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financial institutions management

Questions and Answers of Financial Institutions Management

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?
What is technology risk? What is the difference between economies of scale and economies of scope? How can these economies create benefits for an FI? How can these economies prove harmful to an FI?
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 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 a
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
If the British pound is expected to appreciate in the near future, would a U.S.-based FI in London prefer to be net long or net short in its asset positions? Discuss.
Consider the simple FI balance sheet below (in millions of dollars). Suppose that depositors unexpectedly withdraw $50 million in deposits and the FI receives no new deposits to replace them.
A money market mutual fund bought $1 million of two-year Treasury notes six months ago. During this time, the value of the securities has increased, but for tax reasons the mutual fund wants to
Consider an FI that issues $100 million of liabilities with one year to maturity to finance the purchase of $100 million of assets with a two year maturity. Suppose that the cost of funds
A property–casualty insurer brings in $6.25 million in premiums on its homeowners multiple line of insurance. The line’s losses amount to $4,343,750, expenses are $1,593,750, and dividends are
An insurance company’s projected loss ratio is 77.5 percent and its expense ratio is 23.9 percent. The company estimates that dividends to policyholders will be 5 percent. What must be the minimum
Insurance companies will charge a higher premium for which of the insurance lines listed below? Why?a. Low-severity, high-frequency lines versus high-severity, low-frequency lines.b. Long-tail versus
Contrast the balance sheet of a property-casualty insurance company (Table 6-5) with the balance sheet of a commercial bank (Table 2-5). Explain the balance sheet differences in terms of the
Contrast the balance sheet of a life insurance company (Table 6-3) with the balance sheet of a commercial bank (Table 2-5) and that of a savings institution (Table 2-9). Explain the balance sheet
a. What is the amount of the annuity purchase required if you wish to receive a fixed payment of $200,000 for 20 years? Assume that the annuity will earn 10 percent per year.b. Calculate the annual
Explain how life insurance and annuity products can be used to create a steady stream of cash disbursements and payments to avoid paying or receiving a single-lump sum cash amount.
Explain how annuity activities represent the reverse of life insurance activities.
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 an annual 12b-1 fee of 25 basis points. How would the length of your expected
Open-end fund A owns 165 shares of AT&T valued at $35 each and 30 shares of Toro valued at $75 each. Closed-end fund B owns 75 shares of AT&T and 72 shares of Toro. Each fund has 1,000
A mutual fund owns 300 shares of General Electric, currently trading at $30, and 400 shares of Microsoft, Inc., currently trading at $54. The fund has 1,000 shares outstanding.a. What is the net
Suppose today a mutual fund contains 2,000 shares of J.P. Morgan Chase, currently trading at $64.75, 1,000 shares of Wal-mart, currently trading at $63.10, and 2,500 shares of Pfizer, currently
Why did the proportion of equities in long-term funds increase from 38.3 percent in 1990 to more than 70 percent by 2000 and then decrease to 56.4 percent in 2015? How might an investor’s
Using the data in Table 5-2, discuss the growth and ownership holdings over the last 35 years of long-term funds versus short-term funds.
How did the National Securities Markets Improvement Act of 1996 (NSMIA) change the regulatory structure of the securities industry?
Based on the data in Table 4-7, what were the largest assets and liabilities of securities firms in 2015? Are these asset and liability categories related? Exactly how does a repurchase agreement
An investor notices that an ounce of gold is priced at $1,018 in London and $1,025 in New York. a. What action could the investor take to try to profit from the price
One of the major activity areas of securities firms is trading.What is the difference between position trading and program trading?
What is the difference between an IPO and a secondary issue?
What have been the major changes in the accounts receivable balances of finance companies over the 38-year period from 1977 to 2015?
How does the asset structure of credit unions compare with the asset structure of commercial banks and savings institutions? Refer to Tables 2-5, 2-9, and 2-12 to formulate your answer.
What happened in 1979 to cause the failure of many savings institutions during the early 1980s? What was the effect of this change on the financial statements of savings associations?
Use the data in Table 2-6 to answer the following questions.a. What was the average annual growth rate in OBS total commitments over the period from 1992-2015?b. Which categories of contingencies
How does the liability maturity structure of a bank’s balance sheet compare with the maturity structure of the asset portfolio? What risks are created or intensified by these differences?
What are five risks common to all financial institutions?

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