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business
financial institutions management

Questions and Answers of Financial Institutions Management

Go to the Federal Reserve Board’s website at www.federalreserve.gov and find the most recent distribution of life insurance industry assets for Table 6–2. Click on “Data.” Click on
Go to the U.S. Treasury website at www.treasury.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 website of the Bank for International Settlements at www.bis.org. Under “Basel Committee on Bank Supervision,” click on “Basel III.” This will download a file onto your computer
Go to the Federal Reserve Board’s website at www.federalreserve.gov and click on “Data.” Click on “Selected Interest Rates-H.15.” In this file, find the most recent values for the fed funds
Go to the Fidelity Investments website and look up the annual 1-, 5-, and 10-year returns on the Fidelity Select Biotechnology Fund using the following steps. The website is www.fidelity.com. In the
Go to the National Credit Union Administration website at www.ncua.gov to collect the most recent information on number of credit unions, assets of credit unions, and membership in credit unions
Go to the Federal Reserve Board’s website at www.federalreserve.gov. Find the latest figures for M1 and M2 using the following steps. Click on “Data.” Click on “Money Stock Measures.” This
Go to the Federal Reserve Board’s website at www.federalreserve.gov. Find the latest figures for financial assets outstanding at various types of financial institutions using the following steps.
Go to the Federal Deposit Insurance Corporation website at www.fdic.gov and find the latest balance sheet information available for savings institutions using the following steps. Click on
Go to the Federal Reserve’s website at www.federalreserve.gov and get the latest information on finance company consumer, real estate, and business lending using the following steps. Click on
Go to the Investment Company Institute website and look up the most recent data on the asset values and number of short-term and long-term mutual funds using the following steps. The website is
Go to the Securities Industry and Financial Markets Association website at www.sifma.org and find the most recent data on U.S. corporate underwriting activity using the following steps. Click on
What is FinTech?
What is the spread effect?
What are fintech risks?
What are the risks associated with DLT?
Describe applications of the Internet of things (IoT) in financial services industry.
What is a fintech sandbox?
Go to the Federal Deposit Insurance Corporation’s website at www.fdic.gov and update Tables 19–5 and 19–6 using the following steps. Click on “Researchers & Analysts.” Click on
How do restrictions on product diversification reduce the profitability and risk of FIs?
What are the reasons why an FI may prefer the use of either pass-through securities or CMOs to the use of MBBs?
What does an FI mean when it states that its mortgage pool prepayments are assumed to be 100 percent PSA equivalent?
What is a possible reason why the spreads on HLT loans perform differently than do the spreads on high-yield bonds?
What is a digital default option?
An FI has a $200 million asset portfolio that has an average duration of 6.5 years. The average duration of its $160 million in liabilities is 4.5 years. Assets and liabilities are yielding 10
Corporate Bank has $840 million of assets with a duration of 12 years and liabilities worth $720 million with a duration of seven years. Assets and liabilities are yielding 7.56 percent. The bank is
An FI has a $100 million portfolio of six-year Eurodollar bonds that have an 8 percent coupon. The bonds are trading at par and have a duration of five years. The FI wishes to hedge the portfolio
A pension fund manager anticipates the purchase of a 20-year, 8 percent coupon Treasury bond at the end of two years. Interest rates are assumed to change only once every year at year-end, with an
Dudley Hill Bank has the following balance sheet:The interest rate on both the assets and the liabilities is 8 percent. The bank manager receives information from an economic forecasting unit that
An FI is planning to hedge its $100 million bond instruments with a hedge using Eurodollar interest rate futures. How would the FI estimate br = [ΔRf/(1+Rf)
Refer again to problem 21. How does consideration of basis risk change your answers to problem 21?a. Compute the number of futures contracts required to construct a macrohedge if [ΔRf/(1+Rf) /
For a given change in interest rates, why is the sensitivity of the price of a Treasury bond futures contract greater than the sensitivity of the price of a Treasury bill futures contract?
An FI holds a 15-year, $10 million par value bond that is priced at 104 with a yield to maturity of 7 percent. The bond has a duration of eight years and the FI plans to sell it after two months.
What are derivative contracts? What is the value of derivative contracts to the managers of FIs? Which type of derivative contracts had the highest notional value outstanding among all U.S. banks as
What factors affected the proportion of U.S. banking assets that were controlled by foreign banks during the 1990s through 2015?
What effect have the problems of emerging market economies in the late 1990s and 2000s had on the global expansion of traditional banking activities by U.S. banks?
How did the Overseas Direct Investment Control Act of 1964 assist in the growth of global banking activities? How much growth in foreign assets occurred from 1980 to 2015?
