Exercises – Lecture 06
1. 商业与投资银行代写
The operations department of a major FI is planning to reorganize several of its back-office functions. Its current operating expense is $1.5 million, of which $1 million is for staff expenses. The FI uses a 12 percent cost of capital to evaluate cost-saving projects.
(a) One way of reorganizing is to outsource a portion of its data entry functions. This will require an initial investment of approximately $500,000 after taxes. The FI expects to save $150,000 in annual operating expenses after taxes for the next seven years. Should it undertake this project?
(b) Another option is to automate the entire process by installing new state-of-the-art computers and software. The FI expects to realize more than $500,000 per year in after-tax savings, but the initial investment will be approximately $3 million. In addition, the life of this project is limited to seven years, at which time new computers and software will need to be installed. Using this seven-year planning horizon, should the FI invest in this project? What level of after-tax savings would be necessary to make this plan comparable in value creation to the plan in part (a)?
2. 商业与投资银行代写
A corporation is planning to issue $1 million of 270-day commercial paper for an effective annual yield of 5 percent. The corporation expects to save 30 basis points on the interest rate by using either an SLC or a loan commitment as collateral for the issue.
(a) What are the net savings to the corporation if a bank agrees to provide a 270-day SLC for an up-front fee of 20 basis points (of the face value of the loan commitment) to back the commercial paper issue?
(b) What are the net savings to the corporation if a bank agrees to provide a 270-day loan commitment to back the issue? The bank will charge 10 basis points for an upfront fee and 10 basis points for a back-end fee for any unused portion of the loan. Assume the loan is not needed and that the fees are on the face value of the loan commitment.
3.Integrated Mini Case: Calculating Income on Off-Balance-Sheet Activities 商业与投资银行代写
Dudley National has issued the following off-balance-sheet items:
- A one-year loan commitment of $1 million with an up-front fee of 40 basis points.
The back-end fee on the unused portion of the commitment is 55 basis points. The bank’s base rate on loans is 8 percent and loans to this customer carry a risk premium of 2 percent. The bank requires a compensating balance on this loan of 10 percent to be placed in demand deposits and must maintain reserve requirements on demand deposits of 8 percent. The customer is expected to draw down 75 percent of the commitment at the beginning of the year.
- A one-year loan commitment of $500,000 with an up-front fee of 25 basis points.
The back-end fee on the unused portion of the commitment is 30 basis points. Loans to this customer carry a risk premium of 2.5 percent. The bank will not require a compensating balance on this loan. The customer is expected to draw down 90 percent of the commitment at the beginning of the year.
- A three-month commercial letter of credit on behalf of one of its AA-rated customers who is planning to import $400,000 worth of goods from the Germany. The bank charges an up-front fee of 75 basis points on commercial letters of credit to AA-rated customers.
- A standby letter of credit to one its A-rated customers who is planning to issue $5 million of 270-day commercial paper for an effective yield of 5 percent. The corporation expects to save 50 basis points on the interest rate by using the SLC. The bank charges an up-front fee of 40 basis points on SLCs to A-rated customers to back the commercial paper issue.
(a)
What up-front fees does the bank earn on each of these?
(b) What other income does the bank earn on these off-balance-sheet activities?
(c) Calculate the returns on each of the off-balance-sheet activities assuming that the takedowns on the loan commitments are at the expected percentage and the customers holding the letters of credit do not default on their obligations.
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