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financial markets institutions

Questions and Answers of Financial Markets Institutions

What is shadow banking? How does the shadow banking system differ from the traditional banking system? (LG 13-2) LO.1
What insurance activities are permitted for U.S. commercial bank holding companies? (LG 13-2) LO.1
A Section 20 subsidiary of a major U.S. bank is planning to underwrite corporate securities and expects to generate $5 million in revenues. It currently underwrites U.S. Treasury securities and
How has the separation of commercial banking and investment banking activities evolved through time? How does this differ from banking activities in other countries? (LG 13-2, LG 13-3) LO.1
What forms of protection and regulation are imposed by regulators of CBs to ensure their safety and soundness? (LG 13-1) LO.1
For example, for Bank of America, the denominator of each of the four ratios ($40,916 +$25,704 = $66,620) less the sum of the numerators of the four ratios ($1,948 + $4,116 +$38,140 + $7,204 =
We are using quarter-end balance sheet data to calculate ratios. The use of these data may bias ratios in that they are data for one day in the year, whereas income statement data cover the full
The ROE framework is similar to the DuPont analysis that managers of nonfinancial institutions frequently use. LO.1
A bank can recognize income for at least 90 days after the due date of the interest payment. LO.1
Reputational considerations and the need for future access to markets for hedging deter the incentive to default (see Chapter 23 as well). However, most empirical evidence suggests that derivative
In a swap, two parties contract to exchange interest rate payments or foreign exchange payments. If interest rates (or foreign exchange rates) move a good deal, one party can face considerable future
Under an interest rate cap, the seller, in return for a fee, promises to compensate the buyer should interest rates rise above a certain level. If rates rise much more than expected, the cap seller
Note that the options still can be subject to interest rate risk; see the discussion in Chapter 23. LO.1
See OCC Bank Derivative Report, First Quarter 2016, and Chapter 10. LO.1
These are often purchased in $100,000 increments. For example, a broker may receive$1 million from an investor and break this up into 10 lots of $100,000 CDs that are placed(brokered out) at 10
Super-NOW accounts have very similar features to NOW accounts, but require a larger minimum balance. LO.1
Investment securities included in the bank’s trading portfolio and designated as trading securities or available-for-sale securities are listed on the balance sheet at their market value. All other
Payments of principal and interest on general obligation bonds are backed by the full faith, credit, and taxing authority of the issuer. Payments of principal and interest on revenue bonds are backed
Not all of a bank’s investment securities can be sold immediately. Some securities, such as U.S. Treasury securities and municipals, can be pledged against certain types of borrowing by the bank
The U.S. Congress passed the Financial Services Modernization Act of 1999, which opened the door for the creation of full-service financial institutions in the United Stales. A financial services
The financial statements reported by banks use book value accounting concepts; that is, assets, liabilities, and equity accounts are generally reported at their original cost or book value. An
From the most recent balance sheet and income statement, calculate the interest income, noninterest income, provision for loan loss, and tax ratios.Which ratio has changed the most since 2016 as
What is the most recent value of total interest income for Bank of America?How has this changed since 2016 as reported in Table 12–3? LO.1
What is the most recent value of total deposits for Bank of America? How has this changed since 2016 as reported in Table 12–1? LO.1
Financial Fitness Bank reported a debt-to-equity ratio of 1.75× at the end of 2018. If the firm’s total assets at year-end were $25 million, how much of its assets are financed with debt? How much
You have been asked to analyze First Union Bank. You have only the following information on the bank at year-end 2018: Net income is$250,000, total debt is $2.5 million, and the bank’s debt ratio
Everytown Bank has the following ratios: (LG 12-5)a. Profit margin: 5%b. Asset utilization: 20%c. Equity multiplier: 7.75×Calculate Everytown’s ROE and ROA. LO.1
Anytown Bank has the following ratios: (LG 12-5)a. Profit margin: 21%b. Asset utilization: 11%c. Equity multiplier: 12×Calculate Anytown’s ROE and ROA. LO.1
Dudley Bank has the following balance sheet and income statement.(LG 12-5)Income Statement Interest on fees and loans $6,715 Interest on repurchase agreements 143 Interest on other investment
Megalopolis Bank has the following balance sheet and income statement. (LG 12-5)Income Statement Interest on fees and loans $ 9,000 Interest on fees and loans $ 9,000 Interest on investment
Community Bank has the following balance sheet, rates earned on its assets, and rates paid on its liabilities. (LG 12-4)Balance Sheet (in thousands)Assets Rate Earned(%)Cash and due from banks $
Smallville Bank has the following balance sheet, rates earned on its assets, and rates paid on its liabilities.Balance Sheet (in thousands)Assets Rate Earned (%)Cash and due from banks $ 6,000 0
The financial statements for THE Bank are shown below: (LG 12-5)page 411 Income Statement THE Bank Interest income $2,450 Interest expense 1,630 Provision for loan losses 80 Noninterest income 240
The financial statements for MHM Bank (MHM) are shown below:(LG 12-5)a. Calculate the dollar value of MHM’s earning assets.b. Calculate the dollar value of MHM’s interest-bearing liabilities.c.
