Personal Finance Chapter Revision Questions
End of chapter revision questions for the mid term exam Rose Ch5 Questions 3, 6, 7 Ch 6 Questions 4, 5, 9 Rose Ch 17 Questions 7, 8 Ch 12 Questions 3, 6
5-3. If you know the following figures:
|Total Interest Income |290 |Provision for Loan Loss |10 |
|Total Interest Expense |205 |Income Taxes |15 |
|Total Noninterest Income |27 |Dividends to Common |11 |
|Total Noninterest Expense |40 | Shareholders | |
Please Calculate these items:
|Net Interest Income |85 …show more content…
|*Total Interest Income Less Total Interest Expense |
|Net Noninterest Income |-13 |*Total Noninterest Income Less Total Noninterest Expense |
|Pretax net operating income |62 |*Net Interest Income Plus Net Noninterest Income and PLL |
|Net Income After Taxes |47 |*Pretax net operating income less PLL less Taxex |
|Total Operating Revenues |317 |*Interest Income Plus Noninterest Income |
|Total Operating Expenses |255 |*Interest Expenses Plus Noninterest Expenses Plus PLL |
|Increases in Undivided Profit |36 |Net Income After Taxes Less Dividends |
5-6. For each of the following transactions, which items on a bank’s statement of income and expenses (Report of Income) would be affected?
a. Office supplies are purchase so the bank will have enough deposit slips and other necessary forms for customer and employee use next week.
This would be part of Additional noninterest expense and part of Total Noninterest Expense.
b. The bank sets aside funds to be contributed through its monthly payroll to the employee pension plan in the name of all of its eligible employees.
This would be part of Salaries and Benefits and part of Total Noninterest Expenses.
c. The bank posts the amount of interest earned on the savings account of one of its customers.
This would be part of Total Interest Expenses.
d. Management expects that among a series of real estate loans recently granted the default rate will probably be close to 3 percent.
This would be part of PLL to go into reserves for future bad debts.
e. Nr. And Mrs. Harold Jones just purchased a safety deposit box to hold their stock certificates and wills.
This would be part of Additional Noninterest Income and part of Total Noninterest Income
f. The bank colleges $1 million in interest payments from loans it made earlier this year to Intel Composition Corp.
This would be part of Total Interest Income
g. Hal Jones’s checking account is charged $30 for two of Hal’s checks that were returned for insufficient funds.
This would be part of Service Charges on Deposit Accounts and then part of Total Noninterest Income
h. The bank earns $5 million in interest on government securities it has held since the middle of last year.
This would be part of Total Interest
Income.
i. The bank has to pay its $5000 monthly utility bill today to the local electric company.
This would be part of Premises and Equipment Expenses and part of Total Noninterest Expenses
j. A sale of government securities has just netted the bank a $290,000 capital gain (net of taxes).
This would be part of Security Gains (Losses)
5-9. See if you can determine the amount of Rosebush State Bank’s current net income after taxes from the figures below (stated in millions of dollars) and the amount of its retained earnings from current income that it will be able to reinvest in the bank. (Be sure to arrange all the figures given in correct sequence to derive the bank’s Report of Income.)