How are insurance companies able to offer services in states beyond their state of incorporation?
An investment bank subsidiary of a financial services holding company agrees to underwrite a debt issue for one of its clients. It has suggested a firm commitment offering for issuing 100,000 shares
A property-casualty insurance company has estimated the following required charges for its various risk classes (in millions):a. What is the RBC charge as per the model recommended by the NAIC?b. If
A securities firm has the following balance sheet (in millions):The debt securities have a coupon rate of 6 percent, 20 years remaining until maturity, and trade at a yield of 8 percent. The equity
What is the countercylical capital buffer? If the home country set a countercyclical capital buffer of 2.5 percent, how would this buffer affect your answers to question 18?
How is the leverage ratio for an DI defined?
Two depository institutions have composite CAMELS ratings of 1 or 2 and are “well capitalized.” Thus, each institution falls into the FDIC Risk Category I deposit insurance assessment scheme.
Million Bank has a composite CAMELS rating of 2, a total risk-based capital ratio of 9.8 percent, a Tier I risk-based capital ratio of 6.8 percent, a CET1 capital ratio of 6.0 percent, and a Tier I
Webb Bank has a composite CAMELS rating of 2, a total risk-based capital ratio of 10.2 percent, a Tier I risk-based capital ratio of 6.2 percent, a CET1 capital ratio of 5.0 percent, and a Tier I
Under what conditions may the implementation of minimum capital guidelines, either risk-based or non-risk-based, fail to impose stockholder discipline as desired by the regulators?
How does a risk-based deposit insurance program solve the moral hazard problem of excessive risk taking by DIs? Is an actuarially fair premium for deposit insurance always consistent with a
What is moral hazard? How did the fixed-rate deposit insurance program of the FDIC contribute to the moral hazard problem of the depository institution industry?
What trends have been observed between 1960 and 2015 in regard to liquidity and liability structures of commercial banks? What changes have occurred in the management of assets that may cause
Rank the following liabilities, with respect, first, to funding risk and second to funding cost: Funding Risk Funding Cost a. Money market deposit account. b. Demand deposits. c. Certificates of
What is the relationship between funding cost and funding or withdrawal risk?
If over the first 12 days of the current reserve maintenance period the average daily reserves held by the bank in problem (12) were $56 million (or 12 x $56m = $672 m cumulative total over the 12
A bank has an average balance of transactions accounts, July 14 to 27, of $850.55 million. The average balance in the cash account is $20.150 million over this period. The bank is carrying forward a
Rank these financial assets according to their liquidity: cash, corporate bonds, NYSE-traded stocks, and T-bills.
Buy Bank had $130 million in assets and $20 million in expenses before the acquisition of Sell Bank, which had assets of $50 million and expenses of $10 million. After the merger, the bank had $180
City Bank upgrades its computer equipment every five years to keep up with changes in technology. Its next upgrade is two years from today and is budgeted to cost $1 million. Management is
Table 17-1 shows data on earnings, expenses, and assets for all insured banks. Calculate the annual growth rates in the various income, expense, earnings, and asset categories from 1991 to 2014. If
What role does Schedule L play in reporting off-balance-sheet activities? Refer to Table 16-4. What was the annual growth rate over the 21-year period 1992-2015 in the notional value of
What factors explain the growth of off-balance-sheet activities in the 1980s through the 2000s among U.S. FIs? What factors explain the decrease in off-balance-sheet activities in the 2010s?
