Solutions to Online Mini-Cases 175
Chapter 16 Mini-Case
1. Austria, Belgium. Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxemburg,
Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.
2. Other countries will be forced to bail out Portugal. This will increase the interest rates as perceived
risk will be higher. This will increase the possibility of debt crisis in the Euro-zone. This may lead to
lower economic growth because the interest rates will be higher, which means that it will be more
3. Germany seems to be the Euro-zone country that is leading the push towards greater fiscal integration
as a means to greater financial stability. Why? What does Germany stand to gain by a fiscal union?
Because Germany is clearly the economic motor of the Euro-zone, it is committed to preserving the
176 Mishkin/Eakins • Financial Markets and Institutions, Seventh Edition
Chapter 17 Mini-Case
1. Using the balance sheet for each year.
a. Balance sheet with assets as a percentage of total assets, and liabilities as a percentage of total liabilities:
Your Bank,
Year 3
Your Bank,
Year 2
Your Bank,
Year 1
Banks in Your
Region, Year 3
Assets (Use of Funds)
Provincial and local governments 6.00 6.00 6.00 6.00
Loans
Commercial and industrial 16.00 16.01 16.01 16.00
Real estate 22.00 22.00 22.01 22.00
Consumer 15.00 15.00 15.01 15.00
Checkable deposits 24.00 24.00 23.99 24.00
Nontransaction deposits
Savings deposits 21.00 16.54 21.00 21.00
Small-denomination time deposits 14.00 14.00 14.00 14.00
Large-denomination time deposits 11.00 11.00 11.00 11.00
position is better than that of the regional banks. The bank will have insufficient reserves if
© 2012 Pearson Education, Inc. Publishing as Prentice Hall
2. a. Income statement with operating income items as a percentage of total operating income:
Operating Income
Your Bank,
Year 3
Your Bank,
Year 2
Your Bank,
Year 1
Banks in Your
Region, Year 3
Interest on loans 42.22 44.78 44.73 47.18
Total noninterest income 44.87 40.46 41.58 40.68
Total operating income 100.00 100.00 100.00 100.00
Noninterest income is rising—your bank needs to reverse that. Compared to regional banks,
the bank has lower interest income and higher noninterest income.
b. Income statement with operating expenses as a percentage of total operating expenses:
Your Bank,
Your Bank,
Your Bank,
Banks in Your
Other 4.84 4.66 5.14 3.61
Noninterest expenses
Salaries and employee benefits 24.35 22.61 34.97 20.67
Premises and equipment 14.12 13.47 3.43 12.98
Other 13.72 13.13 10.97 12.60
equipment, and other.
178 Mishkin/Eakins • Financial Markets and Institutions, Seventh Edition
3. a. Return on Assets (ROA) = Net Profit after Taxes/Assets
1.17 1.01 1.00 1.00
Hence, ROA increased over the last 3 years. It is higher than regional banks.
19.49 9.63 16.73 9.07
Clearly, ROE is down in Year 2 but back up in Year 3. It is much higher than regional banks.
Solutions to Online Mini-Cases 179
Chapter 20 Mini-Case
Suppose the mutual fund contains 390 shares of Stock A, currently trading at $48.39, 1,000 shares of
Stock B currently trading at $43.70, and 2,690 shares of stock C, currently trading at $13.00. The mutual
fund has 15,000 shares outstanding held by investors. Calculate NAV for the fund.
1. 390(48.39) + 1000 (43.70) + 2690 (13) = $97,542.1
NAV = 97542.1/15000 = 6.5
6. Assets of Closed-End Funds by Type, End of period
Millions of dollars
3Q 2010 2Q 2010 2009 2008
Total Equity 98,098 88,088 92,399 75,682
Domestic 58,365 52,294 53,848 46,830
Global 39,733 35,795 38,552 28,851
180 Mishkin/Eakins • Financial Markets and Institutions, Seventh Edition
Chapter 23 Mini-Case
1. (Using assumptions in the chapter example):
2. a. 55.4 = 10% of 10 + 5 + (20% of 12 + 6 + 19 + 10) + 12)
b. 71.6 = 10% of 14 + 9 + (20% of 16 + 12 + 14 + 14) + 18)
3. a. The income on assets declines by 0.03 × $29 million = $0.87 million. The payments on the
4. a. 0.31%
b. 0.31%
6. Calculate the weighted duration of each asset and liability.
Assets (Your Firm)
Asset Amount Duration Amount × Duration Weighted Duration
3 0 0 0.000
4 0.6 2.4 0.016
3 1.6 4.8 0.032
Solutions to Online Mini-Cases 181
Liabilities (Your Firm)
Amount Duration Amount
× Duration Weighted Duration
10 1 10 0.069
5 0.6 3 0.021
12 1 12 0.083
Assets (Your Competition)
Asset Amount Duration Amount × DurationWeighted Duration
4 0 0 0.000
5 0.3 1.5 0.010
7 1.2 8.4 0.056
Liabilities (Your Competition)
Amount Duration Amount
× Duration Weighted Duration
14 1 14 0.097
9 0.5 4.5 0.031
16 1 16 0.110
Solutions to Online Mini-Cases 183
Chapter 24 Mini-Case A
1. Short
5. a. –$3
Because: %ΔNW = –DURgap × Δi/(1 + i) = –2.2 × 0.01/(1 + 0.06) = –0.0207 = –2.07%. Hence,
6. a. 75
Because: Vf = –DURgap × Va/DURf = –150 million × 2.2/4.4 = –75 million
7. Prices of hedged asset and underlying asset may not move together over time, creating less than
a perfect hedge.
10. [=
β
× (value of portfolio)/(value of contract) = 0.90 × (12 million)/(200,000)]
11. Bank would set up the hedge to offset adverse changes in foreign exchange rates relative to the U.S.
184 Mishkin/Eakins • Financial Markets and Institutions, Seventh Edition
Chapter 24 Mini-Case B
1. $7 million/$100,000 = 70
2. Yes. With options, the bank manager will not exercise the options if interest rates fall, eliminating
any additional losses. The bank then benefits from interest-rate declines after the effect of premiums.
6. a. There is insufficient information to solve for the swap’s duration. However, if we assume the
swap’s duration is –3.3, the rest, b through d, can be solved as follows:
Chapter 26 Mini-Case-Web
1. 7% or $20
2. 50% or $140