Salaries and employee benefits
1. Here below is the Bank of New Folk prepared Report of Income for the FDIC. Please fill in the missing items from its statement shown below (all figures in millions of dollars):
Report of Income
Total interest income _____(a)_______
Total interest expense 120
Net interest income 60
Provision for loan and lease losses (b)
Total noninterest income 90
Fiduciary activities 20
Service charges on deposit accounts 25
Trading account gains and fees 10
Additional noninterest income (c)
Total noninterest expense (d)
Salaries and employee benefits 90
Premises and equipment expense 10
Additional noninterest expense 20
Pretax net operating income 15
Securities gains (losses) ____(e)______
Applicable income taxes 3
Income before extraordinary items 7
Extraordinary gains—net 2
Net income (f)
2. Bank of New Folk has a net interest margin of 3% in its most recent financial report. The total interest revenue is $90 million and the total interest costs are $60 million.
(a) How much are the earning assets must the bank hold?
(b) Suppose the bank’s interest revenue increases by 5% and its interest costs and earnings assets increase by 10%. What will happen to Bank of New Folk’s net interest margin?
3. Bank of New Folk charge 6.5% rate of interest on a 9-month loan. Company Folkland recently needs to apply for a loan of amount $10.25 million. Bank of New Folk told Company Folkland that if it can obtain a credit guarantee, the loan interest will be at 6%. Bank of New Folk agrees to sell a standby letter of credit to Company Folkland at $10,000. Is Folkland likely to buy the this guarantee that Bank New Folk offered? Please explain.
4. Suppose you buy one September call option on U.S. Treasury Bonds Futures with the premium quoted on April 15 as referenced below:
April 15th
All prices are settlement prices. Volume and open interest are from the previous trading day.
US TREASURY BONDS (CBOT)
$100,000, pts & 64ths of 100 pct
Calls Puts
Strike Price May Jun Sep May Jun Sep
10900 8-28 8-30 7-62 0-01 0-04 0-49
11100 7-28 7-32 7-21 0-01 0-06 0-61
11200 6-28 6-36 - 0-01 0-10 1-12
11300 5-28 5-41 5-44 0-01 0-15 1-29
11400 4-29 4-49 5-00 0-02 0-23 1-49
11500 3-32 3-36 4-24 0-05 0-34 2-08
Volume Calls 11000 Puts 26000
Open Interest Calls 490000 Puts 480000
a. If you chose the strike price of 11100, how much did you pay for the call in dollars?
b. Using the following information for trades taking place on June 10. If you sold the call on June 10, due to a change in circumstances, would you have reaped a profit or loss? Determine the amount of the profit or loss.
US TREASURY BONDS (CBOT)
$100,000, pts & 64ths of 100 pct
Calls Puts
Strike Price Jul Sep Dec Jul Sep Dec
10900 — 5-15 — 0-06 0-58 1-61
11000 3-34 4-31 4-47 0-12 1-10 2-20
11100 2-44 3-51 — 0-22 1-30 2-46
11200 1-59 3-12 3-39 0-37 1-54 3-11
11300 1-19 2-40 — 0-61 2-18 —
11400 0-52 2-09 2-46 1-30 2-51 4-17
11500 0-31 1-47 2-22 2-09 3-25 4-57
5. On Bank of New Folk’s balance sheet, there are:
Residential real estate loans, $300 million;
Government securities, $150 million;
Cash, $200 million;
U.S. and corporate loans, $350 million.
The off-balance-sheet items are:
Standby credit letters, $50 million;
Long-term credit commitments to corporations, $150 million.
The conversion factor for converting standby credit letters into equivalent amounts of on-balance sheet assets is 0.2; The conversion factor for converting long-term commitments to corporations into equivalent amounts of on-balance sheet assets is 0.5.
i. What are Bank of New Folk’s total risk-weighted assets?
ii. If the bank reports Tier 1 capital of $24 million and Tier 2 capital of $25 million, does it have a capital deficiency problem?