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    CB Chapter 13 Answer

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    Sim Pei Ying
    This document contains 5 practice exercises involving calculations related to interest rates, yields, and costs for various financial instruments like CDs, repurchase agreements, and sources of funds for banks. The exercises calculate: [1] interest paid on a 60-day CD; [2] interest cost of overnight repurchase borrowing; [3] projected funds gap for a bank; [4] interest earned on a 3-month CD; and [5] effective cost rates to determine the cheapest source of funds for a bank needing to raise $775 million.

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    CB Chapter 13 Answer

    Uploaded by

    Sim Pei Ying
    473 views2 pages
    This document contains 5 practice exercises involving calculations related to interest rates, yields, and costs for various financial instruments like CDs, repurchase agreements, and sources of funds for banks. The exercises calculate: [1] interest paid on a 60-day CD; [2] interest cost of overnight repurchase borrowing; [3] projected funds gap for a bank; [4] interest earned on a 3-month CD; and [5] effective cost rates to determine the cheapest source of funds for a bank needing to raise $775 million.

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    This document contains 5 practice exercises involving calculations related to interest rates, yields, and costs for various financial instruments like CDs, repurchase agreements, and sources of funds for banks. The exercises calculate: [1] interest paid on a 60-day CD; [2] interest cost of overnight repurchase borrowing; [3] projected funds gap for a bank; [4] interest earned on a 3-month CD; and [5] effective cost rates to determine the cheapest source of funds for a bank needing to raise $775 million.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    473 views2 pages

    CB Chapter 13 Answer

    Uploaded by

    Sim Pei Ying
    This document contains 5 practice exercises involving calculations related to interest rates, yields, and costs for various financial instruments like CDs, repurchase agreements, and sources of funds for banks. The exercises calculate: [1] interest paid on a 60-day CD; [2] interest cost of overnight repurchase borrowing; [3] projected funds gap for a bank; [4] interest earned on a 3-month CD; and [5] effective cost rates to determine the cheapest source of funds for a bank needing to raise $775 million.

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    CHAPTER 13

    Week 9 Class Exercises

    1. Top Globe Corporation purchases a 60-day negotiable CD with a $5 million


    denomination from Republic Bank, bearing a 2.95 percent annual yield. How much in interest
    will the bank have to pay when this CD matures? What amount in total will the bank have to
    pay back to Top Globe at the end of 60 days?

    Interest owed to Top Globe Corporation by bank = $5,000,000 * 60/360 * 0.0295


    = $24,583.33

    Total amount = $5,000,000 + $24,583.33


    = $5,024,583.33

    2. DIMB Bank borrows $125 million overnight through a repurchase agreement (RP)
    collateralized by Treasury bills. The current RP rate is 2.50 percent. How much will the bank pay
    in interest cost due to this borrowing?

    Interest cost of RP = $125,000,000 * 0.0250 * 1/360


    = $8,680.56

    3. Sime Bank of New Warisan expects new deposit inflows next month of $265
    million and deposit withdrawals of $425 million The bank's economics department has projected
    that new loan demand will reach $400 million and customers with approved credit lines will
    need $175 million in cash. The bank will sell $450 million in securities, but plans to add $60
    million in new securities to its portfolio. What is its projected available funds gap?

    Projected funds gap = $400 + $175 + [$60 - $450] – [$265 - $425]


    = $345 million

    4. Xiamen Bank of New Sepang issues a three-month (90-day) negotiable CD in the amount
    of $20 million to ABC Insurance Company at a negotiated annual interest rate of 2.75 percent
    (360 day basis). Calculate the value of this CD account on the day it matures and the amount of
    interest income ABC will earn. What interest return will ABC Insurance earn in a 365 day year?

    CD = Principal + (Principal * Days to Maturity/360 * Annual Interest Rate)


    = $20 million + ($20 million * 90/360 * 0.0275_
    = $20,137,500

    The amount of interest income = $20 million *90/360 * 0.0275


    = $137,500

    Interest return:
    APY = [1 + 137,500/20,000,000]365/90 – 1

    13-1
    APY = 0.0282 / 2.82%

    5. Banks and other lending affiliates within the holding company of Times Square Financial
    are reporting heavy loan demand this week from companies in the southeastern United States
    that are planning a significant expansion of inventories and facilities before the beginning of the
    fall season. The holding company plans to raise $775 million in short-term funds this week, of
    which about $700 million will be used to meet these new loan requests. Fed funds are currently
    trading at 2.25 percent, negotiable CDs are trading in New York at 2.40 percent, and Eurodollar
    borrowings are available in London at all maturities under one year at 2.30 percent. One-month
    maturities of directly placed commercial paper carry market rates of 2.35 percent, while the
    primary credit discount rate of the Federal Reserve Bank of Richmond is currently set at 2.75
    percent — a source that Best-of-Times has used in each of the past two weeks. Noninterest costs
    are estimated at 0.25 percent for Fed funds, discount window borrowings, and CDs; 0.35 percent
    for Eurodollar borrowings; and 0.50 percent for commercial paper. Calculate the effective cost
    rate of each of these sources of funds for Times Square and make a management decision on
    what sources to use. Be prepared to defend your decision.

    Effective Federal Funds Cost Rate


    = [(0.0225 * $775 million) + (0.0025 * $775 million)] / $700 million
    = ($17,437,500 + $1,937,500) / $700 million
    = 0.0277 / 2.77%

    Effective CD Cost Rate


    = [(0.024 * $775 million) + (0.0025 * $775 million)] / $700 million
    = ($18,600,000 + $1,937,500) / $700 million
    = 0.0293 / 2.93%

    Effective Eurodollar Cost Rate


    = [(0.023 * $775 million) + (0.0035 * $775 million)] / $700 million
    = ($17,825,000 + $2,712,5000) / $700 million
    = 0.0293 / 2.93%

    Effective Commercial Paper Cost Rate


    = [(0.0235 * $775 million) + (0.0050 * $775 million)] / $700 million
    = ($18,212,500 + $3,875,000) / $700 million
    = 0.0316 / 3.16%

    Effective Cost of Borrowing from the Fed


    = [(0.0275 * $775 million) + (0.0025 * $775 million)] / $700 million
    = ($21,312,500+ $1,937,500) / $700 million
    = 0.0332 / 3.32%

    The management decision would be borrowing from the Fed Funds Market. This is because it is
    the cheapest source.

    13-2

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