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financial markets institutions

Questions and Answers of Financial Markets Institutions

Consider the following. (LG 22-3)a. Calculate the leverage-adjusted duration gap of an FI thata. Calculate the leverage-adjusted duration gap of an FI that has assets of $1 million invested in
Consider the following. (LG 22-3)a. What is the duration of a two-year bond that pays an annual coupon of 10 percent and whose current yield to maturity is 14 percent? Use $1,000 as the face value.b.
Use the following information about a hypothetical govern- ment security dealer named J.P. Groman. (Market yields are in parentheses; amounts are in millions.) (LG 22-1) Assets Liabilities and Equity
A bank has the following balance sheet: (LG 22-1) Assets Avg. Rate Avg. Rate Liabilities/ Equity Rate Rate sensitive $ 550,000 7.75% sensitive $ 375,000 6.25% Fixed rate 755,000 8.75 Fixed rate
Consider the following balance sheet for Watchovia Bank (in millions): (LG 22-1) Assets Liabilities and Equity Floating-rate 1-year time mortgages (currently deposits (currently 10% annually) $ 50 6%
Consider the following balance sheet for Watchover Savings Inc. (in millions): (LG 22-1) Assets Liabilities and Equity Floating-rate Now deposits mortgages (currently (currently 10% p.a.) $ 60 6%
Calculate the repricing gap and impact on net interest income of a 1 percent increase in interest rates for the fol- lowing positions: (LG 22-1)a. Rate-sensitive assets = $100 million; Rate-sensitive
Why is the market value of equity a better measure of a bank's ability to absorb losses than book value of equity? (LG 22-5)
What are some of the arguments for and against the use of market value versus book value of capital? (LG 22-5)
What are the differences between the economist's definition of capital and the accountant's definition of capital? (LG 22-4) j. How does economic value accounting recognize the adverse effects of
What is the difference between book value accounting and market value accounting? How do interest rate changes affect the value of bank assets and liabilities under the two methods? (LG 22-5)
What are the criticisms of using the duration model to immunize an FI's portfolio? (LG 22-2)
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 duration gap to take advan- tage of this
If interest rates rise and an investor holds a bond for a time longer than the duration, will the return earned exceed or fall short of the original required rate of return? (LG 22-3)
If you use duration only to immunize your portfolio, what three factors affect changes in an FI's net worth when inter- est rates change? (LG 22-3)
How is duration related to the interest elasticity of a fixed- income security? What is the relationship between duration and the price of the fixed-income security? (LG 22-3)
Consider the repricing model. (LG 22-2)a. What are some of its weaknesses?b. How have large banks solved the problem of choosing the optimal time period for repricing?
Which of the following assets or liabilities fit the one-year rate or repricing sensitivity test? (LG 22-1)a. 91-day U.S. Treasury bills.b. 1-year U.S. Treasury notes.c. 20-year U.S. Treasury
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 repricing gap to take advan- tage of this
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? (LG 22-1)a.
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? (LG 22-1)
What is a maturity bucket in the repricing model? Why is the length of time selected for repricing assets and liabilities important when using the repricing model? (LG 22-1)
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. (LG
Calculate the percentage change in each rate since 2010, as reported in Figure 21-2. Which rate has increased or decreased more? Why?
Using information in this file, update Figure 21-2.
A mutual fund has $1 million in cash and $9 million invested in securities. It currently has I million shares outstanding. (LG 21-7)a. What is the NAV of this fund?b. Assume that some of the
A mutual fund has the following assets in its portfolio: $40 million in fixed-income securities and $40 million in stocks at current market values. In the event of a liquidity crisis, it can sell its
The Plainbank has $10 million in cash and equivalents, $30 million in loans, and $15 in core deposits. Calculate (a) the financing gap and (b) the financing requirement. (LG 21-3)
A DI has the following assets in its portfolio: $20 million in cash reserves with the Fed, $20 million in T-bills, and $50 million in mortgage loans. If it needs to dispose of its assets at short
The Acme Corporation has been acquired by the Conglom- erate Corporation. To help finance the takeover, Conglomer- ate is going to liquidate the overfunded portion of Acme's pension fund. The assets
ADI has $10 million in T-bills, a $5 million line of credit to bor- row in the repo market, and $5 million in excess cash reserves (above reserve requirements) with the Fed. The DI currently has
A DI has assets of $10 million consisting of $1 million in cash and $9 million in loans. It has core deposits of $6 million. It also has $2 million in subordinated debt and $2 million in equity.
