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business
financial institutions management

Questions and Answers of Financial Institutions Management

What are some of the methods banking organizations have employed to re- duce the net regulatory burden? What has been the effect on profitability?
In the transmission of monetary policy, what is the difference between inside money and outside money? How does the Federal Reserve Board try to control the amount of inside money? How can this
What forms of protection and regulation do the regulators of Fls impose to ensure their safety and soundness?
Why are Fls among the most regulated sectors in the world? When is the net regulatory burden positive?
If financial markets operated perfectly and costlessly, would there be a need for financial intermediaries?
What is denomination intermediation? How do Fls assist in this process?
What is maturity intermediation? What are some of the ways the risks of ma- turity intermediation are managed by financial intermediaries?
How do Fls alleviate the problem of liquidity risk faced by investors who wish to invest in the securities of corporations?
What is a benefit to lenders, borrowers, and financial markets in general of the solution to the information problem provided by large financial institutions?
How do Fls solve the information and related agency costs when household savers invest directly in securities issued by corporations? What are agency costs?
Identify and explain the two functions in which Fls may specialize that would enable the smooth flow of funds from household savers to corporate users.
Identify and explain three economic disincentives that probably would dampen the flow of funds between household savers of funds and corporate users of funds in an economic world without financial
Explain how economic transactions between household savers of funds and corporate users of funds would occur in a world without financial intermediaries.
Suppose that an FI holds two loans with the following characteristics.Calculate the return and risk on the two-asset portfolio using Moody’s Analytics Portfolio Manager.
The Bank of Tinytown has two $20,000 loans with the following characteristics: Loan A has an expected return of 10 percent and a standard deviation of returns of 10 percent. The expected return and
A manager decides not to lend to any firm in sectors that generate losses in excess of 5 percent of capital.a. If the average historical losses in the automobile sector total 8 percent, what is the
Go to the Federal Reserve Board’s website at www.federalreserve.gov and update Table 10–7 using the following steps. Click on “All Statistical Releases.”Click on “Consumer Credit.” This
Go to the Federal Housing Finance Agency’s website at www.fhfa.gov and find the most recent data on the percentage of conventional single-family mortgages with adjustable rates using the following
Go to the Federal Reserve Board’s website at www.federalreserve.gov and update the data in Table 10–1 using the following steps. Click on “All Statistical Releases.” Click on “Assets and
Consider the following company balance sheet and income statement.Balance Sheet Assets Liabilities and Equity Cash $ 4,000 Accounts payable $ 30,000 Accounts receivable 52,000 Notes payable 12,000
A score between 120 and 190 (noninclusive) is reviewed by a loan committee for a final decision.
Suppose you are a loan officer at Carbondale Local Bank. Joan Doe listed the following information on her mortgage application.Use the information below to determine whether or not Joan Doe should be
A firm has assets of $200,000 and total debts of $175,000. With an option pricing model, the implied volatility of the value of the firm’s assets is estimated at $10,730. Under the Moody’s
A bank is planning to make a loan of $5,000,000 to a firm in the steel industry.It expects to charge a servicing fee of 50 basis points. The loan has a maturity of 8 years with a duration of 7.5
The table below shows the dollar amounts of outstanding bonds and corresponding default amounts for every year over the past five years. Note that the default figures are in millions, while those
The following is a schedule of historical defaults (yearly and cumulative) experienced by an FI manager on a portfolio of commercial and mortgage loans.a. Complete the blank spaces in the table.b.
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 Treasury strip 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 strip and corporate bond (pure discount) yield curves. Be sure to calculate
For the second year, suppose that 1 p2 0.05. Calculate the cumulative probability of default over the next two years.
Suppose an FI manager wants to find the probability of default on a two-year loan. For the one-year loan, 1 p1 0.03 is the marginal and total or cumulative probability ( Cp ) of default in year
Assume that a one-year Treasury strip is currently yielding 5.5 percent and an AAA-rated discount bond with similar maturity is yielding 8.5 percent.a. If the expected recovery from collateral in the
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
Suppose the estimated linear probability model used by an FI to predict business loan applicant default probabilities is PD 0.03 X1 0.02 X2 0.05 X3 error, where X1 is the borrower’s debt/equity
Suppose there were two factors influencing the past default behavior of borrowers: the leverage or debt–assets ratio ( D / A ) and the profit margin ratio ( PM ).Based on past default (repayment)
Although not mentioned in Appendix 9A, for a given percentage ()change in interest rates, the increase in price for a decrease in rates is greater than the decrease in value for an increase in
The change in value of longer-term fixed-rate financial assets increases at a decreasing rate.Rule
The longer is the maturity of a fixed-income financial asset, the greater is the change in price for a given change in interest rates.Rule
Interest rates and prices of fixed-rate financial assets move inversely.Rule
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 at a yield to maturitya. Complete the following table:b. Use
A financial institution has an investment horizon of two years 9.33 months(or 2.777 years). The institution has converted all assets into a portfolio of 8 percent, $1,000 three-year bonds that are
