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financial institutions management

Questions and Answers of Financial Institutions Management

= The following is a schedule of historical defaults (yearly and cumulative) experienced by an FI manager on a portfolio of commercial and mortgage loans. Years after Issuance Loan Type 1 Year 2
= The bond equivalent yields for U.S. Treasury and A-rated corporate bonds with maturities of 93 and 175 days are given below: 93 Days 175 Days U.S. Treasury 8.07% 8.11% A-rated corporate 8.42 8.66
= Calculate the term structure of default probabilities over three years using the following spot rates from the Treasury and corporate bond (pure discount) yield curves. Be sure to calculate both
= Assume that a one-year T-bill is currently yielding 5.5 percent and an AAArated discount bond with similar maturity is yielding 8.5 percent. If the expected recovery from collateral in the event
= bank has made a loan charging a base lending rate of 10 percent. It expects a probability of default of 5 percent. If the loan is defaulted, the bank expects to recover 50 percent of its money
= If the rate on one-year T-bills currently is 6 percent, what is the repayment probability for each of the following two securities? Assume that if the loan is defaulted, no payments are expected.
= Consider the coefficients of Altman’s Z score. Can you tell by the size of the coefficients which ratio appears most important in assessing creditworthiness of a loan applicant? Explain.
= MNO, Inc., a publicly traded manufacturing firm in the United States, has provided the following financial information in its application for a loan. All numbers are in thousands of dollars. Assets
= Describe how a linear discriminant analysis model works. Identify and discuss the criticisms which have been made regarding the use of this type of model to make credit risk evaluations.
= Suppose the estimated linear probability model is PD .3 X1 + .2 X2 − 0.5 X3 + error, where X1 0.75 is the borrower’s debt/equity ratio, X2 0.25 is the volatility of borrower earnings, and
= What are the purposes of credit scoring models? How do these models assist an FI manager in better administering credit?
= Why is the degree of collateral as specified in the loan agreement of importance to the lender? If the book value of the collateral is greater than or equal to the amount of the loan, is the
= Identify and define the borrower-specific and market-specific factors that enter into the credit decision. What is the impact of each type of factor on the risk premium? Which of these factors is
= What are covenants in a loan agreement? What are the objectives of covenants? How can these covenants be negative? Positive?
= Why are most retail borrowers charged the same rate of interest, implying the same risk premium or class? What is credit rationing? How is it used to control credit risks with respect to retail
= Metrobank offers one-year loans with a 9 percent stated or base rate, charges a 0.25 percent loan origination fee, imposes a 10 percent compensating balance requirement, and must pay a 6 percent
= What are compensating balances? What is the relationship between the amount of compensating balance requirement and the return on the loan to the FI?
= How does the credit card transaction process assist in the credit monitoring function of financial institutions? Which major parties receive a fee in a typical credit card transaction? Do the
= What are the two major classes of consumer loans at U.S. banks? How do revolving loans differ from nonrevolving loans?
