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business
financial institutions management

Questions and Answers of Financial Institutions Management

Using the data in Table 5-3, discuss the growth and ownership holding over the last 26 years of long-term funds versus short-term funds.
What are long-term mutual funds? In what assets do these funds usually in- vest? What factors caused the strong growth in this type of fund during the 1990s and early 2000s?
What is a mutual fund? In what sense is it a financial intermediary?
Go to the Standard & Poor's Market Insight Web site at www.mhhe.com/edu- marketinsight and find the most recent balance sheets for Allstate Corporation (ALL) and Cigna (CI) using the following steps.
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 life and health insurance and
Go to the Insurance Information Institute's Web site at www.iii.org and use the following steps to find the most recent data on the largest life insurance companies by total revenue. Click on "Facts
Go to the FDIC Web site at www.federalreserve.gov and find the most recent distribution of life insurance industry assets for Table 3-2. Click on "Economic Research and Data." Click on "Statistics:
Consider the data in Table 3-6. Since 1980, what has been the necessary invest- ment yield for the industry to enable the operating ratio to be less than 100 in each year? How is this requirement
How do state guarantee funds for life insurance companies compare with deposit insurance for commercial banks and thrifts?
Using the data in Table 3-2, how has the composition of assets of U.S. life insurance companies changed over time?
Contrast the balance sheet of a life insurance company with the balance sheet of a commercial bank and with that of a savings institution. Explain the balance sheet differences in terms of the
You deposit $10,000 annually into a life insurance fund for the next 10 years, after which time you plan to retire.a. If the deposits are made at the beginning of the year and earn an interest rate
a. Calculate the annual cash flows of a $1 million, 20-year fixed-payment annu- ity earning a guaranteed 10 percent per year if payments are to begin at the end of the current year.b. Calculate the
Bank of Bentley has determined that its inventory of yen (¥) and Swiss franc (SFr) denominated securities is subject to market risk. The spot exchange rates are ¥120.00/$ and SFr0.9500/$,
What is the difference between loans sold with recourse and loans sold without recourse from the perspective of both sellers and buyers?
A bank has made a three-year, $10 million loan that pays annual interest of 8 percent. The principal is due at the end of the third year.a. The bank is willing to sell this loan with recourse at an
What are leveraged loans?
How do the characteristics of a leveraged loan differ from those of a short-term loan that is sold?
What is a possible reason why the spreads on leveraged loans perform differently than do the spreads on high-yield bonds?
Who are the buyers of U.S. loans and why do they participate in this activity?a. What are vulture funds?b. What are three reasons the interbank market has been shrinking?c. What are reasons a small
Who are the sellers of U.S. loans and why do they participate in this activity?a. What is the purpose of a bad bank?b. What are the reasons why loan sales through a bad bank will be value
An FI is planning the purchase of a $5 million loan to raise the existing average duration of its assets from 3.5 years to 5 years. It currently has total assets worth$20 million, $5 million in cash
Go to the FDIC website at https://www.fdic.gov/buying/historical/index.html. From there, click on “Closed Loan Sales,” and then click on “Find” to get information on recent loan sales by
What is a pass-through security?
Should an FI with DA > kDL seek to securitize its assets? Why or why not?
What are the two sources of cash flows on a pass-through security?
What two factors can cause prepayments on the mortgages underlying pass-through securities?
Should an FI with DA < kDL seek to securitize its assets? Why or why not?
In general terms, discuss the three approaches developed by analysts to model prepayment behavior.
In the context of the option model approach, list three ways in which transaction and other contracting costs are likely to interfere with the accuracy of its predictions regarding the fair price or
Why did Fannie Mae and Freddie Mac come under fire from regulators in the early 2000s?
What problems did Fannie Mae and Freddie Mac experience during the financial crisis?
In our example, the coupon on the class C bonds was assumed to be higher than that on the class B bonds and the coupon on class B bonds was assumed to be higher than that on class A bonds. Under what
Would thrifts or insurance companies prefer Z-class CMOs? Explain your answer.
Are Z-class CMOs exactly the same as T-bond strips? If not, why not?
Would an AAA rated FI ever issue mortgage-backed bonds? Explain your answer.
Would an FI with DA < kDL be interested in buying an IO strip for hedging purposes?
To which investors or investor segments is the IO attractive? To which investors or investor segments is the PO attractive? Explain your answer.