A bank has a balance sheet as shown below. At the beginning of the month, the bank has $15,141,000 in its loan portfolio and $183,000 in the allowance for loan losses. During the month, management
The financial statements for BSW National Bank (BSWNB) are shown below: (LG 12-5)Income Statement BSW National Bank Interest income $1,150 Interest expense 475 Provision for loan losses 150
The financial statements for First National Bank (FNB) are shown below: (LG 12-5)Income Statement First National Bank Interest income $2,600 Interest expense 1,650 Provision for loan losses 180
A bank is considering an investment in a municipal security that offers a yield of 6 percent. What is this security’s tax equivalent yield if the page 410 bank’s tax rate is 35 percent? (LG 12-4)
A bank is considering two securities: a 30-year Treasury bond yielding 7 percent and a 30-year municipal bond yielding 5 percent. If the bank’s tax rate is 30 percent, which bond offers the higher
How does a bank’s asset size affect its financial ratios? (LG 12-5) LO.1
How does a bank’s choice of market niche affect its financial ratios?(LG 12-5) LO.1
What is the difference between the net interest margin and the spread? LO.1
A bank has an ROA of 1.0 percent. The industry average ROA is 1.5 percent. How can ratio analysis help the firm’s managers identify the reasons for this difference? (LG 12-5) LO.1
If a bank’s asset utilization ratio increases, what will happen to its return on equity, all else constant? (LG 12-5) LO.1
A security analyst calculates the following ratios for two banks. How should the analyst evaluate the financial health of the two banks? (LG 12-5)Bank A Bank B Return on equity 22% 24%Return on
What is the likely relationship between the interest income ratio and the noninterest income ratio? (LG 12-5) LO.1
How does the asset utilization ratio for a bank compare to that of a retail company? How do the equity multipliers compare? (LG 12-5) LO.1
How might the use of an end-of-the-year balance sheet bias the calculation of certain ratios? (LG 12-5) LO.1
How does a bank’s annual net income compare with its annual cash flow? (LG 12-4) LO.1
What are the major categories of off-balance-sheet activities? (LG 12-3) LO.1
How do core deposits differ from purchased funds? (LG 12-2) LO.1
How does a retail CD differ from a wholesale CD? (LG 12-2) LO.1
How does a NOW account differ from a demand deposit? (LG 12-2) LO.1
Repurchase agreements are listed as both assets and liabilities in Table 12–1. How can an account be both an asset and a liability? (LG 12-1, LG 12-2) LO.1
If we examine a typical bank’s asset portion of the balance sheet, how are the assets arranged in terms of expected return and liquidity? (LG 12-1) LO.1
Classify the following accounts into one of the following categories:(LG 12-1, LG 12-2, LG 12-3, LG 12-4)a. Assetsb. Liabilitiesc. Equityd. Revenuee. Expensef. Off-balance-sheet activities Service
Match these three types of cash balances with the functions that they serve: (LG 12-1)a. Vault cashb. Deposits at the Federal Reservec. Deposits at other FIs Used to meet legal reserve requirements
What does it mean when a bank has a CAMELS rating of 2? Of 4?(LG 12-1) LO.1
How does a bank’s report of condition differ from its report of income? (LG 12-1, LG 12-4) LO.1
Calculate the percentage of investment securities to total assets, loans to total assets, deposits to total assets, and equity to total assets. How have these changed since 2016? LO.1
Calculate the percentage change in total assets for the commercial bank industry since 2016 reported in Table 11–1. LO.1
What are the advantages and disadvantages of international expansion? (LG 11-8) LO.1
For each of the following banking organizations, identify which regulatory agencies (OCC, FRB, FDIC, or state banking commission)may have some regulatory supervision responsibility. (LG 11-7)a.
