A corporation is planning to issue $10 million worth of 180-day commercial paper. In order to reduce the interest rates by 25 basis points (per annum), it plans to back this issue with a standby letter of credit or a loan commitment. The standby letter of credit is available for 20 basis points to be paid up-front. The loan commitment for $10 million is available for an up-front fee of 15 basis points and a 5 basis points back-end fee.
1. What are the savings to the corporation if it obtains a standby letter of credit to back its $10 million issue of commercial paper?
a. $1,250; b. $2,500; c. $3,750; d. $5,000; e. $6,250.
2. What are the savings to the corporation if it obtains a loan commitment to back its $10 million issue of commercial paper?
a. $1,250; b. $2,500; c. $3,750; d. $5,000; e. $6,250
3. What is the asset adjustment to a bank's balance sheet if the bank sold a five-year, 7percent annual coupon $100,000 bond acquired at par, but now yielding 8 percent? The bond was not in the mark-to-market portfolio.
a. A $96,007 reduction in assets; b. A $96,007 increase in assets; c. A $100,000 reduction in assets; d. A $100,000 increase in assets; e. A $100,000 increase in liabilities.
4. An open-end bond mutual fund is holding a three-year, $1 million par value 5 percent annual coupon bond. What is the impact on the total asset value of the fund of a 1 percent decrease in interest rates?
a. A decrease of $10,000; b. An increase of $10,000; c. A decrease of $26,730; d. An increase of $27,751; e. The answer depends upon the number of mutual funds shares outstanding..
5. What is the impact of a 50 basis point increase in interest rates on the net asset value of an openâ€‘end bond mutual fund holding a seven year, $100 million par value 7 percent annual coupon bond? The fund has 10 million shares.
a. An increase of $0.24 per share; b. A decrease of $0.265 per share; c. An increase of $0.05 per share; d. A decrease of $0.05 per share; e. An increase of $0.265 per share.
6. A DI has two assets: 50 percent in one-month Treasury bills and 50 percent in real estate loans. If the DI must liquidate its T-bills today, it receives $98 per $100 of face value; if it can wait to liquidate them on maturity (in one month’s time), it will receive $100 per $100 of face value. If the DI has to liquidate its real estate loans today, it receives $90 per $100 of face value liquidation at the end of one month will produce $92 per $100 of face value. The one-month liquidity index value for this DI’s asset portfolio is
a. 0.973; b. 0.940; c.0.979; d. 1.06; e. 1.10.
7. Consider a mutual fund with 100 shareholders who each invested $10 for a total of $1,000. Ifthe assets of the mutual fund are worth $900, what is the net asset value for each one ofthe mutual fund shares?
a. $0.9; b. $9; c. $90; d. $10; e. $0.10.
These questions belong to Finance and it is about a company which is planning to issue $10million worth of 180 day commercial paper. To reduce interest rate by 25 basis points, it plans to back this issue with standby letter of credit. Various questions such as the savings to the corporation, asset adjustment, impact of 50 basis points, etc have been answered in the solution.
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