|Total Interest Income | |
| Interest and Fees on Loans |$75 |
| Int and Div on Govt. Bonds and Notes |$9 |
| Total |$84 |
| | |
|Total Interest Expense | |
| Interest Paid on Fed Funds Purchased |$9 |
| Interest Paid to Customers Time and Savings Deposits |$34 |
| Total |$43 |
| | |
|Net Interest Income |$41 |
|Provision for Loan Loss |$8 |
| | |
|Total Noninterest Income | |
| Service Charges Paid by Depositors |$5 |
| Trust Department Fees |$3 |
| Total |$8 |
| | |
|Total Noninterest Expenses | |
| Employee Wages, Salaries and Benefits |$13 |
| Overhead Expenses |$3 |
| Total |$16 |
| | |
|Net Noninterest Income |($8) |
| | |
|Pretax Income |$25 |
|Taxes Paid (30%) |$7.5 |
|Securities Gains |$3 |
| | |
|Net Income |$20.5 |
|Less Dividends |$2 |
|Reitained Earnings from Current Income |$18.5 |
6-4. The latest report of condition and income and expense statement for Galloping Merchants National Bank are as shown in the following tables:
Galloping Merchants National Bank
|Interest Fees on Loans |$65 |
|Interest Dividends on Securities |12 |
| Total Interest Income |77 |
| | |
|Interest Paid on Deposits |49 |
|Interest on Nondeposit Borrowings |6 |
| Total Interest Expense |55 |
|Net Interest Income |22 |
|Provision for Loan Losses |2 |
|Noninterest Income and Fees |7 |
|Noninterest Expenses: | |
| Salaries and Employee Benefits |12 |
| Overhead Expenses |5 |
| Other Noninterest Expenses |3 |
| Total Noninterest Expenses |20 |
|Net Noninterest Income |-13 |
| | |
|Pre Tax Operating Income |7 |
| Securities Gains (or Losses) |1 |
|Pre Tax Net Operating Income |8 |
|Taxes |1 |
|Net Operating Income |7 |
|Net Extraordinary Income |-1 |
|Net Income |$6 |
FTE 40
|Galloping Merchants National Bank | | |
|Report of Condition | | | |
| | | | |
|Cash and Due From Banks |$100 |Demand Deposits |$190 |
|Investment Securities |$150 |Savings Deposts |$180 |
|Federal Funds Sold |$10 |Time Deposits |$470 |
|Net Loans |$670 |Federal Funds Purch |$69 |
| (ALL 25) | | Total Liabilities |$900 |
| (Unearned Income 5) | |Common Stock |$20 |
|Plant and Equipment |$50 |Surplus |$25 |
| | |Retained Earnings |$35 |
|Total Assets |$980 | Total Ca |$80 |
| | | | |
|Total Earnings Assets |$830 |Interest Bearing Deposits |$650 |
Fill in the missing items on the income and expense statement. Using these statements, calculate the following performance measures:
[pic]
[pic]
[pic]
[pic]
[pic]
[pic]
[pic]
[pic]
[pic]
[pic]
[pic]
[pic]
[pic]
[pic]
6-5. The following information is for Shallow National Bank
|Interest Income |$2,100 |
|Interest Expense |$1,400 |
|Total Assets |$30,000 |
|Securities Gains (losses) |$21 |
|Earning Assets |$25,000 |
|Total Liabilities |$27,000 |
|Taxes Paid |$16 |
|Shares of Common Stock |5,000 |
|Noninterest income |$700 |
|Noninterest Expense |$900 |
|Provision for Loan Losses |$100 |
|ROE |= |$405 | |ROA |= |$405 |
| | |$30,000 - $27,000 | | | |$30,000 |
| | | | | | | |
|0.135 or 13.5 percent | |0.0135 or 1.35 percent |
|Earnings |= |$405 |= $.081 per share |
|Per Share | |5000 | |
|Net Interest |= |$2100 - $1400 |= |$700 |= 0.028 or 2.8 percent |
|Margin | |$25,000 | |$25,000 | |
|Net Noninterest |= |$700 - $900 |= |-$200 |= 0.008or .8 percent |
|Margin | |$25,000 | |$25,000 | |
|Net Operating |= |($2100 + $700) – ($1,400 + $900 + $100) |= |$400 |=0.0133 or 1.33 percent |
|Margin | |$30,000 | |$30,000 | |
Alternative Scenario 1:
Suppose interest income, interest expenses, noninterest income, and noninterest expenses each increase by 5 percent, with all other items remaining unchanged.
