1. A 20 U.S. Treasury bond with a par value of $1,000 is currently selling for $1,025 from various securities dealers. The bond carries a 6 percent coupon rate with payments made annually. If purchased today and held to maturity, what is its expected yield to maturity?
2. A municipal bond has a $1,000 face (par) value. Its yield to maturity is 5 percent, and the bond promises its holders $60 per year in interest (paid annually) for the next 10 years before it matures. What is the bond's duration?
3. Calculate the yield to maturity of a 20-year U.S. government bond that is selling for $975 in today's market and carries a 5 percent coupon rate with interest paid semi-annually.
4. A corporate bond being seriously considered for purchase by Old Dominion Financial will mature 20 years from today and promises a 7 percent interest payment once a year. Recent inflation in the economy has driven the yield to maturity on this bond to 10 percent, and it carries a face value of $1,000. Calculate this bond duration?
5. Forever Savings Bank regularly purchased municipal bonds issued by small rural school districts in its region of the state. At the moment, the bank is considering purchasing an $8 million general obligation issue from the York school district, the only bond issue that district plans this year. The bonds, which mature in 15 years, carry a nominal annual rate of return of 6.75 percent. Forever Savings, which is in the top corporate tax bracket of 35 percent, must pay an average interest rate of 4.25 percent to borrow the funds needed to purchase the municipals. Would you recommend purchasing these bonds? Calculate the net after-tax return on this bank-qualified municipal security. What is the tax advantage for being a qualified bond?
6. Forever Savings Bank also purchases municipal bonds issued by the city of Richmond. Currently the bank is considering a nonqualified general obligation municipal issue. The bonds, which mature in 15 years, provide a nominal annual rate of return of 9.75 percent. Forever Savings Bank has the same cost of funds and tax rate as stated in the previous problem.
a. Calculate the net after-tax return on this nonqualified municipal security.
b. What is the difference in the net after-tax return for this qualified security (problem 5) versus the nonqualified municipal security?
c. Discuss the pros and cons of purchasing the nonqualified rather than the bank-qualified municipal described in the previous problem.
7. Lakeway Thrift Savings and Trust is interested in doing some investment portfolio shifting. This institution has had a good year thus far, with strong loan demand; its loan revenue has increased by 16 percent over last year's level. Lakeway is subject to the 35 percent corporate income tax rate. The investment officer has several options in the form of bonds that have been held for some time in its portfolio:
a. Selling $4 million in 12- year city of Dallas bonds with a coupon rate of 7.5 percent and purchasing $4 million in bonds from Bexar County (also with 12- year maturities) with a coupon of 8 percent and issued at par. The Dallas bonds have a current market value of $3,750,000 but are listed at par on the institution's books.
b. Selling $4 million in 12-year U.S. Treasury bonds that carry a coupon rate of 12 percent and are recorded at par, which was the price when the institution purchased them. The market value of these bonds has risen to $4,330,000.
Which of these two portfolio shifts would you recommend? Is there a good reason for not selling these Treasury bonds? What other information is needed to make the best decision? Please explain.
8. Current market yields on U.S. government securities are distributed by maturity as follows:
3-month Treasury bills = 1.90 percent
6-month Treasury bills = 2.10 percent
1-year Treasury notes = 2.25 percent
2-year Treasury notes = 2.51 percent
3-year Treasury notes = 2.82 percent
5- year Treasury notes = 3.28 percent
7-year Treasury notes = 3.56 percent
10-year Treasury bonds = 3.98 percent
20-year Treasury bonds = 4.69 percent
30-year Treasury bonds = 5.25 percent
Draw a yield curve for these securities. What shape does the curve have? What significance might this yield curve have for an investing institution with 75 percent of its investment portfolio in 7-year to 30-year U.S. Treasury bonds and 25 percent in U.S. government bills and notes with maturities under one year? What would you recommend to management?
1. Ocean View State Bank estimates that over the next 24 hours the following cash inflow and outflows will occur (all figures in millions of dollars):
- Deposit withdrawals $100 Sales of bank assets $40
- Deposit inflows 95 Stockholder dividend payments $150
- Scheduled loan repayments 90 Revenues from sale of non-deposit services 95
- Acceptable loan requests 60 Repayments of bank borrowings 60
- Borrowings from the money market 80 Operating expenses 50
What is this bank's projected net liquidity position in the next 24 hours? From what sources, can the bank cover its liquidity needs?
2. Mountain Top Savings is projecting a net liquidity deficit of $10 million next week partially as a result of expected quality loan demand of $32 million, necessary repayments of previous borrowings of $15 million, planned stockholder dividend payments of $10 million, expected deposit inflows of $26 million, revenues from non-deposit service sales of $18 million, scheduled repayments of previously made customer loans of $23 million, asset sales of $10 million other operating expenses of $15 million, and money market borrowings of $15 million. How much must Mountain Top's expected deposit withdrawals be for the coming week?