= What are the primary characteristics of residential mortgage loans? Why does the ratio of adjustable rate mortgages to fixed-rate mortgages in the economy vary over the interest rate cycle? When
= Differentiate between a secured loan and an unsecured loan. Who bears most of the risk in a fixed-rate loan? Why would FI managers prefer to charge floating rates, especially for longer-maturity
MLK Bank has an asset portfolio that consists of $100 million of 30-year, 8 percent coupon $1,000 bonds that sell at par. What will be the bonds’ new prices if market yields change immediately by
Consider a $1,000 bond with a fixed-rate 10 percent annual coupon rate and a maturity (N) of 10 years. The bond currently is trading to a market yield to maturity (YTM) of 10 percent.a. Complete the
Consider a five-year, 15 percent annual coupon bond with a face value of $1,000. The bond is trading at a market yield to maturity of 12 percent.a. What is the price of the bond?b. If the yield to
A financial institution has an investment horizon of two years 9.5 months (or 2.7917 years). The institution has converted all assets into a portfolio of 8 percent, $1,000 three-year bonds that are
Assume that a goal of the regulatory agencies of financial institutions is to im- munize the ratio of equity to total assets, that is, A(E/A) =0.Explain how this goal changes the desired duration gap
Hands Insurance Company issued a $90 million, one-year zero-coupon note at 8 percent add-on annual interest (paying one coupon at the end of the year) or with an 8 percent yield. The proceeds were
The balance sheet for Gotbucks Bank, Inc. (GBI), is presented below ($ millions). Cash Federal funds Assets Liabilities and Equity $ 30 Core deposits 20 Federal funds 105 Euro CDs 65 Equity $220
Two banks are being examined by the regulators to determine the interest rate sensitivity of their balance sheets. Bank A has assets composed solely of a 10-year $1 million loan with a coupon rate
Consider the case in which an investor holds a bond for a period of time lon- ger than the duration of the bond, that is, longer than the original investment horizon.a. If interest rates rise, will
The duration of an 11-year, $1,000 Treasury bond paying a 10 percent semian- nual coupon and selling at par has been estimated at 6.9 years.a. What is the modified duration of the bond?b. What will
You can obtain a loan for $100,000 at a rate of 10 percent for two years. You have a choice of paying the principal at the end of the second year or amortizing the loan, that is, paying interest (10
Two bonds are available for purchase in the financial markets. The first bond is a two-year, $1,000 bond that pays an annual coupon of 10 percent. The sec- ond bond is a two-year, $1,000 zero-coupon
What is the impact over the next year on net in- terest income if interest rates on RSAs increase 60 basis points and on RSLs increase 40 basis points?
What is the impact over the next six months on net interest income if interest rates on RSAs in- crease 60 basis points and on RSLs increase 40 basis points?
What is the repricing gap if the planning pe- riod is 30 days? 6 months? 1 year? 2 years? 5 years?
You note the following yield curve in The Wall Street Journal. According to the unbiased expectations hypothesis, what is the one-year forward rate for the period beginning two years from today, f?
The Wall Street Journal reports that the rate on three-year Treasury securities is 5.25 percent and the rate on four-year Treasury securities is 5.50 percent. The one-year interest rate expected in
Based on economists' forecasts and analysis, one-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows: R = 5.65% E(21) = 6.75% L = 0.05% = E(31) =
The Wall Street Journal reports that the rate on three-year Treasury securities is 5.60 percent and the rate on four-year Treasury securities is 5.65 percent. According to the unbiased expectations
A recent edition of The Wall Street Journal reported interest rates of 6 percent, 6.35 percent, 6.65 percent, and 6.75 percent for three-year, four-year, five-year, and six-year Treasury notes,
Suppose that the current one-year rate (one-year spot rate) and expected one- year T-bill rates over the following three years (i.e., years 2, 3, and 4, respec- tively) are as follows: R =6% E(2) =
What are the weaknesses of the maturity model? The following questions and problems are based on material in Appendix 8B to the chapter.