Consider the balance sheet for the DI listed below: (LG 21-2) Assets (in millions) Cash Securities Loans Liabilities $10 15 Deposits Equity $68 7 50 The DI is expecting a $15 million net deposit
The AllStar Bank has the following balance sheet: (LG 21-2) Assets (in millions) Cash Other assets Liabilities $ 30 Deposits $90 140 $170 Borrowed funds 40 Other liabilities 40 $170 Its largest
How is the liquidity problem faced by investment funds different from those of DIs and insurance companies? (LG 21-7)
What is the greatest cause of liquidity exposure that property-casualty insurers face? (LG 21-6)
Why does deposit insurance deter bank runs? (LG 21-5)
Describe the unprecedented steps the Federal Reserve took with respect to the discount window operations during the financial crisis. (LG 21-5)
What is a bank run? What are some possible withdrawal shocks that could initiate a bank run? What feature of the demand deposit contract provides deposit withdrawal momentum that can result in a bank
What are the several components of a DI's liquidity plan? How can the plan help a DI reduce liquidity shortages? (LG 21-4)
Define each of the following four measures of liquidity risk. Explain how each measure would be implemented and uti- lized by a DI. (LG 21-3)a. Sources and uses of liquidity.b. Peer group ratio
How is asset side liquidity risk likely to be related to liabil- ity side liquidity risk? (LG 21-2)
The probability distribution of the net deposit drain of a DI has been estimated to have a mean of 2 percent and a stan- dard deviation of 1 percent. (LG 21-2)a. Is this DI increasing or decreasing
What are the two reasons liquidity risk arises? How does liquidity risk arising from the liability side of the balance sheet differ from liquidity risk arising from the asset side of the bal- ance
Why would a DI be forced to sell assets at fire-sale prices? (LG 21-1)
How does the degree of liquidity risk differ for different types of financial institutions? (LG 21-1)
Calculate the percentage of mortgage loans outstanding comprised of 1- to 4-family, multifamily residential, commercial, and farm loans.
What is the current dollar value of mortgage loans outstanding? How has this value changed since 2010 as reported in Figure 7–1 ?
You plan to purchase a house for $175,000 using a 15-year mortgage obtained from your local bank. You will make a down payment of 25 percent of the purchase price and monthly payments. You will not
You plan to purchase a house for $195,000 using a 30-year mortgage obtained from your local bank. You will make a down payment of 20 percent of the purchase price and monthly payments. You will not
You plan to purchase a house for $115,000 using a 30-year mortgage obtained from your local bank. You will make a down payment of 20 percent of the purchase price and monthly payments. You will not
e cel x Using a Spreadsheet to Calculate Mortgage Payments: What is the monthly payment on a $150,000, 30-year mortgage if the mortgage rate is 5.75 percent? 6.25 percent? 7.5 percent? 9 percent? (
e cel x Using a Spreadsheet to Calculate Mortgage Payments: What is the monthly payment on a $150,000, 15-year mortgage if the mortgage rate is 5.75 percent? 6.25 percent? 7.5 percent? 9 percent? (
You plan to purchase a $200,000 house using a 30-year mortgage obtained from your local credit union. The mortgage rate offered to you is 6.50 percent. You will make a down payment of 20 percent of
You plan to purchase a $150,000 house using a 15-year mortgage obtained from your local credit union. The mortgage rate offered to you is 5.25 percent. You will make a down payment of 20 percent of
You plan to purchase an $80,000 house using a 15-year mortgage obtained from your local bank. The mortgage rate offered to you is 8.00 percent. You will make a down payment of 20 percent of the
You plan to purchase a $175,000 house using a 15-year mortgage obtained from your local bank. The mortgage rate offered to you is 7.75 percent. You will make a down payment of 20 percent of the
You plan to purchase a $100,000 house using a 30-year mortgage obtained from your local credit union. The mortgage rate offered to you is 8.25 percent. You will make a down payment of 20 percent of
Describe a collateralized mortgage obligation. How is a CMO created? ( LG 7-8 )
What is the Federal National Mortgage Association? How does this organization play a role in secondary mortgage markets? ( LG 7-7 )
What is the Government National Mortgage Association? How does this organization play a role in secondary mortgage markets? ( LG 7-7 )
What is a pass-through security? ( LG 7-7 )
How did mortgage-backed securities contribute to the recent financial crisis? ( LG 7-1 )
What is a mortgage sale? How does a mortgage sale differ from the securitization of mortgage?
How did the U.S. secondary mortgage markets evolve? ( LG 7-1 )
What is an option ARM? What are the different options available with this type of mortgage? ( LG 7-5 )
What is a subprime mortgage? What instrumental role did these mortgages play in the recent financial crisis? ( LG 7-5 )
What is a jumbo mortgage? ( LG 7-5 )
Explain the difference between a fixed-rate mortgage and an adjustable-rate mortgage. Include a discussion of mortgage borrowers’ versus mortgage lenders’ preferences for each. ( LG 7-3 )
What is the purpose of putting a lien against a piece of property? ( LG 7-3 )
Why are mortgage markets studied as a separate capital market? ( LG 7-1 )
Compare the nonperformance rate of C&I loans with real estate and credit card loans. Which has changed the most since 2010?