|Interest Income |$2,205 |
|Interest Expense |$1,470 |
|Total Assets |$30,000 |
|Securities Gains (losses) |$21 |
|Earning Assets |$25,000 |
|Total Liabilities |$27,000 |
|Taxes Paid |$16 |
|Shares of Common Stock |5,000 |
|Noninterest income |$735 |
|Noninterest Expense |$945 |
|Provision for Loan Losses |$100 |
|ROE |= |$430 | |ROA |= |$430 |
| | |$30,000 - $27,000 | | | |$30,000 |
| | | | | | | |
|0.1433 or 14.33 percent | |0.0143 or 1.43 percent |
|Earnings |= |$430 |= $.086 per share |
|Per Share | |5000 | |
|Net Interest |= |$2205 - $1470 |= |$735 |= 0.0294 or 2.94 percent |
|Margin | |$25,000 | |$25,000 | |
|Net Noninterest |= |$735 - $945 |= |-$210 |= 0.0084 or .84 percent |
|Margin | |$25,000 | |$25,000 | |
|Net Operating |= |($2205 + $735) – ($1,470 + $945 + $100) |= |$425 |=0.0142 or 1.42 percent |
|Margin | |$30,000 | |$30,000 | |
Alternative Scenario 2:
On the other hand, suppose Shallow’s interest income, interest expenses, noninterest income, and noninterest expenses decline by 5 percent, again with all other factors held equal. How would the bank’s ROE, ROA and per share earnings change?
|Interest Income |$1995 |
|Interest Expense |$1,330 |
|Total Assets |$30,000 |
|Securities Gains (losses) |$21 |
|Earning Assets |$25,000 |
|Total Liabnilities |$27,000 |
|Taxes Paid |$16 |
|Shares of Common Stock |5,000 |
|Noninterest income |$665 |
|Noninterest Expense |$855 |
|Provision for Loan Losses |$100 |
|ROE |= |$380 | |ROA |= |$380 |
| | |$30,000 - $27,000 | | | |$30,000 |
| | | | | | | |
|0.1267 or 12.67 percent | |0.0127 or 1.27 percent |
|Earnings |= |$380 |= $.076 per share |
|Per Share | |5000 | |
|Net Interest |= |$1995 - $1330 |= |$665 |= 0.0266 or 2.66 percent |
|Margin | |$25,000 | |$25,000 | |
|Net Noninterest |= |$665 - $855 |= |-$190 |= 0.0076 or .76 percent |
|Margin | |$25,000 | |$25,000 | |
|Net Operating |= |($1995 + $665) – ($1,330 + $855 + $100) |= |$375 |=0.0125 or 1.25 percent |
|Margin | |$30,000 | |$30,000 | |
6-9. Saylor County National Bank presents us with these figures for the year just concluded. Please determine the net profit margin, equity multiplier, asset utilization ratio, and ROE:
Net Income = $18 Total Operating Revenues = $125 Total Assets = $1,500 Total Equity Capital Accounts = $155
|a. | |Net Profit Margin |= |Net Income |= |$18 mill. |= 0.144 or 14.4% |
| | | | |Total Operating Revenue | |$125 mill. | |
|b. | |Asset Utilization |= |Total Operating Revenues |= |$125 mill. |= 0.083 or 8.3% |
| | | | |Total Assets | |$1500 mill. | |
|c. | |Equity Multiplier |= |Total Assets |= |$1500 mill. |= 9.68 times |
| | | | |Total Equity Capital | |$155 mill. | |
|d. | |ROE |= |Net Income |= |$18 mill. |= 0.1161 or 11.61% |
| | | | |Total Equity Capital | |$155 mill. | |
17-7. In order to help fund a loan request of $10 million for one year from one of its best customers, Lonestar Bank sold negotiable CDs to its business customers in the amount of $6 million at a promised annual yield of 5.75 percent and borrowed $4 million in the Federal funds market from other banks at today’s prevailing interest rate of 5.40 percent. Credit investigation and recordkeeping costs to process this loan application were an estimated $25,000. The Credit Analysis Division recommends a minimal 1 percent risk premium on this loan and a minimal profit margin of one fourth of a percentage point. The bank prefers using cost plus loan pricing in this cases. What loan rate would it charge?
