Determine the repricing gap for each maturity range.

  1. A company has assets worth $366.11 million. It has debt with a total face value of $205.4 million. If the risk-free interest rate is 2.25% and the standard deviation of monthly returns on the company’s stock is 0.188, what is the likelihood the company will be unable to repay the debt in three years when it is due?
  2. If the contract rate for a one period loan is 10.25%, the expected recovery in event of default is 25%, and the financial institution requires that the expected return on the loan equal the risk free rate of 3.625%, what is the probability of default on the loan?
  3. What risk premium will a financial institution require on a $25 million loan given the following information:
    the financial institution needs an expected return of 5.875% in order to generate the desired profit for its investors;
    the expected default rate on loans of this type is 3.5%;
    if the borrower defaults on the loan, the financial institution expects to recover 60% of the total return;
    the financial institution’s base rate covers its costs of funds (2.5%) and overhead (2%); and
    the lender charges an origination fee of 0.625% of the loan amount.

4.(A) Using the data below, determine the repricing gap for each maturity range.
maturity range time deposits expected MMDA runoff expected savings runoff securities loans and leases
3 months or less 3500000 450000 550000 35000 4000000
over 3 months to 1 year 2050000 2250000 3250000 210000 7500000
over 1 year to 3 years 450000 0 0 180000 2000000
over 3 years 100000 0 0 550000 3800000

(B). If interest rates are expected to increase by 85 basis points over the next year, what effect will it have on the bank in the following year?

  1. A financial institution is considering a customer’s request for a 12-year $15 million loan, with annual interest payments and the principal due at maturity. The financial institution requires a 22.5% risk adjusted return on capital for this loan. Its cost of funds is 3.875% for this loan and it will charge a 2% risk premium. Historically, the worst 1% of comparable loans experience a 125 basis point increase in the credit risk premium. The financial institution’s typical origination fee for this type of loan is 0.25% and similar loans yield 6.125%. The loan has a duration of 10.3.

a. If the financial institution charges its standard origination fee and the uses the yield on similar loans as the coupon rate, what risk adjusted return on capital will the loan generate?

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