What are the main advantages of being a member of the Federal Reserve System? (LG 11-7) LO.1
What are the major functions performed by the FDIC? (LG 11-7) LO.1
Who are the major regulators of commercial banks? Which banks does each agency regulate? (LG 11-7) LO.1
Which commercial banks are experiencing the highest profitability?Which commercial banks are experiencing the lowest profitability?(LG 11-6) LO.1
How has the performance of the commercial banking industry changed in the last 30 years? (LG 11-6) LO.1
Compare and contrast the profitability ratios (ROE and ROA) of banks with assets below and above $100 million in Figure 11–7 from 1990 through 2016. What conclusions can you derive from those
How do small bank activities differ from large bank activities? (LG 11-5) LO.1
What are the differences between community banks, regional banks, and money center banks? Contrast the business activities, locations, and markets of each of these bank groups. (LG 11-6) LO.1
What is a money center bank and a regional bank? (LG 11-5) LO.1
What challenges have been made to the commercial banking industry by nonbanks? (LG 11-5) LO.1
What has been the recent trend in the number of commercial banks in the United States? What factors account for this trend? (LG 11-5) LO.1
The following balance sheet accounts (in millions of dollars) have been taken from the annual report for a U.S. bank. Arrange the accounts in balance sheet order and determine the value of total
What are the main off-balance-sheet activities undertaken by commercial banks? (LG 11-4) LO.1
What types of activities are normally classified as off- balance-sheet(OBS) activities? (LG 11-4)a. How does an OBS activity move onto the balance sheet as an asset or liability?b. What are the
How does one distinguish between an off-balance-sheet asset and an off-balance-sheet liability? (LG 11-4) LO.1
What is meant by an off-balance-sheet activity? What are some of the forces responsible for them? (LG 11-4) LO.1
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? (LG 11-2,
What are the three major segments of deposit funding? How are these segments changing over time? Why? What strategic impact do these changes have on the profitable operation of a bank? (LG 11-3) LO.1
What type of transaction accounts do commercial banks issue? Which type of accounts have dominated the transaction accounts of banks?(LG 11-3) LO.1
What are the principal liabilities for commercial banks? What does this liability structure tell us about the maturity of the liabilities of banks? What types of risks does this liability structure
Why do commercial banks hold investment securities? (LG 11-2) LO.1
What are the principal types of financial assets for commercial banks?How has the relative importance of these assets changed over the past several decades? What are some of the forces that have
What are the major sources of funds for commercial banks in the United States? What are the major uses of funds for commercial banks in the United States? For each of your answers, specify where the
What is meant by the term depository institution? How does a depository institution differ from an industrial corporation? (LG 11-1) LO.1
Note that a cap can be viewed as a call option on interest rates (as discussed here) or as a put option on bond prices, since rising interest rates mean falling bond prices. Similarly, a floor
For interest rate swaps where the dealer intermediates, a different (higher) fixed rate will be set for receiving fixed-rate payments compared to paying a fixed rate. LO.1
See footnote 2 in this chapter. LO.1
In a currency swap, both principal and interest payments are usually included as part of the swap agreement. For interest rate swaps, it is usual to include only interest rate payments. The reason
These rates implicitly assume that this is the cheapest way each party can hedge its interest rate exposure. For example, LIBOR plus 1.5 percent is the lowest cost way that the money center bank can
For example, futures contracts are offered usually with a maximum maturity of two years or less. LO.1
For example, a four-year swap with annual swap dates involves four net cash flows between the parties to a swap. This is essentially similar to arranging four forward rate agreement (FRA) contracts:
There are also swaptions, which are options to enter into a swap agreement at some preagreed contract terms (e.g., a fixed rate of 10 percent) at some time in the future in return for the payment of
To keep the focus of this example on the ability to hedge risk on a stock portfolio using a stock index option, we do not include transaction costs or taxes in the calculations. LO.1
Times 100 since each option contract is for 100 shares. LO.1
Other major exchanges are the New York Stock Exchange, the American Stock Exchange, the Pacific Stock Exchange (part of NYSE Euronext), the Financial Instrument Exchange of the ICE Futures U.S., the
See J. Cox and M. Rubinstein, Options Markets (Englewood Cliffs, NJ: Prentice-Hall, 1985). LO.1
Traders using options get extra leverage on their investments. For example, suppose that a stock price is $32 and an investor who feels that this price will rise buys call options with an exercise

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