Lonestar Bank has sold negotiable CDs in the amount of $6 million at a yield of 5.75% and purchased $4 million in federal funds at a rate of 5.40%. The weighted average cost of bank funds in this case would be:
$ 6,000,000 * .0575 = $345,000 $ 4,000,000 * .0540 = $216,000 Total Interest Cost = $561,000
On a $10 million loan this is an average annual interest cost of $561,000/$10,000,000 or 0.0561 which is 5.61 %. There was also $25,000 in noninterest costs or 0.25% of the loan total of $10 million. With a one percent risk premium and a 0.25% minimal profit margin, the loan rate on a cost-plus basis would be:
Interest Cost + Non-interest Cost + Risk Premium + Profit Margin = 5.61% + 0.25% + 1.00% + 0.25% = 7.11%.
To break even we take out the profit margin, thus the loan rate would be 7.11 -.25 = 6.86%
Interest Cost = Loan rate -Non-interest cost - risk premium
Interest cost = 7.11 – 0.25 – 1.00 = 5.86%
17-8. Many loans to corporations are quoted today at small risk premiums and profit margins over the London Interbank Offered rate (LIBOR. Englewood Bank has a $25 million loan request for working capital to fund accounts receivable and inventory from one of its largest customers, APEX Exports. The bank offers its customer a floating-rate loan for 90 days with an interest rate equal to LIBOR on 30-day Eurodeposits (currently trading at 4.0%) plus a one quarter percentage point markup over LIBOR. APEX, however, wants the loan rate set at 1.014 * LIBOR. If the bank agrees to this loan request what interest rate will attach to the loan if it is made today? How does this compare with the loan rate the bank wanted to charge? What does this customer’s request reveal about the borrowing firm’s interest rate forecast for the next 90 days?
At today’s prevailing LIBOR rate the customer's requested loan-rate formula would generate a loan interest rate of 1.014 * 4.0% = 4.056%. The bank wanted to charge a rate of 4.0% + 0.25% = 4.25%. Loan rates tend to move up and down faster with the customer's loan-rate formula than with the bank's LIBOR-plus formula. This customer appears to believe interest rates will soon decline, pulling its loan rate lower.
12-3. First Metrocentre Bank posts the following schedule of fees for its household and small business checking accounts: • For average monthly account balances over $1500 there is no monthly maintenance fee and no charge per check or other draft. • For average monthly account balances of $1000 to $1500 a $2 monthly maintenance fee is assessed and there is a $.10 charge per check or charge cleared. • For average monthly account balances of less than $1000, a $4 monthly maintenance fee is assessed and there is a $.15 per check or per charge fee.
What form of deposit pricing is this? What is First Metrocentre trying to accomplish with its pricing schedule? Can you foresee any problems with this pricing schedule?
First Metrocentre Bank has posted a schedule of deposit fees that allows the customer service-charge free checking for average monthly account balances over $1500. Lower balances are assessed an inverse monthly maintenance fee plus an increased per-check charge as the average monthly account balance falls. This is conditional deposit pricing designed to encourage more stable, larger-denomination accounts which would give the bank more money to use and, perhaps, a more stable funding base. The fees on under-$1000 accounts are stiff which may drive away many small depositors to other banks.
12-6. Bender Savings Bank finds that its basic checking account which requires a $400 minimum balance, costs the bank $2.65 per month in servicing costs (including labor and computer time) and $1.18 per month in overhead expenses. The savings bank also tries to build in a $0.50 per month profit margin on these accounts. What monthly fee should the bank charge each customer?
Following the cost-plus-profit approach, the monthly fee should be:
Monthly fee = $2.65 + $1.18 + $0.50 = $4.33 per month.
Further analysis of customer accounts reveals that for each $100 above the$400 minimum in average balance maintained in its checking accounts, Bender Savings saves about 5 percent in operating expenses with each account. For a customer who consistently maintains an average balance of $1000 per month, how much should the bank charge in order to protect its profits margin?
If the bank saves about 5 percent in operating expenses for each $100 held in balances above the $400 minimum, then a customer maintaining an average monthly balance of $1,000 should save the bank 30 percent in operating costs.