EDF Bank has a very simple balance sheet. Assets consist of a two-year, $1 million loan that pays an interest rate of LIBOR plus 4 percent annually. The loan is funded with a two-year deposit on
Scandia Bank has issued a one-year, $1 million CD paying 5.75 percent to fund a one-year loan paying an interest rate of 6 percent. The principal of the loan will be paid in two installments:
Gunnison Insurance has reported the following balance sheet (in thousands): Assets Liabilities and Equity 2-year Treasury note $175 1-year commercial paper $135 15-year munis 165 5-year note 160
The following is a simplified FI balance sheet: Assets Liabilities and Equity Loans $1,000 Deposits Equity $ 850 150 Total assets $1,000 Total liabilities and equity $1,000 The average maturity of
An insurance company has invested in the following fixed-income securities: (a) $10,000,000 of five-year Treasury notes paying 5 percent interest and selling at par value, (b) $5,800,000 of 10-year
FI International holds seven-year Acme International bonds and two-year Beta Corporation bonds. The Acme bonds are yielding 12 percent and the Beta bonds are yielding 14 percent under current market
Consumer Bank has $20 million in cash and a $180 million loan portfolio. The assets are funded with demand deposits of $18 million, a $162 million CD, and $20 million in equity. The loan portfolio
If a bank manager is certain that interest rates are going to increase within the next six months, how should the bank manager adjust the bank's matu- rity gap to take advantage of this anticipated
County Bank has the following market value balance sheet (in millions, all interest at annual rates). All securities are selling at par equal to book value. Assets Liabilities and Equity Cash 15-year
Nearby Bank has the following balance sheet (in millions): Cash 5-year Treasury notes 30-year mortgages Total assets Assets Liabilities and Equity $ 60 Demand deposits $140 60 200 1-year certificates
What are some of the weaknesses of the repricing model? How have large banks solved the problem of choosing the optimal time period for repricing? What is runoff cash flow, and how does this amount
A bank has the following balance sheet: Assets Rate sensitive $225,000 Avg. Rate 6.35% Liabilities/Equity Rate sensitive $300,000 Avg. Rate 4.25% Fixed rate 550,000 7.55 Nonearning Total 120,000
The balance sheet of A. G. Fredwards, a government security dealer, is listed below. Market yields are in parentheses, and amounts are in millions. Assets Cash Liabilities and Equity $ 20 Overnight
A bank has the following balance sheet: Assets Avg. Rate Liabilities/Equity Rate sensitive $ 550,000 7.75% Rate sensitive $ 575,000 Avg. Rate 6.25% Fixed rate Nonearning 755,000 265,000 8.75 Fixed
A bank has the following balance sheet: Assets Rate sensitive $ 550,000 Avg. Rate 7.75% Liabilities/Equity Fixed rate Nonearning Total 755,000 265,000 8.75 Rate sensitive Fixed rate $ 375,000 Avg.
Use the following information about a hypothetical government security dealer named M. P. Jorgan. Market yields are in parentheses, and amounts are in millions. Assets Liabilities and Equity Cash $
Consider the following balance sheet for WatchoverU Savings, Inc. (in millions): Floating-rate mortgages Liabilities and Equity Assets 1-year time deposits (currently 10% annually) $ 50 (currently 6%
A bank manager is quite certain that interest rates are going to fall within the next six months. How should the bank manager adjust the bank's six-month repricing gap and spread to take advantage of
What is the gap ratio? What is the value of this ratio to interest rate risk man- agers and regulators?
Consider the following balance sheet positions for a financial institution: Rate-sensitive assets = $200 million Rate-sensitive liabilities = $100 million Rate-sensitive assets = $100 million
If a bank manager was quite certain that interest rates were going to rise within the next six months, how should the bank manager adjust the bank's six-month repricing gap to take advantage of this
How do the supply of and demand for loanable funds, together, determine in- terest rates?
What is liquidity risk? What routine operating factors allow Fls to deal with this risk in times of normal economic activity? What market reality can create severe financial difficulty for an FI in
Suppose you purchase a 10-year, AAA-rated Swiss bond for par that is paying an annual coupon of 6 percent. The bond has a face value of 1,000 Swiss francs (SF). The spot rate at the time of purchase
Six months ago, Qualitybank, LTD., issued a $100 million, one-year maturity CD denominated in euros. On the same date, $60 million was invested in a -denominated loan and $40 million was invested in
Assume that a bank has assets located in London that are worth 150 million on which it earns an average of 8 percent per year. The bank has 100 million in liabilities on which it pays an average of 6
A U.S. insurance company invests $1,000,000 in a private placement of British bonds. Each bond pays 300 in interest per year for 20 years. If the current exchange rate is 1.7612/$, what is the nature
If international capital markets are well integrated and operate efficiently, will Fls be exposed to foreign exchange risk? What are the sources of foreign exchange risk for Fls?
What two factors provide potential benefits to Fls that expand their asset hold- ings and liability funding sources beyond their domestic borders?
What is credit risk? Which types of Fls are more susceptible to this type of risk? Why?
