REVISION

Ex.1. Suppose a commercial bank has new loan requests that meet its quality standards of $150
million; it wishes to purchase $75 million in new Treasury securities being issued this week,
$25 million in corporate bonds, and expects drawings on credit lines from its best corporate
customers of $135 million. Deposits and other customer funds received today total $185
million, and those expected in the coming week will bring in another $100 million. Calculate
this bank's estimated available funds gap (AFG) for the coming week (in millions of dollars).
What should the bank do given this AFG to reduce risk and operate more efficiently?

Ex.2. Discuss types of market risk and measures of market risk. What are consequences of
improper market risk management?

Ex.3. Evergreen Financial Services has a corporate bond portfolio that generates the
following cash flows over six years:

• End of Year 1: $80 million

• End of Year 2: $90 million
• End of Year 3: $100 million
• End of Year 4: $110 million
• End of Year 5: $120 million
• End of Year 6: $130 million

The discount rate for years 1 to 3 is 8%, and for years 4 to 6, it increases to 12%, 14%, and
15% respectively. Determine the duration of this bond portfolio using the provided cash flows
and discount rates.

Ex.4. OceanView Bank is a famous regional bank. The bank is managing its financial
operations during a peak period with various financial activities. The bank has received
deposits and other customer funds today totaling $300 million. It is also anticipating an influx
of funds from maturing commercial real estate investments worth $100 million, residential real
estate investments worth $30 million, and projected new deposits over the next week
amounting to $200 million. Additionally, interest payments from other investments are
expected to generate another $30 million. On the expenditure side, the bank is considering new
loan requests worth $300 million. It forecasted drawdowns on existing credit lines with prime
corporate clients amounting to $250 million, but the actual drawdowns reduce to $180 million.
To diversify its investment portfolio, it plans to invest $120 million in corporate bonds.
Calculate the absolute value of OceanView Bank's available funds gap in this scenario.

Ex.5. Tech Innovators Inc., a rapidly growing technology firm, is exploring alternative non-
deposit funding sources to support its expansion. The company's finance team needs to
calculate the effective cost rate (marginal cost) of independent sources of funds to make an
informed decision. Given the following information:

• Market interest rate for borrowing is 3.0%

• Servicing costs, including loan servicing and administration, are 3.5% of the borrowed
balances
• Acquisition costs, such as underwriting and origination fees, are 1.2% of the borrowed
balances
• Deposit insurance costs, required to secure the borrowed funds, are 0.3% of the
borrowed balances
• Net investable balance, considering the company's requirement for maintaining
reserves and float, is 80% of the borrowed balance (15% required reserves and 5%
float)

Question: Calculate the marginal cost of borrowing for Tech Innovators Inc. using the
provided figures.

Ex.6. Given the following financial data of OrangeCounty Bank in 2024 fiscal year:

• Total assets = $6000

• Total liabilities = $4000
• Total interest income = $450
• Provision for loan losses = $30
• Total interest expenses = $150
• Income taxes = $15
• Total noninterest income = $112
• Increases in bank’s undivided profits = $50
• Total noninterest expenses = $98
• Depreciation and amortization = $12
• Number of shares outstanding = 10000 shares
• Number of employees = 200

Answer the following questions

1. Retention ratio
2. Total operating income
3. Total operating expenses
4. Net operating income
5. Net interest income
6. Net non-interest income
7. Earnings before taxes and depriciation
8. Pretax net operating income
9. Net income
10. ROA
11. ROE
12. Asset utilisation ratio
13. Net interest margin
14. Earnings per share
15. Dividend per share
16. Sales per employee
17. Given that the bank operates normally (no changes to the above data), but bad
debts increase (i.e., provision for loan losses increases). As a result, net income
reduces to 160. What is provision for loan losses in this case?
Ex.7. GreenTech Innovations, a renewable energy company, plans to borrow $100
million through a repurchase (RP) agreement collateralized by high-grade corporate
bonds for a period of seven days. The current RP rate in the market is 4.5%.

Question: Calculate GreenTech Innovations' total interest cost for this RP transaction.

Ex.8. A financial-services provider has an average asset duration of four years, an

average liability duration of two years, total assets of $500 million, and total liabilities
of $460 million at a given point in time. Suppose, too, that the firm plans to trade in
Treasury bond futures contracts. The T-bonds named in the futures contracts have a
duration of nine years, and the T-bonds' current price is $99,700 per $100,000 contract.
What is the number of futures contracts needed to cover risk exposure?,

Ex.9. Given the following financial information from 2024 financial statements of
Wells Fargo

• Miscellaneous Assets: $95 billion

• Accounts Payable: $80 billion

• Net Premises: $120 billion

• Deferred Tax Liabilities: $35 billion

• Long-term Debt: $275 billion

• Gross Loans: $1450 billion

• Investment Securities: $455 billion

• Treasury Stock: -$55 billion

• Net Loans: $1355 billion

• Accounts Receivable: $65 billion

• Prepaid Expenses: $5 billion

• Cash and Cash Equivalents: $125 billion

• Accrued Expenses: $50 billion

• Common Stock Par: $20 billion

• Inventory: $35 billion

• Deferred Tax Assets: $50 billion

• Surplus: $20 billion

 • Non-Deposit Borrowings: $155 billion

• Deposits: $1595 billion

• Premise Depreciation: $65 billion

• Gross Premises: Unknown

• Allowance for Loan Losses: Unknown

• Undivided Profits: Unknown

• Total Assets: Unknown

• Total Liabilities: Unknown

• Total Equity: Unknown

a. Classify all above items into a formal balance sheet for Wells Fargo.
b. Calculate all unknown values.
c. Calculate ROA, ROE, Equity multipliers, leverage ratio, current ratio, cash ratio,
total capital to total assets
d. Given that Well Fargo reports a net income of $10 billion and decides to keep only
20% of the earnings to reinvest into its banking and investment operations. How
much should Well Fargo’s assets grow without decreasing the current ratio of total
capital to total assets? How much should Well Fargo’s assets grow to reduce the
current ratio of total capital to total assets by half? How much should Well Fargo’s
assets grow to increase the current ratio of total capital to total assets by two times?

Ex.10. A customer is taking out a loan of $10,000 with a discount rate of 5% for one
year. Answer the following questions:

• Calculate the interest amount that the customer has to pay upfront.
• Determine the amount the customer will actually receive after the interest is
deducted.
• If the discount rate is increased to 6%, calculate the amount the customer will
receive for the same principal amount of $10,000.

Ex.11. Explain why liquidity risk management is important. Discuss types of liquidity
risk and tools to manage liquidity risk.

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