rate, what will be the expected yen’s percentage change over the upcoming period?
Zero growth: A communications company pays annual dividends of $8.50 with no possibility of it changing in the next several years. If the firm's stock is currently selling at $60.71, what is the required rate of return? (Round to nearest whole number..
Jasper is bequeathed a thirty year deferred annuity that has a payment at the end of each third year. The first payment is for $15000 and is made five years after she receives inheritance. There is always an increase of $ 4000 from one payment to the..
The stock of Lead Zeppelin, a metal manufacturer, What is the value of a European put option with a strike price of $75 and 59 days to expiration?
What would be the nominal and effective cost of such a credit? what would be the effective cost of the bank loan?
What is the difference between the income statement and balance sheet in regards to timing? What is wrong with this statement: "The clinic's cash balance for 2011 was $150,000 while its net income on December 31, 2011 was $50,000."
Suppose you want to use a decision tree to model, based on economic considerations, the decision of whether to pursue an MBA degree. What would such a decision tree look like?
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