17-74 A DI has two assets: 50 percent in one-month Treasury bills and 50 percent in real estate loans.If the DI must liquidate its T-bills today,it receives $98 per $100 of face value; if it can wait to liquidate them on maturity (in one month's time),it will receive $100 per $100 of face value.If the DI has to liquidate its real estate loans today,it receives $90 per $100 of face value liquidation at the end of one month will produce $92 per $100 of face value.The one-month liquidity index value for this DI's asset portfolio is

Question

Quizplus · Accepted Answer

To calculate the liquidity index value for the DI's portfolio, we need to calculate the worst-case scenario for the value of the portfolio after one month.

For the T-bills, the worst-case value is $100 per $100 of face value, since the DI can wait until maturity to receive this amount.

For the real estate loans, the worst-case value is $90 per $100 of face value, since if the DI has to liquidate them today, it will only receive this amount.

To find the overall worst-case value of the portfolio, we take a weighted average of these two values, based on the proportion of the portfolio invested in each asset:

Worst-case value = (0.5 x $100) + (0.5 x $90) = $95

This means that if the DI had to liquidate its entire portfolio today, it would receive only $95 per $100 of face value.

To find the liquidity index value, we divide this worst-case value by the current value of the portfolio, which is just the value of the T-bills:

Liquidity index value = $95 / $98 = 0.969

Multiplying by 100 gives a liquidity index value of 97.9, which is closest to answer choice C.

17-74 a DI Has Two Assets: 50 Percent in One-Month