A bank invested $50 million in a two-year asset paying 10 percent interest per annum and simultaneously issued a $50 million, one-year liability paying 8 percent interest per annum. The liability
If the investment goal is to leave the assets untouched until maturity, such as for a child's education or for one's retirement, which of the two bonds has more interest rate risk? What is the source
Consider again the two bonds in problem
How does a policy of matching the maturities of assets and liabilities work (a) to minimize interest rate risk and (b) against the asset-transformation function of Fls?
A financial institution has the following market value balance sheet structure: Assets Liabilities and Equity Cash Bond $ 1,000 Certificate of deposit 10,000 Equity $10,000 1,000 Total assets $
Go to the Standard & Poor's Market Insight Web site at www.mhhe.com/edu- marketinsight and look up the most recent balance sheets for Merrill Lynch (MER) and Morgan Stanley Dean Witter (MWD) using
Go to the Standard & Poor's Market Insight Web site at www.mhhe.com/ edumarketinsight and look up the industry financial highlights as posted by S&P for investment banking and brokerage using the
Go to the Standard & Poor's Market Insight Web site at www.mhhe.com/ edumarketinsight and identify the industry description and industry con- stituents for investment banking and brokerage using the
Go to the U.S. Treasury Web site at www.ustreas.gov and find the most recent data on foreign transactions in U.S. securities and U.S. transactions in foreign securities using the following steps.
Go to the Thomson Financial Securities Data Web site at www.thomson.com /solutions/financials and find the most recent data on merger and acquisition volume and number of deals using the following
Based on the data in Table 4-6, what were the second-largest single asset and the largest single liability of securities firms in 2006? Are these asset and liabil- ity categories related? Exactly how
How do the operating activities, and thus the balance sheet structures, of secu- rities firms differ from the operating activities of depository institutions such as commercial banks and insurance
Using Table 4-5, which type of security accounts for most underwriting in the United States? Which is likely to be more costly to underwrite: corporate debt or equity? Why?
An investor notices that an ounce of gold is priced at $318 in London and $325 in New York.a. What action could the investor take to try to profit from the price discrepancy?b. Under which of the
XYZ, Inc., has issued 10 million new shares of stock. An investment banker agrees to underwrite these shares on a best-efforts basis. The investment banker is able to sell 8 million shares for $27
An investment banker pays $23.50 per share for 4 million shares of JCN Company. It then sells those shares to the public for $25 per share. How much money does JCN receive? What is the profit to the
An investment banker agrees to underwrite a $500 million, 10-year, 8 percent semiannual bond issue for KDO Corporation on a firm commitment basis. The investment banker pays KDO on Thursday and plans
What are the risk implications to an investment banker from underwriting on a best-efforts basis versus a firm commitment basis? If you operated a com- pany issuing stock for the first time, which
Go to the Investment Company Institute Web site and look up the most re- cent data on the asset values and number of short-term and long-term mutual funds using the following steps. The Web site is
Go to the Fidelity Investments Web site and look up the annual 1-, 5-, and 10- year returns on Fidelity Select Biotechnology Fund using the following steps. The Web site is www.fidelity.com. Click on
What types of fees do mutual funds charge?
What is a 12b-1 fee? Suppose you have a choice between a load fund with no annual 12b-1 fee and a no-load fund with a maximum 12b-1 fee. How would the length of your expected investment horizon, or
What is the difference between a load fund and a no-load fund? Is the argu- ment that load funds are more closely managed and therefore have higher returns supported by the evidence presented in
Open-end fund A owns 100 shares of AT&T valued at $100 each and 50 shares of Toro valued at $50 each. Closed-end fund B owns 75 shares of AT&T and 100 shares of Toro. Each fund has 100 shares of
A mutual fund owns 400 shares of Fiat, Inc., currently trading at $7, and 400 shares of Microsoft, Inc., currently trading at $70. The fund has 100 shares outstanding.a. What is the net asset value
What change in regulatory guidelines occurred in 1998 that had the primary purpose of giving investors a better understanding of the risks and objectives of a fund?
Why did the proportion of equities in long-term funds increase from 38.3 per- cent in 1990 to over 70 percent by 2000 and then decrease to 62 percent in 2002? How might an investor's preference for a

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