Q1.A bank is planning to make a loan of $1,000,000 to a firm in the steel industry. The loan has a maturity of 2 years and an annual coupon of 10 percent (annual payment and compounding). The current market interest rate for loans in this sector is 12 percent. What is the Macaulay Duration, Modified Duration, and Dollar Duration of the loan? Show the steps of calculation.
Q2. The 1980 Depository Institutions Deregulation and Monetary Control Act (DIDMCA) and 1982 GarnSt. Germain Depository Institutions Act (DIA) eliminated interest ceilings on deposits and gave banks and saving institutions new liability and asset powers, followed by a savings and loan crisis lasting for more than 10 years. a) The DIDMCA and DIA, together with the interest rate environment in 1980s, pushed many saving and loan associations to the brink of insolvency and bankruptcy. Explain why. b) Many people blamed the banking regulators, including the deposit insurers, for accentuating the crisis. How did regulator accentuate the crisis?
Q.3 On May 14, 2020, Lloyd’s of London, a British insurance and reinsurance market, said that it expects coronavirus-related losses to the insurance sector to be the largest to date. The market has projected that its own Covid-19 property and casualty (P&C) claims could reach up to $4.3 billion as at June 30 and warned that this could rise further if the pandemic continues for another quarter. Relating to the determinants of loss risk, please make a brief qualitative analysis of the loss risk of P&C insurers facing the coronavirus outbreak and related claims.
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