The appropriate fee for this customer would be:
[$2.65 -0.30 ($2.65)] + $1.18 + $0.50 = $1.855 + $1.18 + $0.50 = $3.535 per month.
5-3. If you know the following figures:
|Total Interest Income |290 |Provision for Loan Loss |10 |
|Total Interest Expense |205 |Income Taxes |15 |
|Total Noninterest Income |27 |Dividends to Common |11 |
|Total Noninterest Expense |40 | Shareholders | |
Please Calculate these items:
|Net Interest Income |85 …show more content…
|*Total Interest Income Less Total Interest Expense |
|Net Noninterest Income |-13 |*Total Noninterest Income Less Total Noninterest Expense |
|Pretax net operating income |62 |*Net Interest Income Plus Net Noninterest Income and PLL |
|Net Income After Taxes |47 |*Pretax net operating income less PLL less Taxex |
|Total Operating Revenues |317 |*Interest Income Plus Noninterest Income |
|Total Operating Expenses |255 |*Interest Expenses Plus Noninterest Expenses Plus PLL |
|Increases in Undivided Profit |36 |Net Income After Taxes Less Dividends |
5-6. For each of the following transactions, which items on a bank’s statement of income and expenses (Report of Income) would be affected?
a. Office supplies are purchase so the bank will have enough deposit slips and other necessary forms for customer and employee use next week.
This would be part of Additional noninterest expense and part of Total Noninterest Expense.
b. The bank sets aside funds to be contributed through its monthly payroll to the employee pension plan in the name of all of its eligible employees.
This would be part of Salaries and Benefits and part of Total Noninterest Expenses.
c. The bank posts the amount of interest earned on the savings account of one of its customers.
This would be part of Total Interest Expenses.
d. Management expects that among a series of real estate loans recently granted the default rate will probably be close to 3 percent.
This would be part of PLL to go into reserves for future bad debts.
e. Nr. And Mrs. Harold Jones just purchased a safety deposit box to hold their stock certificates and wills.
This would be part of Additional Noninterest Income and part of Total Noninterest Income
f. The bank colleges $1 million in interest payments from loans it made earlier this year to Intel Composition Corp.
This would be part of Total Interest Income
g. Hal Jones’s checking account is charged $30 for two of Hal’s checks that were returned for insufficient funds.
This would be part of Service Charges on Deposit Accounts and then part of Total Noninterest Income
h. The bank earns $5 million in interest on government securities it has held since the middle of last year.
This would be part of Total Interest
Income.
i. The bank has to pay its $5000 monthly utility bill today to the local electric company.
This would be part of Premises and Equipment Expenses and part of Total Noninterest Expenses
j. A sale of government securities has just netted the bank a $290,000 capital gain (net of taxes).
This would be part of Security Gains (Losses)
5-9. See if you can determine the amount of Rosebush State Bank’s current net income after taxes from the figures below (stated in millions of dollars) and the amount of its retained earnings from current income that it will be able to reinvest in the bank. (Be sure to arrange all the figures given in correct sequence to derive the bank’s Report of Income.)
