Caput Commercial Banking Academic Year 2010/2011 Exam January 2011
Student name …………….. Student ID …………….. Signature ……………..
The rules of this exam are as follows: • Please write your full name, student ID and signature. • Please keep all answers brief and to the point. Do not provide irrelevant informa- tion, but show all steps that are necessary to solve a problem. • There are 12 pages in this exam including this page. Questions start on Page 2 and end on Page 9. The last three pages are empty and are to be used for rough work. • Please return all the pages together with the text of the exam. • This is a closed books closed notes exam. • Ordinary calculators are permitted, but no computers or other devices. • Dictionary is not allowed. • Please answer in the space provided as far as possible. • The exam includes four exercises. All exercises are compulsory (no options!) - so attempt all exercises you can. • If a question seems unclear, interpret it as best you can and proceed. Do not contact me or anyone else seeking clarification. • You have 2 hours (!) to complete the exam. Good luck! Score Exercise 1 (max 10 points) Exercise 2 (max 25 points) Exercise 3 (max 25 points) Exercise 4 (max 40 points) Total points: 100
Bank XYZʼs debt obligations have a present value Euros 2b and a duration of 5 years. Half of this is a 10-year note with a duration of six years. The bankʼs CFO has decided that the bank should target a debt duration of four years instead of five. Assume that it is possible to issue 4-year notes with a duration of three years. If the proceeds from issuing these notes are used to retire 10-year notes, there will be a reduction in the duration of the bankʼs liabilities. Assuming a flat yield curve, how many Euros of 4-year notes should the bank issue?
Consider an economy with a large number of penniless entrepreneurs. Each