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business
financial markets institutions

Questions and Answers of Financial Markets Institutions

How do FIs reduce monitoring costs associated with the flow of funds from fund suppliers to fund investors? ( LG 1-6 )
Why would a world limited to the direct transfer of funds from suppliers of funds to users of funds likely result in quite low levels of fund flows? ( LG 1-6 )
How would economic transactions between suppliers of funds (e.g., households) and users of funds (e.g., corporations) occur in a world without FIs? ( LG 1-6 )
What are the different types of financial institutions? Include a description of the main services offered by each. ( LG 1-5 )
If a U.S. bank is holding Japanese yen in its portfolio, what type of exchange rate movement would the bank be most concerned about? ( LG 1-3 )
Which of the capital market instruments has grown the fastest since 1990? ( LG 1-2 )
What are the major instruments traded in capital markets? ( LG 1-2 )
Which of the money market instruments has grown the fastest since 1990? ( LG 1-2 )
How does the location of the money market differ from that of the capital market? ( LG 1-2 )
Classify the following financial instruments as money market securities or capital market securities: ( LG 1-2 )a. Banker’s acceptancesb. Commercial paperc. Common stockd. Corporate bondse.
Classify the following transactions as taking place in the primary or secondary markets: ( LG 1-1 )a. IBM issues $200 million of new common stock.b. The New Company issues $50 million of common stock
LG 19-1. Describe the major risks faced by financial institutions.
LG 19-2. Recognize that insolvency risk is a consequence of the other types of risk.
LG 19-3. Understand how the various risks faced by financial institutions are related.
1. Why credit risk exists for FIs?
2. How diversification affects an FI’s credit risk exposure?
3. Why an FI might face a sudden liquidity crisis?
5. What refinancing risk is?
6. Why a rise in the level of interest rates adversely affects the market value of both assets and liabilities?
7. What the concept of maturity matching means?
8. What market risk is?
9. What modern conditions have led to an increase in market risk for FIs?
10. Why FIs are motivated to pursue off-balance-sheet business? What are the risks?
11. Why letter of credit guarantees are an off-balance-sheet item?
12. Why the returns on domestic and foreign portfolio investments are not, in general, perfectly correlated?
13. How an FI can be subject to sovereign risk even if it lends to the highest quality foreign corporations?
14. How an FI can discipline a country that threatens not to repay its loans?
15. How operational risk is related to technology risk?
16. How technological expansion can help an FI better exploit economies of scale and economies of scope?
17. When insolvency risk occurs?
18. How insolvency risk is related to credit risk and liquidity risk?
19. What the term event risk means?
20. The event and general macroeconomic risks facing FIs?
6. What is refinancing risk? How is refinancing risk part of interest rate risk? If an FI funds long-term fixed-rate assets with short-term liabilities, what will be the impact on cam- ings of an
7. What is reinvestment risk? How is reinvestment risk part of interest rate risk? If an FI funds short-term assets with long-term liabilities, what will be the impact on camings of a decrease in the
8. The sales literature of a mutual fund claims that the fund has no risk exposure since it invests exclusively in default risk-free federal govemment securities. Is this claim true? Why or why not?
18. If intemational capital markets are well integrated and oper- ate efficiently, will banks be exposed to foreign exchange risk? What are the sources of foreign exchange risk for FIs? (LG 19-1)
27. Why can insolvency risk be classified as a consequence or outcome of any or all of the other types of risks? (LG 19-2)
1. A financial institution has the following market value balance sheet structure: ( LG 19- 1)Assets Liabilities and Equity Cash $ 1,000 Certificate of deposit $10,000 Bond 10,000 Equity 1,000 Total
2. Consider the following income statement for WatchoverU Savings Inc. (in millions): ( LG 19- 1)Assets Liabilities Floating-rate NOW accounts mortgages (currently 6%(currently annually) $ 70 10%
1. How has the charge-off rate changed since 2010 as reported in Figure 19–1 ?Go to the FDIC Web site at www.fdic.gov . Find the most recent breakdown for charge-off rates for C&I loans of
2. Compare the charge-off rate of C&I loans with real estate and credit card loans. Which has changed the most since 2010?Go to the FDIC Web site at www.fdic.gov . Find the most recent breakdown for
LG 20-1. Examine trends in nonperforming loans at commercial banks.
LG 20-2. Understand the processes financial institutions use to evaluate a mortgage loan application.
LG 20-3. Use a credit-scoring model.
LG 20-4. Appreciate the analysis that is involved in mid-market commercial and industrial lending.
LG 20-5. Analyze large commercial and industrial loans.
LG 20-6. Calculate the return on a loan.
1. What a credit-scoring system is?
2. What a title search accomplishes?
