Question

A mutual fund has the following assets in its portfolio: $65 million in fixed-income securities and $65 million in stocks at current market values. In the event of a liquidity crisis, the fund can sell the assets at a 92 percent of market value if they are disposed of in two days. The fund will receive 96 percent if the assets are disposed of in three days. Two shareholders, A and B, own 6 percent and 9 percent of equity (shares), respectively.

a. Market uncertainty has caused shareholders to sell their shares back to the fund. What will the two shareholders receive if the mutual fund must sell all of the assets in two days? In four days?
b. How does this situation differ from a bank run? How have bank regulators mitigated the problem of bank runs?

Answer 1

Answer: Please refer to explanation.

Step-by-step explanation:

a) In 2 days

Fund can get back 92%.

Fund Total Position

= $65 million + $65 million

= $130 million.

= 92% * 130 million

= $119,600,000

Shareholder A gets 6%

= 0.06 * 119.6 million

= $7,176,000

Shareholder B gets 9%

= 0.09 * 119.6 million

= $10,764,000

In 4 days

We will assume that the question meant 96% if done in 3 days or more.

Fund Total Position

= $65 million + $65 million

= $130 million.

= 96% * 130 million

= $124.8 million

Shareholder A gets 6%

= 0.06 * 124.8 million

= $7,488,000

Shareholder B gets 9%

= 0.09 * 124.8 million

= $11,232,000

b) A BANK RUN occurs when multiple people withdraw their money from a bank simultaneously because they are worried about the Solvency of the bank. This is the situation that made the Stock Market crash of 1929 more dastardly. This on the other hand is liquidating positions in stock and other instruments so as to have liquidity.

Bank Regulators have mitigated the problem of Bank Runs in the following ways

- Encourage Strict Adherence to SOX Requirements

- Enforcing Strict Disclosure Requirements.

- Ensuring that Statutory Audits are carried out.