An FI is planning to issue $100 million in BB rated commercial loans. The FI will finance the loans by issuing demand deposits.a. What is the minimum amount of capital required under Basel III?b.
Calculate the value of (a) the mortgage pool and (b) the GNMA pass-through in question 11 if market interest rates increase by 50 basis points. Assume no prepayments.
If 150 of $200,000 mortgages in a $60 million 15-year mortgage pool are expected to be prepaid in three years and the remaining 150 of the $200,000 mortgages are to be prepaid in four years, what is
Consider $200 million of 30-year mortgages with a coupon of 10 percent per year paid quarterly.a. What is the quarterly mortgage payment?b. What are the interest and principal repayments over the
Why would buyers of class C tranches of collateralized mortgage obligations(CMOs) be willing to accept a lower return than purchasers of class A tranches?
Go to the Federal Reserve Board’s website at www.federalreserve.gov. From there, click on Data.” Click on “Financial Accounts of the United States - Z.1” and then click on “Levels.” Go to
Refer to Table 13–1.a. What was the spot exchange rate of Canadian dollar per U.S. dollar on November 15, 2021?b. What was the six-month forward exchange rate of Japanese yen per U.S. dollar on
Refer to Table 13–1.a. On October 15, 2021, you purchased a British pound–denominated CD by converting $1 million to pounds at a rate of 0.7263 pound per U.S. dollar. It is now November 15, 2021.
On October 15, 2021, the exchange rate of U.S. dollar per Canadian dollar was 0.8092. It is now November 15, 2021. A U.S.-made Chevrolet Tahoe costs$65,000 over the entire period. Has the U.S. dollar
On October 15, 2021, the exchange rate of U.S. dollar per Australian dollar was 0.7425. It is now November 15, 2021. A U.S.-made big screen TV costs $3,500 over the entire period. Has the U.S. dollar
On November 15, 2021, you convert $500,000 U.S. dollars to Japanese yen (¥) in the spot foreign exchange market and purchase a one-month forward contract to convert yen into dollars. How much will
The following are the foreign currency positions of an FI, expressed in the foreign currency:The exchange rate of dollars per SFr is 1.0230, dollars per British pounds is 1.3100, and dollars per yen
On November 12, 2021, a U.S. FI has a net exposure to Swiss francs of SFr 5,500,000. The exchange rate of U.S. dollar per Swiss franc was 1.0850. It is now November 15, 2021. Calculate the FI’s
On November 12, 2021, a U.S. FI has a net exposure to euros of –€7,500,000. The exchange rate of U.S. dollars per euro was 1.1445. It is now November 15, 2021.Calculate the FI’s dollar
City Bank issued $200 million of one-year CDs in the United States at a rate of 6.50 percent. It invested part of this money, $100 million, in the purchase of a one-year bond issued by a U.S. firm at
Sun Bank USA has purchased a €16 million one-year euro loan that pays 12 percent interest annually. The spot rate of U.S. dollars per euro is 1.15. Sun Bank has funded this loan by accepting a
Bank USA just made a one-year, $10 million loan that pays 10 percent interest annually. The loan was funded with a Swiss franc–denominated one-year deposit at an annual rate of 6 percent. The
Suppose that instead of funding the $100 million investment in 12 percent British loans with U.S. CDs, the FI manager in problem 19 funds the British loans with $100 million equivalent one-year pound
Suppose that instead of funding the $100 million investment in 12 percent British loans with CDs issued in the United Kingdom, the FI manager in problem 20 hedges the foreign exchange risk on the
Suppose that a U.S. FI has the following assets and liabilities:The promised one-year U.S. CD rate is 4 percent, to be paid in dollars at the end of the year; the one-year, default risk–free loans
Suppose that instead of funding the $200 million investment in 10 percent German loans with U.S. CDs, the FI manager in problem 22 funds the German loans with $200 million equivalent one-year euro
Suppose that instead of funding the $200 million investment in 10 percent German loans with CDs issued in Germany, the FI manager in problem 23 hedges the foreign exchange risk on the German loans by
North Bank has been borrowing in the U.S. markets and lending abroad, thus incurring foreign exchange risk. In a recent transaction, it issued a one-year,$2 million CD at 6 percent and funded a loan
A bank purchases a six-month, $1 million Eurodollar deposit at an annual interest rate of 6.5 percent. It invests the funds in a six-month Swedish krona AA-rated bond paying 7.5 percent per year. The
Suppose that the current spot exchange rate of U.S. dollars per Australian dollars, SUSD/AUD , is 0.72 (i.e., $0.72 can be received for 1 Australian dollar). The price of Australian-produced goods
Explain the concept of interest rate parity. What does this concept imply about the profit opportunities from investing in international markets? What market conditions must prevail for the concept
Go to the website of the U.S. Treasury at home.treasury.gov and update Table 13–3 using the following steps. Under “About Treasury,” and “Bureaus,”click on “Bureau of Fiscal Service.”
