You Have A Portfolio Of Two Branches

You Have A Portfolio Of Two Branches Br

1. You have a portfolio of two branches, Branch A and Branch B and 75 percent of your total assets are invested in Branch A. The following information is given: Expected return, E(ð‘…ð´)ð‘Žð‘›ð‘‘ ð¸(ð‘…ðµ) Branch A B Expected return 20% 12% Covariance matrix Branch A B A B Note: ðœŽ2(ð‘…ð´)=625, 120= Cov(ð‘…ð´, ð‘…ðµ)), 𜎠2(ð‘…ðµ)=196 A. Calculate the expected return of the portfolio. B. Compute portfolio standard deviation of return.

2. Discuss the differences of balance sheets of commercial banks and nonfinancial firms.

3. What are the principal accounts that appear on a bank’s balance sheet (Report of Condition)?

4. Discuss three main characteristics of banks’ balance sheets.

5. What are core deposits and why are they so important as a funding source for commercial banks?

6. What factors influence the stock price of a financial-service corporation?

7. Suppose that a bank paying an annual dividend of $4 per share on its stock in the current period and dividends are expected to grow 5% a year every year, and the minimum required return-to-equity capital based on the bank’s perceived level of risk is 10%. Can you estimate the current value of the bank’s stock?

8. What is return on equity capital, and what aspect of performance is it supposed to measure? Can you see how this performance measure might be useful to the managers of financial firms?

9. UMB has the following balance sheet and income state information. Assets Liabilities and Equity Cash 2,600 Deposits 13,800 Securities 7,000 Fed funds purchased and repos 1,584 Fed funds sold and reverse repos 87 Other borrowed funds 5 Loans 6,400 All other liabilities 91 Fixed assets 217 Other assets 339 Retained Earnings 1,142 Total assets 16,643 Total liabilities and equity 16,643 Selected items on income state (in millions) Interest income 350 Interest expense 15 Provision for loan losses 18 Noninterest income 249 Noninterest expense 463 Taxes) Calculate return on equity (ROE). (2) Calculate return on assets (ROA). (3) Calculate return on sales.

10. Suppose a bank reports its net income for the current year is $51 million, total assets are $1,144 million, and liabilities are $926 million. What is its return on equity capital? Is the ROE you have calculated good or bad? What information do you need to answer this last question?

11. U.S. Treasury bills are available for purchase this week at the following prices (based upon $100 par value) and with the indicated maturities: a. $97.25, 182 days. b. $95.75, 270 days. Calculate the bank discount rate (DR) on each bill (a and b) if held to maturity. What is the equivalent yield to maturity (sometimes called the bond- equivalent or coupon-equivalent yield) on each of these Treasury Bills?

12. First National Bank of Bannerville has posted interest revenues of $63 million and interest costs from all of its borrowings of $42 million. If this bank possesses $700 million in total earning assets, what is First National’s net interest margin? Suppose the bank’s interest revenues and interest costs double, while its earning assets increase by 50 percent. What will happen to its net interest margin?

13. Commerce National Bank reports interest-sensitive assets of $870 million and interest-sensitive liabilities of $625 million during the coming month. Is the bank asset sensitive or liability sensitive? What is likely to happen to the bank’s net interest margin if interest rates rise? If they fall?

14. A government bond is currently selling for $1,195 and pays $75 per year in interest for 14 years when it matures. If the redemption value of this bond is $1,000, what is its yield to maturity if purchased today for $1,195?

15. Florida bank has the following balance sheet: Assets in Million $ and Liabilities and Equity in Million $ Cash $35 Demand deposits $240 Short-term securities $200 Interest-bearing transaction deposits $260 Short-term loans $225 Fed funds borrowings $25 Long-term fixed-rate loans $250 Long-term fixed-rate borrowings $119 Total $710 Equity $66 Total $

Calculate the bank’s one-year re-pricing gap. (2) Measure the impact on net income when there is a 1 percent increase in rates.

16. Discuss shortcomings of re-pricing gap.

Paper For Above instruction

The assignment encompasses a comprehensive analysis of portfolio construction, banking balance sheets, valuation methods, and risk management strategies within financial institutions. It begins with a quantitative evaluation of a two-branch portfolio, emphasizing the calculation of expected return and risk metrics. Furthermore, it explores structural distinctions between commercial banks and nonfinancial firms, highlighting core components, characteristics, and funding sources of banks. The assessment extends to stock valuation and performance measurement through return on equity and examines how macroeconomic factors affect banking operations and stock prices. Additionally, financial ratios such as return on assets, return on sales, and net interest margin are calculated based on provided data, illustrating key performance indicators. The discussion discusses the significance of core deposits for bank stability, the impact of interest rate changes on bank assets and liabilities, and the practical limitations of re-pricing gaps. Lastly, valuation techniques like yield to maturity are reviewed for government bonds. Collectively, these topics deepen understanding of financial management, risk assessment, and strategic decision-making in banking and finance.

The first part involves computing the expected return of the diversified portfolio made up of two branches, where 75% of assets are invested in Branch A. The expected return is a weighted average of individual returns, considering their respective proportions in the portfolio. Similarly, the portfolio’s standard deviation involves covariance and variance calculations, capturing the total risk considering the correlation between branches. These calculations elucidate how diversification affects risk reduction in investment portfolios.

Understanding the differences between the balance sheets of commercial banks and nonfinancial firms is vital for financial analysis. Banks primarily focus on assets like loans and securities, with liabilities mainly consisting of deposits, while nonfinancial firms emphasize tangible assets and equity financing. The principal accounts on a bank’s balance sheet include assets such as cash, securities, and loans, and liabilities like deposits and borrowed funds, which serve different strategic functions in liquidity management and funding.

In addition, examining characteristic features of banks’ balance sheets highlights their liquidity, leverage, and risk profiles. Core deposits form the backbone for bank funding because of their stability and low-cost nature, thus supporting liquidity and profitability. The influence of macroeconomic factors like interest rates, economic growth, and regulatory changes on stock prices underscores the interconnectedness between market perceptions and firm fundamentals. Valuation models like the Dividend Discount Model are used to estimate the current stock value, incorporating expected dividends and growth rates.

Return on equity (ROE) is a core profitability indicator measuring how effectively a bank utilizes shareholders’ equity to generate profits. It offers insights into managerial efficiency and is crucial for investors assessing performance. The calculation of ROE, ROA, and return on sales helps evaluate operational efficiency, asset utilization, and profitability. Additionally, key financial ratios derived from the Balance Sheet and Income Statement provide benchmarks for the bank’s financial health.

Analysis of bank balance sheets, including the computation of the one-year re-pricing gap, underscores interest rate sensitivity and potential net income impacts. A positive gap indicates asset sensitivity, implying higher net interest income when rates rise. Conversely, the shortcomings of re-pricing gaps, such as mismatch timing and interest rate assumptions, limit their predictive power.

The valuation of bonds using yield to maturity is an essential aspect of fixed-income analysis, helping investors assess prices and returns in the bond market. These valuation methods inform financial decision-making, risk assessment, and strategic planning in banking operations and investment management.

Overall, a thorough understanding of these financial concepts equips banking professionals and investors to make informed decisions, manage risks effectively, and optimize financial performance in a dynamic economic environment.

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