Guidelines

Some elements of each task focus on calculations and do not specify a word count. However, you should explain the process by which you solve the problem and summarise your results. You should read widely on the topics included in your task and not assume that the lecture and seminar materials are wholly sufficient. The discussion elements should show evidence of wider reading by use of references.

The written work should be submitted as a group document including all five tasks. However, the individual within each group responsible for each task must be clearly indicated in the work. The mark awarded to each individual is based on the quality of their own work, not the overall quality of the group submission. The written submission should include an introduction detailing who carried out which task.

Students across the different groups undertaking the same task should not collaborate. Discussion of the tasks should be group-based. Evidence of students submitting the same written work will be deemed as being in breach of academic rules regarding plagiarism.

Tasks

Task 1

a) Discuss the reasons why the Cruickshank Report was ordered and the main findings of the report. The word count for this element should be 500-600 words.

b) Slides 13 to 16 of the lecture notes in week 16 present some statistics for banks in the US and Europe for the period of up to 2003/2004. Discuss what you think happened to these same indicators in the subsequent years up to the present. The word count for this element should be 300-400 words.

c) Discuss the main challenges facing the investment banking sector. The word count for this element should be 300-400 words.

Task 2

a) Estimates of unemployment for the upcoming year have been developed as follows:
Economy           Probability          Unemployment Rate
Worst                        15%                               30%
Poor                          45%                               18%
Good                         28%                                8%
Best                           12%                                 2%
Calculate the expected unemployment rate and the standard deviation.

b) Building on the example of the New Bank used during the tutorials, following on from the
balance sheet calculated in question 12 of the tutorial in week 14, the following additional
information is provided.

• Calculate NewBank’s Return on Assets (ROA) and Net Interest Margin (NIM) for its first month. Assume that net interest equals EBT, and that NewBank is in the 28% tax bracket.
• Calculate NewBank’s Return on Equity (ROE) and final balance sheet including its tax liabilities. Assuming NewBank is required to establish a loan loss reserve at 0.5% of the loan value for commercial loans, how is this recorded?
• Recalculate NewBank’s ROE and final balance sheet including its tax liabilities in this instance.
• Assuming NewBank’s target ROE is 5%, how much net fee income must it generate to meet this target?
• After making payments for three years, one of the mortgage borrowers defaults on the mortgage. NewBank immediately takes possession of the house and sells it at auction for $175,000. Legal fees amount to $25,000. If no loan loss reserve was established for the mortgage loans, how is this event recorded?

c) Briefly discuss the different available sources of finance for small and medium companies (SMEs). The word count for this element should be 500-600 words.

Task 3

In the final page there is a table containing a list of the largest Initial Public Offerings (IPOs) that have occurred so far in 2017, with the Current Price column representing the share price of March

a) For each of the companies calculate the Market Capitalisation at the time of IPO and now. If you had won a lottery prize of $2,275 on January 15th and decided to invest your winnings in the next available IPO and then sold your investment on the 24th of March, how much money did you make and what yearly return does that represent (Assume your broker charges $25 per transaction).

b) The following is an extract from an article published on November, 21st 2016 on the U.S. News website: "Of all the possible 2017 IPOs, a public offering from ride-hailing giant Uber, valued at nearly $70 billion, would doubtlessly be the biggest of the year. Uber CEO Travis Kalanick has spoken of pushing back an Uber IPO for as long as possible, but a recent merger of Uber China with bitter Chinese rival Didi Chuxing could pave the way for a 2017 offering. This makes a 2017 IPO more likely since China was a huge profit suck for Uber. Still, Uber lost over $1.2 billion in the first half of 2016. "Uber needs to get expenses and losses under control quickly," says K C Ma, professor of finance at Stetson University." Discuss the reasons for and against an investor subscribing Uber's shares if and when the company decide to seek a stock market listing. The word count for this element should be 500-600 words.

c) Briefly discuss the main risks that affect the performance of banks. The word count for this element should be 300-400 words.

Task 4

a) A bank issues a $250,000 variable-rate, 25-year mortgage with a nominal annual rate of 3.5%. If the required rate increases to 4.0% after the first three months, what is the impact on the interest income for the first 12 months?

b) A Bank manager is setting targets for the upcoming weeks about the amount of Savings deposits it needs to raise. The Bank's current balance sheet includes the following items:

Asset                                   Value         Duration(in years)     Liability                                  Value     Duration (in years)
Bonds                         230,000,000         8.50                         Demand Deposits        1,380,000,000         1.00
Consumer Loans     690,000,000          3.50                         Saving Accounts                       ??                    0.60
Commercial
Loans                        1,150,000,000        5.50

Assuming the manager wants a duration gap of 4.00 years, what level of Saving Accounts should the bank raise? Calculate in approximate $mill and assume that any difference between assets and liabilities is held as cash (duration  0).

c) Hedging products were created for commercial companies to reduce or eliminate some of the risks they face but have since been widely used by speculators as a mechanism to generate profits by taking significant risks. Explain how speculators use options in order to attempt to make large profits and the risks they face. The word count for this element should be 400-500 words.

Task 5

a) A bank issues a $5 million commercial mortgage with a nominal APR of 6%. The loan is fully amortized over 10 years requiring monthly payments. The bank plans on selling the loan after 4 months. If the required nominal APR increases by 65 basis points when the loan is sold, what gain or loss does the bank incur?

b) That same bank has a differential advantage in issuing variable-rate mortgages, but does not want the interest income risk associated with such loans. The bank currently has a portfolio of $33,000,000 mortgages with an APR of prime  175 basis points, reset monthly. Prime is currently 3%. A swap has been arranged to turn the current cash flows into a fixed interest payment of 5.75% on a notional amount of $33,000,000 in return for its variable interest
income. If the bank agrees to this, what interest is received and given in the first month? What if prime suddenly increased 220 basis points?

c) A bond portfolio manager administers a $100 million portfolio. The portfolio currently has a duration of 6.5 years. The manager wants to shorten the duration to 5 years using T-bill futures. T-bill futures have a duration of 0.3 years and are trading at $990 (face value  $1,000). How can the fund manager achieve this objective?

d) In 2002, following the bankruptcy of Enron, the United States introduced the Sarbanes-Oxley Act, commonly referred to as SOX. Discuss the aims, main requirements and penalties contained in the Act. The word count for this element should be 450-550 words