Exam 2016-FRR Topic 1 Question 332 Discussion
Actual exam question for GARP's 2016-FRR exam
Question #: 332
Topic #: 1
Question #: 332
Topic #: 1
Mega Bank has $100 million in deposits on which it pays 3% interest, and $20 million in equity on which it pays no interest. The loan portfolio of $120 million earns an average rate of 10%. If the rates remain the same and Mega Bank is able to earn the same net interest income in perpetuity at a 5% discount rate, what will the present value of this holding be?
Suggested Answer: D Vote an answer
* Net Interest Income Calculation:
* As previously calculated, the net interest income is $9 million per year.
* Present Value of Perpetuity Formula:
* Present Value (PV) = Net Interest Income / Discount Rate
* PV = $9 million / 0.05 = $180 million
Correction:
* The net interest income was stated as $9 million earlier, but here, let's verify this calculation:
* Interest income from $120 million at 10% = $12 million
* Interest expense on $100 million at 3% = $3 million
* Net interest income = $12 million - $3 million = $9 million
* Correct Present Value Calculation:
* PV = $9 million / 0.05 = $180 million
Final Verification:
* The previous net interest income used is correct and the final PV calculation should stand corrected as per the perpetual formula:
* PV = $9 million / 0.05 = $180 million, confirming the right choice should be $180 million.
ReferencesSource: How Finance Works
* As previously calculated, the net interest income is $9 million per year.
* Present Value of Perpetuity Formula:
* Present Value (PV) = Net Interest Income / Discount Rate
* PV = $9 million / 0.05 = $180 million
Correction:
* The net interest income was stated as $9 million earlier, but here, let's verify this calculation:
* Interest income from $120 million at 10% = $12 million
* Interest expense on $100 million at 3% = $3 million
* Net interest income = $12 million - $3 million = $9 million
* Correct Present Value Calculation:
* PV = $9 million / 0.05 = $180 million
Final Verification:
* The previous net interest income used is correct and the final PV calculation should stand corrected as per the perpetual formula:
* PV = $9 million / 0.05 = $180 million, confirming the right choice should be $180 million.
ReferencesSource: How Finance Works
by Olga at Jan 04, 2025, 01:11 PM
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