Go to the FDIC website at www.fdic.gov and find the most recent values for foreign exchange trading revenue at JPMorgan Chase and Citigroup using the following steps. Click on “Analysis.” Click
What is the difference between credit risk and sovereign risk?
In deciding to lend to a party residing in a foreign country, what two considerations must an FI weigh?
What is the difference between debt repudiation and debt restructuring?
Provide four reasons we see sovereign loans being restructured rather than repudiated.
Are the credit ratings of countries in the Institutional Investor rating scheme forward looking or backward looking?
What variables are most commonly included in country risk analysis models? What does each one measure?
What are the major problems involved with using traditional CRA models and techniques?
Which sovereign risk indicators are the most important for a large FI, those with a high or those with a low systematic element?
Identify and explain at least four reasons that restructuring debt in the form of loans is easier than restructuring debt in the form of bonds.
What types of variables normally are used in a CRA Z score model? Define the following ratios and explain how each is interpreted in assessing the probability of restructuring.a. Debt service
An FI manager has calculated the following values and weights to assess the credit risk and likelihood of having to restructure a loan. From the Z score calculated using these weights and values, is
Countries A and B have exports of $2 billion and $6 billion, respectively. The sum of principal repayments and interest paid on long-term debt and interest paid on short-term debt for both countries
Explain the following relation:where p = Probability of restructuring I R = Total imports / Total foreign exchange reserves INVR = Real investment/ GNP p = f (IR, INVR) +, + or -
The average σ 2E R (or VAREX = variance of export revenue) of a group of countries has been estimated at 20 percent. The individual VAREXes of two countries in the group, the Netherlands and
What are the benefits and costs of restructuring to the following?a. A borrower.b. A lender.
Identify and describe the three market segments of the secondary market for LDC and EM debt.The following questions and problems are based on material presented in Appendix 14A.
What is concessionality in the process of restructuring a loan?
How would the restructuring, such as restructuring, of sovereign bonds affect the interest rate risk of the bonds? Is it possible that such restructuring would cause the FI’s cost of capital not to
A bank is in the process of renegotiating a three-year nonamortizing loan to Greece.The principal outstanding is $20 million and the interest rate is 8 percent.The new terms will extend the loan to
A $20 million loan outstanding to the Nigerian government is currently in arrears with City Bank. After extensive negotiations, City Bank agrees to reduce the interest rate from 10 percent to 6
A bank was expecting to receive $100,000 from a loan issued to the Spanish government. Since Spain has problems repaying the loan immediately, the bank extends the loan for another year at the same
Go to the Heritage Foundation website at www.heritage.org/index and find the most recent Economic Freedom Index for the United States using the following steps. Click on “Explore the data.” This
Go to the World Bank website at http://databank.worldbank.org and find the data necessary to calculate import ratio for Brazil, using the following steps.In “Explore Databases” search window,
What is the ultimate objective of market risk measurement models?
Refer to Example 15–1. What is the DEAR for this bond if σ is 15 bp? EXAMPLE 15-1 Daily Earnings at Risk on Fixed- Income Securities Suppose we define bad yield changes such that there is only a 1
Refer to Example 15–4. What is the DEAR of the portfolio if the returns on the three assets are independent of each other? EXAMPLE 15-4 Calculation of the DEAR of a Portfolio $ Table 15-3 shows
What are the advantages of the historic, or back simulation, approach over Risk-Metrics to measure market risk?
What are the steps involved with the historic, or back simulation, approach to measuring market risk?
What is the Monte Carlo simulation approach to measuring market risk?
What is the difference between VAR and ES?
Why is ES superior to VAR as a measure of market risk?
What is the BIS standardized framework for measuring market risk?
What is the effect of using the 99th percentile (1 percent worst case) rather than the 95th percentile (5 percent worst case) on the measured size of an FI’s market risk exposures?
The mean change in the daily yields of a 15-year, zero-coupon bond has been five basis points (bp) over the past year with a standard deviation of 15 bp. Use these data and assume that the yield

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