Protecting the Bank's Income and the Value of Equity - Essay Example

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The one with lower risk pays lower interest. As a result, the companies would consider swapping in situations where they want to borrow at more…

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Protecting the Banks Income and the Value of Equity

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Subject: Finance & Accounting
Type: Essay
Level: Ph.D.
Pages: 2 (500 words)
Downloads: 2
Author: kulasmavis

Extract of sample "Protecting the Bank's Income and the Value of Equity"

Finance and Accounting Task: Question 20million x 60 days/ 20million x 90days =2/3 Question 2 The HCR Company is termed as a higher risk borrower than LCR and therefore ends up paying higher interest rates in all markets. The one with lower risk pays lower interest. As a result, the companies would consider swapping in situations where they want to borrow at more comparative advantages (Livingstone & Grossman, 2002).The following formula would assist us to calculate the benefit of swapping.Each company will borrow in the market where it has a comparative advantage and they will service each other’s’ loans.

HCR will borrow at LIBOR + 3% and charge LCR a variable rate, LIBOR + X%, and LCR will borrow at 8% and charge HCR a fixed rate, Y%.HCR’s cost of debt = (LIBOR + 3%) – (LIBOR + X%) + Y% = nLCR’s cost of debt = 8% – Y% + (LIBOR + X%) = LIBOR + mEntering either value would give the resultant benefit that can be shared by the two companies.Question 3Weighted Average = [(m1 x M1) + (m2 x M2)] / (m1 + m2).Where M1 is market value of loans, m1 is rate for loans, m2 rate for T-Bonds and M2 is market value for T-Bonds (Livingstone & Grossman, 2002).[(675x0.10)+(0.05x175)]/(0.1+0.05)=$ 508.

33Question 5Average cost of liability= [(m1 x M1) + (m2 x M2)] / (m1 + m2). Where M1 is market value for time deposits, m1 is rate for time deposits, M2 is market value for CDs and m2 is rate for CDs (Fields, 2002).[(500x0.04) + (400x0.06)]/(0.04+0.06)= $ 440Question 6Forward contracts involve cases where terms of sale of an asset are agreed upon on the spot awaiting the decided date of delivery. Future contract is a forward contract except that it is a special case. This is because it involves standard terms.

For example, its values are set in multiples of $ 100000 and its periods in months (Livingstone & Grossman, 2002).ReferencesFields, E. (2002). The essentials of finance and accounting for nonfinancial managers. New York, N.Y: AmacomHorngren, T., Harrison, T., & Bamber, S. (2002). Accounting (5th ed.). Upper Saddle River, N.J.: Prentice Hall.Livingstone, L., & Grossman, T. (2002). The portable MBA in finance and accounting (3rd ed.). New York, N.Y: J. Wiley.

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