|Total Interest Income | |
| Interest and Fees on Loans |$75 |
| Int and Div on Govt. Bonds and Notes |$9 |
| Total |$84 |
| | |
|Total Interest Expense | |
| Interest Paid on Fed Funds Purchased |$9 |
| Interest Paid to Customers Time and Savings Deposits |$34 |
| Total |$43 |
| | |
|Net Interest Income |$41 |
|Provision for Loan Loss |$8 |
| | |
|Total Noninterest Income | |
| Service Charges Paid by Depositors |$5 |
| Trust Department Fees |$3 |
| Total |$8 |
| | |
|Total Noninterest Expenses | |
| Employee Wages, Salaries and Benefits |$13 |
| Overhead Expenses |$3 |
| Total |$16 |
| | |
|Net Noninterest Income |($8) |
| | |
|Pretax Income |$25 |
|Taxes Paid (30%) |$7.5 |
|Securities Gains |$3 |
| | |
|Net Income |$20.5 |
|Less Dividends |$2 |
|Reitained Earnings from Current Income |$18.5 |
6-4. The latest report of condition and income and expense statement for Galloping Merchants National Bank are as shown in the following tables:
Galloping Merchants National Bank
|Interest Fees on Loans |$65 |
|Interest Dividends on Securities |12 |
| Total Interest Income |77 |
| | |
|Interest Paid on Deposits |49 |
|Interest on Nondeposit Borrowings |6 |
| Total Interest Expense |55 |
|Net Interest Income |22 |
|Provision for Loan Losses |2 |
|Noninterest Income and Fees |7 |
|Noninterest Expenses: | |
| Salaries and Employee Benefits |12 |
| Overhead Expenses |5 |
| Other Noninterest Expenses |3 |
| Total Noninterest Expenses |20 |
|Net Noninterest Income |-13 |
| | |
|Pre Tax Operating Income |7 |
| Securities Gains (or Losses) |1 |
|Pre Tax Net Operating Income |8 |
|Taxes |1 |
|Net Operating Income |7 |
|Net Extraordinary Income |-1 |
|Net Income |$6 |
FTE 40
|Galloping Merchants National Bank | | |
|Report of Condition | | | |
| | | | |
|Cash and Due From Banks |$100 |Demand Deposits |$190 |
|Investment Securities |$150 |Savings Deposts |$180 |
|Federal Funds Sold |$10 |Time Deposits |$470 |
|Net Loans |$670 |Federal Funds Purch |$69 |
| (ALL 25) | | Total Liabilities |$900 |
| (Unearned Income 5) | |Common Stock |$20 |
|Plant and Equipment |$50 |Surplus |$25 |
| | |Retained Earnings |$35 |
|Total Assets |$980 | Total Ca |$80 |
| | | | |
|Total Earnings Assets |$830 |Interest Bearing Deposits |$650 |
Fill in the missing items on the income and expense statement. Using these statements, calculate the following performance measures:
[pic]
[pic]
[pic]
[pic]
[pic]
[pic]
[pic]
[pic]
[pic]
[pic]
[pic]
[pic]
[pic]
[pic]
6-5. The following information is for Shallow National Bank
|Interest Income |$2,100 |
|Interest Expense |$1,400 |
|Total Assets |$30,000 |
|Securities Gains (losses) |$21 |
|Earning Assets |$25,000 |
|Total Liabilities |$27,000 |
|Taxes Paid |$16 |
|Shares of Common Stock |5,000 |
|Noninterest income |$700 |
|Noninterest Expense |$900 |
|Provision for Loan Losses |$100 |
|ROE |= |$405 | |ROA |= |$405 |
| | |$30,000 - $27,000 | | | |$30,000 |
| | | | | | | |
|0.135 or 13.5 percent | |0.0135 or 1.35 percent |
|Earnings |= |$405 |= $.081 per share |
|Per Share | |5000 | |
|Net Interest |= |$2100 - $1400 |= |$700 |= 0.028 or 2.8 percent |
|Margin | |$25,000 | |$25,000 | |
|Net Noninterest |= |$700 - $900 |= |-$200 |= 0.008or .8 percent |
|Margin | |$25,000 | |$25,000 | |
|Net Operating |= |($2100 + $700) – ($1,400 + $900 + $100) |= |$400 |=0.0133 or 1.33 percent |
|Margin | |$30,000 | |$30,000 | |
Alternative Scenario 1:
Suppose interest income, interest expenses, noninterest income, and noninterest expenses each increase by 5 percent, with all other items remaining unchanged.
