13 May WHAT ARE THE COMPONENTS OF THE KMV PORTFOLIO MANAGER MODEL ?
The DEAR for a bank is $6,500. What is the VAR for an 8-day period? A 16-day period? Why is the VAR for a 16-day period not twice as much as that for a 8-day period?2. Bank Y has an inventory of 14-year zero-coupon bonds with a face value of $400 million. The bonds currently are yielding 8.5 percent in the over-the-counter market. What is the modified duration of these bonds? What is the price volatility if the potential adverse move in yields is 25 basis points? What is the DEAR?3.X Inc., a publicly traded manufacturing firm in the United States, has provided the following financial information in its application for a loan. All numbers are in thousands of dollars. Assets Liabilities and Equity Cash $ 20 Accounts payable $ 30 Accounts receivables 87 Notes payable 90 Inventory 93 Accruals 30 Long-term debt 150 Plant and equipment 500 Equity (ret. earnings = $0) 400 Total assets $700 Total liabilities and equity $700 Also assume sales = $550,000, cost of goods sold = $360,000, taxes = $56,000, interest payments = $40,000, net income = $42,000, the dividend payout ratio is 50 percent, and the market value of equity is equal to the book value. What is the Altman discriminant function value for X Inc.? Should you approve X Inc.’s application to your bank for a $500,000 capital expansion loan?If sales for X were $300,000, the market value of equity was only half of book value, and the cost of goods sold, interest, and tax rate were unchanged, what would be the net income for X? Assume the tax credit can be used to offset other tax liabilities incurred by other divisions of the firm. Would your credit decision change? 4. A FI has issued a one-year loan commitment of $3 million for an up-front fee of 25 basis points. The back-end fee on the unused portion of the commitment is 10 basis points. The FI requires a compensating balance of 6 percent as demand deposits. The FI’s cost of funds is 7 percent, the interest rate on the loan is 11 percent, and reserve requirements on demand deposits are 8 percent. The customer is expected to draw down 80 percent of the commitment at the beginning of the year. What is the expected return on the loan without taking future values into consideration? What is the expected return using future values? That is, the net fee and interest income are evaluated at the end of the year when the loan is due?5. C Bank holds a $100 million loan to Country X. The loans are being traded at bid-offer prices of 91-93 per 100 in the London secondary market. If C has an opportunity to sell this loan to an investment bank at a 4 percent discount, what are the savings after taxes compared with the revenue from selling the loan in the secondary market? Assume the tax rate is 40 percent. The investment bank in turn sells the debt at a 6 percent discount to a real estate company. What is the profit after taxes to the investment bank?6. What are the components of the KMV Portfolio Manager Model ?7. What is the relevance of the delta of an option ?8. Illustrate the concepts of purchasing power parity and interest rate parity with example.9. Contrast economies of scale with economies of scope.10. Discuss the regulatory issues pertaining to technology and operational risks.
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