In its trading portfolio, an FI holds 5,000 shares of HSBC at a share price of $43.50, 4,000 shares of China Construction Bank at a price of $16.40, and 2,500 shares of Whirlpool at $170.00. The FI
In its trading portfolio, an FI holds 2,000 shares of Under Armour at a share price of $84.50, 3,000 shares of BT Group (British telecommunication firm) at a price of $68.50, and 4,500 shares of
An FI has ¥750 million in its trading portfolio on the close of business on a particular day. The current exchange rate of yen for dollars is ¥120.00/$, or dollars for yen is $0.00833, at the
Export Bank has a trading position in euros and Australian dollars. At the close of business on October 20, the bank had €22 million and A$40 million. The exchange rates for the most recent six
Bank of Southern Vermont has determined that its inventory of 20 million euros (€) and 25 million British pounds (£) is subject to market risk. The spot exchange rates are $1.20/€ and $1.60/£,
Bank Beta has an inventory of AAA-rated, zero-coupon bonds with a maturity of 13.42 years and a face value of $127,503,041. The modified duration of these bonds is 12.5 years, the DEAR is
The mean change in the daily yields of a 15-year, zero-coupon bond has been five basis points (bp) over the past year with a standard deviation of 15 bp. Use these data and assume that the yield
Bank of Bentley has determined that its inventory of yen (¥) and Swiss franc (SFr) denominated securities is subject to market risk. The spot exchange rates are ¥120.00/$ and SFr0.9500/$,
Assume that annual interest rates are 8 percent in the United States and 4 percent in Japan. An FI can borrow (by issuing CDs) or lend (by purchasing CDs) at these rates. The spot rate is
How does the lack of perfect correlation of economic returns between international financial markets affect the risk-return opportunities for FIs holding multicurrency assets and liabilities? Refer
Suppose that a U.S. FI has the following assets and liabilities:The promised one-year U.S. CD rate is 5 percent, to be paid in dollars at the end of the year; the one-year, default risk–free loans
On June 14, 2015, a U.S. FI has a net exposure to Euros of -€7,500,000. The exchange rate of U.S. dollars for Euros was 1.1045. It is now June 15, 2015. Calculate the FI’s dollar loss/gain this
On June 14, 2015, a U.S. FI has a net exposure to Swiss francs of SFr5,500,000. The exchange rate of U.S. dollars for Swiss francs was 1.0955. It is now June 15, 2015. Calculate the FI’s dollar
The following are the foreign currency positions of an FI, expressed in the foreign currency.The exchange rate of dollars per SFrs is 1.0760, of dollars per British pounds is 1.6400, and of dollars
What two factors directly affect the profitability of an FI’s position in a foreign currency?
On June 15, 2015, 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 you
On May 20, 2015, the exchange rate of U.S. dollars for Australian dollars was 0.7794. It is now June 15, 2015. A U.S. made big screen TV costs $3,500 over the entire period. Has the U.S. dollar
On May 15, 2015, the exchange rate of U.S. dollars for Canadian dollars was 0.8095. It is now June 15, 2015. A U.S. made Chevrolet Tahoe costs $65,000 over the entire period. Has the U.S. dollar
Refer to Table 13-1.a. On May 15, 2015, you purchased a British pound-denominated CD by converting $1 million to pounds at a rate of 0.6435 pounds for U.S. dollars. It is now June 15, 2015. Has the
Go to J.P. Morgan Chase’s website (www.jpmorganchase.com) and find the latest Sources and Uses of Funds Statement. How have the sources and uses changed since March 2015 (as shown in Appendix 12A)?
What government safeguards are in place to reduce liquidity risk for DIs?
If the rate on one-year Treasury strips 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
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?a. Which of these factors is
Why is commercial lending declining in importance in the U.S.? What effect does this decline have on overall commercial lending activities?
How does a spot loan differ from a loan commitment? What are the advantages and disadvantages of borrowing through a loan commitment?
Differentiate between a secured 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 loans?
Why is credit risk analysis an important component of FI risk management? What recent activities by FIs have made the task of credit risk assessment more difficult for both FI managers and regulators?
State Bank’s balance sheet is listed below. Market yields and durations (in years) are in parenthesis, and amounts are in millions. a. What is the repricing gap if the planning period is six
a. What is State Bank’s duration gap?b. Use these duration values to calculate the expected change in the value of the assets and liabilities of State Bank for a predicted increase of 1.5
Consider a 12-year, 12 percent annual coupon bond with a required return of 10 percent. The bond has a face value of $1,000.a. What is the price of the bond?b. If interest
Assume that a goal of the regulatory agencies of financial institutions is to immunize the ratio of equity to total assets, that is, Δ(E/A) = 0. Explain how this goal changes the desired duration
Refer again to the financial institution in problem 26.a. What is the change in the value of the firm’s assets for relative upward shift in the entire yield curve of 0.5 percent?b. What is the
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.a. What is the maturity gap for County
Nearby Bank has the following balance sheet (in millions):What is the maturity gap for Nearby Bank? Is Nearby Bank more exposed to an increase or decrease in interest rates? Explain why? Liabilities
A bank has the following balance sheet:Suppose interest rates rise such that the average yield on rate-sensitive assets increases by 45 basis points and the average yield on rate-sensitive
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
What are the reasons for not including demand deposits as rate-sensitive liabilities in the repricing analysis for a commercial bank? What is the subtle but potentially strong reason for including
Consider the following balance sheet for MMC Bancorp (in millions of dollars)a. Calculate the value of MMC’s rate-sensitive assets, rate sensitive liabilities, and repricing gap over the next
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
How has the increased level of financial market integration affected interest rates?

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