Explain how this goal changes the desired duration gap for the institution. Why does this differ from the duration gap necessary to immunize the total equity? How would your answers to part (h) in
Assume that a goal of the regulatory agencies of financial institutions is to immunize the ratio of equity to total assets, that is, Δ( E / A )
The following balance sheet information is available (amounts in thousands of dollars and duration in years) for a financial institution:Amount Duration T-bills T-notes T-bonds Loans Deposits Federal
The balance sheet for Gotbucks Bank Inc. (GBI) is presented below ($ millions).Assets Liabilities and Equity Cash Federal funds Loans (floating)Loans (fixed)$ 30 20 105 65 Core deposits Federal funds
Financial Institution XY has assets of $1 million invested in a 30-year, 10 percent semiannual coupon Treasury bond selling at par. The duration of this bond has been estimated at 9.94 years. The
Consider the case in which an investor holds a bond for a period of time longer than the duration of the bond, that is, longer than the original investment horizon.a. If interest rates rise, will the
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 second bond is a two-year, $1,000 zero-coupon
A one-year, $100,000 loan carries a coupon rate and a market interest rate of 12 percent. The loan requires payment of accrued interest and one-half of the principal at the end of six months. The
What are the two different general interpretations of the concept of duration, and what is the technical definition of this term? How does duration differ from maturity?
What is the impact over the next year on net interest income if interest rates on RSAs increase 60 basis points and on RSLs increase 40 basis points?1 . What is the difference between book value
What is the repricing gap if the planning period 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, 2 f1
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: 5.65%( ) 6.75% 0.05%( ) 6.85% 0.10%(
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
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, respectively. According
The current one-year Treasury bill rate is 5.2 percent, and the expected one-year rate 12 months from now is 5.8 percent. According to the unbiased expectations theory, what should be the current
Suppose that the current one-year rate (one-year spot rate) and expected oneyear T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows:1 1 R Er Er Er
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 which
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 $ 850 Equity 150 Total assets $1,000 Total liabilities and equity $1,000 The average maturity of
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 maturity 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.a. What is the maturity gap for County
Nearby Bank has the following balance sheet (in millions):Assets Liabilities and Equity Cash $ 60 Demand deposits $140 5-year Treasury notes 60 1-year certificates of deposit 160 30-year mortgages
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 Avg. Rate Liabilities/Equity Avg. Rate Rate sensitive $225,000 6.35% Rate sensitive $300,000 4.25%Fixed rate 550,000 7.55 Fixed rate 505,000 6.15
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 Liabilities and Equity Cash $ 20 Overnight
A bank has the following balance sheet:Assets Avg. Rate Liabilities/Equity Avg. Rate Rate sensitive $ 550,000 7.75% Rate sensitive $ 575,000 6.25%Fixed rate 755,000 8.75 Fixed rate 605,000 7.50
A bank has the following balance sheet:Assets Avg. Rate Liabilities/Equity Avg. Rate Rate sensitive $ 550,000 7.75% Rate sensitive $ 375,000 6.25%Fixed rate 755,000 8.75 Fixed rate 805,000 7.50
Consider the following balance sheet for WatchoverU Savings Inc. (in millions):Assets Liabilities and Equity Floating-rate mortgages(currently 10% annually) $ 50 1-year time deposits(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
Which of the following assets or liabilities fit the one-year rate or repricing sensitivity test?3-month U.S. Treasury bills 1-year U.S. Treasury notes 20-year U.S. Treasury bonds 20-year
What is the gap to total assets ratio? What is the value of this ratio to interest rate risk managers and regulators?
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
Premises 6.25$337.50 $337.50a. Calculate the value of MMC’s rate-sensitive assets, rate-sensitive liabilities, and repricing gap over the next year.b. Calculate the expected change in the net
Two-year time deposits 50.00
30-year, floating-rate mortgages 50.00
One-year time deposits 25.00
10-year, fixed-rate mortgages 25.00
Six-month commercial paper 75.00
Three-year T-bonds 75.00
Three-month bankers’ acceptances 25.00
Six-month T-notes 43.75
Three-month CDs 50.00
Three-month T-bills 37.50
Passbook savings 37.50
Long-term consumer loans(two-year maturity) 31.25
Demand deposits 50.00
Short-term consumer loans(one-year maturity) 62.50
Equity capital (fixed) $ 25.00
Cash and due from $ 6.25
Consider the following balance sheet for MMC Bancorp (in millions of dollars):Assets Liabilities
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
Which of the following is an appropriate change to make on a bank’s balance sheet when GAP is negative, spread is expected to remain unchanged, and interest rates are expected to rise?a. Replace
What is the CGAP effect? According to the CGAP effect, what is the relation between changes in interest rates and changes in net interest income when CGAP is positive? When CGAP is negative?
What is a maturity bucket in the repricing model? Why is the length of time selected for repricing assets and liabilities important in using the repricing model?
What is the repricing gap? In using this model to evaluate interest rate risk, what is meant by rate sensitivity? On what financial performance variable does the repricing model focus? Explain.
How has the increased level of financial market integration affected interest rates?
Consider these four types of risks: credit, foreign exchange, market, and sovereign. These risks can be separated into two pairs of risk types in which each pair consists of two related risk types,
Discuss the interrelationships among the different sources of FI risk exposure.Why would the construction of an FI risk management model to measure and manage only one type of risk be incomplete?

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