How has the nonperformance rate changed since 2010, as reported in Table 20-1?
A bank has two loans of equal size outstanding. A and B. and the bank has identified the returns they would earn in two different states of nature, 1 and 2, representing default and no default,
An FI is planning to give a loan of $5,000,000 to a firm in the steel industry. It expects to charge an up-front fee of 0.10 percent and a service fee of 5 basis points. The loan has a maturity of 8
Metrobank offers one-year loans with a 9 percent stated rate, charges a 1/4 percent loan origination fee, imposes a 10 percent compensating balance requirement, and must pay a 6 percent reserve
Countrybank offers one-year loans with a stated rate of 10 percent but requires a compensating balance of 10 percent. What is the true cost of this loan to the borrower? (LG 20-6)
Suppose that the financial ratios of a potential borrowing firm took the following values: X = Net working capital/ Total assets = .10, X = Retained earnings/Total assets = .20, X3 = Earnings before
The following is ABC, Inc.'s, balance sheet (in thousands): (LG 20-5) Assets Liabilities Cash $ 20 Accounts receivable Inventory 288 Accounts payable $ 30 90 Notes payable 90 90 Accruals 30 Long-term
Industrial Corporation has a net income-to-sales (profit margin) ratio of .03, a sales-to-assets (asset utilization) ratio of 1.5, and a debt-to-asset ratio of .66. What is Industrial's return on
Profit margin m. ROA n. ROE 55.55% 28.75% 19.75% 36.88% 35% o. Dividend payout ratio Using these ratios for Lake of Egypt Marina Inc. and the industry, what can you conclude about Lake of Egypt Mari-
Calculate the following ratios for Lake of Egypt Marina Inc. as of year-end 2013. (LG 20-4) Lake of Egypt Marina, Inc. Industrya. Current ratiob. Quick ratioc. Days sales in receivables 2.0 timesd.
(LG 20-4) Lake of Egypt Marina Inc. Balance Sheet as of December 31, 2012 and 2013 (in millions of dollars) 2012 2013 Assets Liabilities & Equity 2012 2013 Current assets: Current liabilities: Cash
In Problem 6, how might we determine whether these ratios reflect a well-managed, creditworthy company? (LG 20-4) Use the following financial statements for Lake of Egypt Marina to answer Problem
Consider the following company's balance sheet and income statement. (LG 20-4) Assets Balance Sheet Liabilities and Equity Cash $ 4,000 Accounts payable $ 30,000 Accounts Notes receivable 52,000
Harper Outdoor Furniture, Inc., has net cash flows from operating activities for the last year of $340 million. The income statement shows that net income is $315 million and depreciation expense is
Use the balance sheet and income statement below to con- struct a statement of cash flows for 2013 for Clancy's Dog Biscuit Corp. (LG 20-4) Clancy's Dog Biscuit Corporation Balance Sheet as of
In 2012, Webb Sports Shop had cash flows from investing activities of $2,567,000 and cash flows from financing activ- ities of $3,459,000. The balance in the firm's cash account was $950,000 at the
Suppose you are a loan officer at Carbondale Local Bank. Joan Doe listed the following information on her mortgage application: (LG 20-2, LG 20-3) Characteristic Annual gross income TDS Relations
Jane Doe earns $30,000 per year and has applied for an $80,000, 30-year mortgage at 8 percent interest, paid monthly. Property taxes on the house are expected to be $1,200 per year. If her bank
Explain how modern portfolio theory can be applied to lower the credit risk of an FI's portfolio. (LG 20-6)
How does loan portfolio risk differ from individual loan risk? (LG 20-6)
Why could a lender's expected return be lower when the risk premium is increased on a loan? (LG 20-6) The following Questions are related to the Appendix material.
Consider the coefficients of Altman's Z-score. Can you tell by the size of the coefficients which ratio appears most important in assessing the creditworthiness of a loan appli- cant? Explain. (LG
How does ratio analysis help to answer questions about the production, management, and marketing capabilities of a prospective borrower? (LG 20-4)
What are some of the special risks and considerations when lending to small businesses rather than large businesses? (LG 20-4, LG 20-5)
In what ways does the credit analysis of a mid-market borrower differ from that of a small-business borrower? (LG 20-4)
How does an FI evaluate its credit risks with respect to con- sumer and commercial loans? (LG 20-1)
Why is credit risk analysis an important component of FI risk management? (LG 20-1)
How has the distribution of underwriting activity changed since 2010, as reported in Table 16-6?

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