Consider a financial instituion which currently has 20 AUD in default free long term as- sets (including reserves with the central bank) assets and...

140 30%

The financial institution has 50 AUD in insured deposits on the balance sheet and 40 AUD in uninsured deposits. The equity value is 10 AUD.

a) Calculate the expected repayment for both investment options.

b) Which investment decision maximizes the shareholder value?

c) Which investment decision maximizes the value of the uninsured deposits?

d) For each of the two investment options, what is the fair deposit insurance premium (premium = expected payment of the insurance)?