3. Why large corporations do not rely heavily on FIs to fulfill their financing needs?
4. Why FIs have separate checks on account officers’ granting credit?
5. Why an account officer must be well versed in the FI’s credit policy before talking to potential borrowers?
6. Why a credit officer should be concerned if a borrower’s number of days’ receivables increases beyond the industry norm?
7. What the major problems with the Z-score model of credit-risk are?
8. What factors impact the rate of return on loans issued by FIs?
9. What the difference between the ROA and the RAROC on a loan is?
1. Why is credit risk analysis an important component of Fl risk management? (LG 20-1)
7. Why could a lender's expected return be lower when the risk premium is increased on a loan? (LG 20-6)
2. 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 Value Annual gross income $45,000
3. In 2012, Webb Sports Shop had cash flows from investing activities of $2,567,000 and cash flows from financing activities of $3,459,000. The balance in the firm’s cash account was $950,000 at
4. Use the balance sheet and income statement below to construct 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
6. Consider the following company’s balance sheet and income statement. ( LG 20- 4)Balance Sheet Assets Liabilities and Equity Cash $ 4,000 Accounts payable $ 30,000 Accounts Notes receivable
7. 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
8. 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 ratio 2.0 timesb. Quick ratio 1.2 timesc. Days sales in
10. The following is ABC, Inc.’s, balance sheet (in thousands):( LG 20- 5)Assets Liabilities Cash $ 20 Accounts payable $ 30 Accounts receivable 90 Notes payable 90 Inventory 90 Accruals 30
15. 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,
1. How has the nonperformance rate changed since 2010, as reported in Table 20–1 ?Go to the FDIC Web site at www.fdic.gov . Find the most recent breakdown for nonperformance rates for C&I loans of
2. Compare the nonperformance rate of C&I loans with real estate and credit card loans. Which has changed the most since 2010?Go to the FDIC Web site at www.fdic.gov . Find the most recent breakdown
LG 21-1. Identify the causes of liquidity risk.
LG 21-2. Define the two methods financial institutions use to manage liquidity risk.
LG 21-3. Describe how depository institutions measure liquidity risk.
LG 21-4. Examine the components of a liquidity plan.
LG 21-5. Explain why abnormal deposit drains occur.
LG 21-6. Consider the extent to which insurance companies are exposed to liquidity risk.
LG 21-7. Clarify the extent to which investment funds are exposed to liquidity risk.
1. What the sources of liquidity risk are?
2. What the phrase “liquidating assets at fire-sale prices”means?
3. The benefits and costs of using (a) purchased liquidity management and (b) stored liquidity management to meet a deposit drain?
4. What the major sources of DI liquidity are? What the major uses are?
5. What factors determine a DI’s financing requirement?
6. How to measure liquidity risk?
8. Whether a life insurance company can be subjected to a run, and if so, under what circumstances?
9. What the greatest cause of liquidity exposure is that property–casualty insurers face?
10. How state-sponsored guarantee funds for insurance companies differ from deposit insurance?
11. What the impact would be on a DI’s liquidity needs if it offered deposit contracts of an open-end investment fund type rather than the traditional all-or-nothing demand deposit contract?
12. How the incentives of an investment fund’s investors to engage in runs compare with the incentives of DI depositors?
10. Why does deposit insurance deter bank runs? (LG 21-5)
11. What is the greatest cause of liquidity exposure that property-casualty insurers face? (LG 21-6)
12. How is the liquidity problem faced by investment funds different from those of DIs and insurance companies? (LG 21-7)
1. The AllStar Bank has the following balance sheet: ( LG 21- 2)Assets (in millions) Liabilities Cash $ 30 Deposits $ 90 Other assets 140 Borrowed funds 40$170 Other liabilities 40$170 Its largest
2. Consider the balance sheet for the DI listed below: ( LG 21- 2)Assets (in millions) Liabilities Cash $10 Deposits $68 Securities 15 Equity 7 Loans 50 The DI is expecting a $15 million net deposit
1. Using information in this file, update Figure 21–2 .Go to the Federal Reserve Board’s Web site at www.federalreserve.gov, and find the most recent data for the fed funds rate and the discount
2. Calculate the percentage change in each rate since 2010, as reported in Figure 21–2 . Which rate has increased or decreased more? Why?Go to the Federal Reserve Board’s Web site at
LG 22-1. Define the repricing gap measure of interest rate risk.
LG 22-2. Understand the weaknesses of the various interest rate risk models.
LG 22-3. Define the duration gap measure of interest rate risk.
LG 22-4. Discuss how capital protects against credit risk and interest rate risk.
LG 22-5. Highlight the differences between the book value and market value of equity.
1. How FIs can change the size and the direction of their repricing gap?

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