|Interest Income |$2,205 |
|Interest Expense |$1,470 |
|Total Assets |$30,000 |
|Securities Gains (losses) |$21 |
|Earning Assets |$25,000 |
|Total Liabilities |$27,000 |
|Taxes Paid |$16 |
|Shares of Common Stock |5,000 |
|Noninterest income |$735 |
|Noninterest Expense |$945 |
|Provision for Loan Losses |$100 |
|ROE |= |$430 | |ROA |= |$430 |
| | |$30,000 - $27,000 | | | |$30,000 |
| | | | | | | |
|0.1433 or 14.33 percent | |0.0143 or 1.43 percent |
|Earnings |= |$430 |= $.086 per share |
|Per Share | |5000 | |
|Net Interest |= |$2205 - $1470 |= |$735 |= 0.0294 or 2.94 percent |
|Margin | |$25,000 | |$25,000 | |
|Net Noninterest |= |$735 - $945 |= |-$210 |= 0.0084 or .84 percent |
|Margin | |$25,000 | |$25,000 | |
|Net Operating |= |($2205 + $735) – ($1,470 + $945 + $100) |= |$425 |=0.0142 or 1.42 percent |
|Margin | |$30,000 | |$30,000 | |
Alternative Scenario 2:
On the other hand, suppose Shallow’s interest income, interest expenses, noninterest income, and noninterest expenses decline by 5 percent, again with all other factors held equal. How would the bank’s ROE, ROA and per share earnings change?
|Interest Income |$1995 |
|Interest Expense |$1,330 |
|Total Assets |$30,000 |
|Securities Gains (losses) |$21 |
|Earning Assets |$25,000 |
|Total Liabnilities |$27,000 |
|Taxes Paid |$16 |
|Shares of Common Stock |5,000 |
|Noninterest income |$665 |
|Noninterest Expense |$855 |
|Provision for Loan Losses |$100 |
|ROE |= |$380 | |ROA |= |$380 |
| | |$30,000 - $27,000 | | | |$30,000 |
| | | | | | | |
|0.1267 or 12.67 percent | |0.0127 or 1.27 percent |
|Earnings |= |$380 |= $.076 per share |
|Per Share | |5000 | |
|Net Interest |= |$1995 - $1330 |= |$665 |= 0.0266 or 2.66 percent |
|Margin | |$25,000 | |$25,000 | |
|Net Noninterest |= |$665 - $855 |= |-$190 |= 0.0076 or .76 percent |
|Margin | |$25,000 | |$25,000 | |
|Net Operating |= |($1995 + $665) – ($1,330 + $855 + $100) |= |$375 |=0.0125 or 1.25 percent |
|Margin | |$30,000 | |$30,000 | |
6-9. Saylor County National Bank presents us with these figures for the year just concluded. Please determine the net profit margin, equity multiplier, asset utilization ratio, and ROE:
Net Income = $18 Total Operating Revenues = $125 Total Assets = $1,500 Total Equity Capital Accounts = $155
|a. | |Net Profit Margin |= |Net Income |= |$18 mill. |= 0.144 or 14.4% |
| | | | |Total Operating Revenue | |$125 mill. | |
|b. | |Asset Utilization |= |Total Operating Revenues |= |$125 mill. |= 0.083 or 8.3% |
| | | | |Total Assets | |$1500 mill. | |
|c. | |Equity Multiplier |= |Total Assets |= |$1500 mill. |= 9.68 times |
| | | | |Total Equity Capital | |$155 mill. | |
|d. | |ROE |= |Net Income |= |$18 mill. |= 0.1161 or 11.61% |
| | | | |Total Equity Capital | |$155 mill. | |
17-7. In order to help fund a loan request of $10 million for one year from one of its best customers, Lonestar Bank sold negotiable CDs to its business customers in the amount of $6 million at a promised annual yield of 5.75 percent and borrowed $4 million in the Federal funds market from other banks at today’s prevailing interest rate of 5.40 percent. Credit investigation and recordkeeping costs to process this loan application were an estimated $25,000. The Credit Analysis Division recommends a minimal 1 percent risk premium on this loan and a minimal profit margin of one fourth of a percentage point. The bank prefers using cost plus loan pricing in this cases. What loan rate would it charge?
