Solutions to Online Mini-Cases 173
Chapter 14 Mini-Case
1. a. Based on 28% PTI of the monthly gross income of $3,000 minus $400 of existing debt
obligation.
i. $50,510
ii. $66,135
iii. The same as (i) above since the mortgage rate is the same whether the down payment is
2. Responses for this question depend upon the Internet rate findings of the students. As for suggestions
3. 0.0669
5. a. Issuing more adjustable rate mortgages is easier said than done. Otherwise the bank would
already have more of them and, consequently, less of an asset-liability mismatch problem.
174 Mishkin/Eakins • Financial Markets and Institutions, Seventh Edition
Chapter 15 Mini-Case
1. a. The market in which exchange rates are determined and currencies traded.
b. Reduction in exchange rate volatility.
c. Current day transactions at the current exchange rate.
2. If the increase in the interest rate in Europe is due to domestic inflationary pressures, the euro will
3. a. The interest rate in all the Euro-zone countries will converge.
b. There will be no direct effect on the U.S. interest rate.
c. The capital market will grow in Europe thanks to a lower foreign exchange risk and a lower cost
of investing across the Euro-zone.
4. Exchange rates are important because the company expects a growth in international sales. If the dollar
5. The advantage of dealing with just one currency will cut the foreign exchange risk-related cost. Other
6. It will not matter whether you hire a Dutch bank or an Italian bank as long as they are equally
competent and competitive.
rise is due to increases in inflation, the dollar depreciates.
8. a. 3% + 10% = 13%
Solutions to Online Mini-Cases 175
Chapter 16 Mini-Case
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?
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
Other 2.17 2.17 2.16 2.17
Other assets (i.e., physical capital) 7.00 7.00 7.00 7.00
Total 100.00 100.00 100.00 100.00
Liabilities (Sources of Funds)
Checkable deposits 24.00 24.00 23.99 24.00
Items increasing: reserves, cash items; items decreasing: U.S. government securities.
b. The bank’s liquidity has improved over the last three years. Moreover, the bank’s liquidity
c. Equity Multiplier Ratio = Assets/Equity Capital:
Your Bank,
Year 3
Your Bank,
Year 2
Your Bank,
Year 1
Banks in Your
Region, Year 3
6.66 9.56 16.67 9.04
Solutions to Online Mini-Cases 177
© 2012 Pearson Education, Inc. Publishing as Prentice Hall
Equity multiplier starts high in Year 1, declines in Year 2, and returns to Year 1 level in Year 3.
Also, equity multiplier is higher than regional banks.
d. Each year it starts high, declines in Year 2, and returns to Year 1 level in Year 3. Equity
multiplier is higher than regional banks.
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
Interest on securities 9.28 11.25 9.84 8.74
b. Income statement with operating expenses as a percentage of total operating expenses:
Operating Expenses
Your Bank,
Year 3
Your Bank,
Year 2
Your Bank,
Year 1
Banks in Your
Region, Year 3
Interest expenses
On deposits 24.11 33.42 32.69 38.31
On overnight funds and repos 8.25 2.58 2.86 2.08
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.
4. 6.5 × 1000 = 6,500
6500/23.91 = 271 shares of Stock C
5. 20,000 (1 − 0.04) = $19,200
Annual operating expenses = average NAV × annual operating expenses
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