Lonestar Bank has sold negotiable CDs in the amount of $6 million at a yield of 5.75% and purchased $4 million in federal funds at a rate of 5.40%. The weighted average cost of bank funds in this case would be:
$ 6,000,000 * .0575 = $345,000 $ 4,000,000 * .0540 = $216,000 Total Interest Cost = $561,000
On a $10 million loan this is an average annual interest cost of $561,000/$10,000,000 or 0.0561 which is 5.61 %. There was also $25,000 in noninterest costs or 0.25% of the loan total of $10 million. With a one percent risk premium and a 0.25% minimal profit margin, the loan rate on a cost-plus basis would be:
Interest Cost + Non-interest Cost + Risk Premium + Profit Margin = 5.61% + 0.25% + 1.00% + 0.25% = 7.11%.
To break even we take out the profit margin, thus the loan rate would be 7.11 -.25 = 6.86%
Interest Cost = Loan rate -Non-interest cost - risk premium
Interest cost = 7.11 – 0.25 – 1.00 = 5.86%
17-8. Many loans to corporations are quoted today at small risk premiums and profit margins over the London Interbank Offered rate (LIBOR. Englewood Bank has a $25 million loan request for working capital to fund accounts receivable and inventory from one of its largest customers, APEX Exports. The bank offers its customer a floating-rate loan for 90 days with an interest rate equal to LIBOR on 30-day Eurodeposits (currently trading at 4.0%) plus a one quarter percentage point markup over LIBOR. APEX, however, wants the loan rate set at 1.014 * LIBOR. If the bank agrees to this loan request what interest rate will attach to the loan if it is made today? How does this compare with the loan rate the bank wanted to charge? What does this customer’s request reveal about the borrowing firm’s interest rate forecast for the next 90 days?
At today’s prevailing LIBOR rate the customer's requested loan-rate formula would generate a loan interest rate of 1.014 * 4.0% = 4.056%. The bank wanted to charge a rate of 4.0% + 0.25% = 4.25%. Loan rates tend to move up and down faster with the customer's loan-rate formula than with the bank's LIBOR-plus formula. This customer appears to believe interest rates will soon decline, pulling its loan rate lower.
12-3. First Metrocentre Bank posts the following schedule of fees for its household and small business checking accounts: • For average monthly account balances over $1500 there is no monthly maintenance fee and no charge per check or other draft. • For average monthly account balances of $1000 to $1500 a $2 monthly maintenance fee is assessed and there is a $.10 charge per check or charge cleared. • For average monthly account balances of less than $1000, a $4 monthly maintenance fee is assessed and there is a $.15 per check or per charge fee.
What form of deposit pricing is this? What is First Metrocentre trying to accomplish with its pricing schedule? Can you foresee any problems with this pricing schedule?
First Metrocentre Bank has posted a schedule of deposit fees that allows the customer service-charge free checking for average monthly account balances over $1500. Lower balances are assessed an inverse monthly maintenance fee plus an increased per-check charge as the average monthly account balance falls. This is conditional deposit pricing designed to encourage more stable, larger-denomination accounts which would give the bank more money to use and, perhaps, a more stable funding base. The fees on under-$1000 accounts are stiff which may drive away many small depositors to other banks.
12-6. Bender Savings Bank finds that its basic checking account which requires a $400 minimum balance, costs the bank $2.65 per month in servicing costs (including labor and computer time) and $1.18 per month in overhead expenses. The savings bank also tries to build in a $0.50 per month profit margin on these accounts. What monthly fee should the bank charge each customer?
Following the cost-plus-profit approach, the monthly fee should be:
Monthly fee = $2.65 + $1.18 + $0.50 = $4.33 per month.
Further analysis of customer accounts reveals that for each $100 above the$400 minimum in average balance maintained in its checking accounts, Bender Savings saves about 5 percent in operating expenses with each account. For a customer who consistently maintains an average balance of $1000 per month, how much should the bank charge in order to protect its profits margin?
If the bank saves about 5 percent in operating expenses for each $100 held in balances above the $400 minimum, then a customer maintaining an average monthly balance of $1,000 should save the bank 30 percent in operating costs.
The appropriate fee for this customer would be:
[$2.65 -0.30 ($2.65)] + $1.18 + $0.50 = $1.855 + $1.18 + $0.50 = $3.535 per month.