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financial markets institutions

Questions and Answers of Financial Markets Institutions

2. What four major weaknesses of the repricing model are?
3. What a runoff means?
4. Why critics argue that the duration model is difficult to apply in real-world situations?How these arguments can be countered?
5. What convexity is?
6. Why an FI can be economically insolvent when its book value of net worth is positive?
7. What the major components of an FI’s book value of equity are?
8. Whether book value accounting for loan losses is backward or forward looking?
9. What a market-to-book ratio that is less than 1 implies about an FI’s performance?
10. What the arguments against the use of market value accounting are?
10. If interest rates rise and an investor holds a bond for a time longer than the duration, will the retum earned exceed or fall short of the original required rate of retum? (LG 22-3)
12. What are the criticisms of using the duration model to immunize an FI's portfolio? (LG 22-2)
15. What are some of the arguments for and against the use of market value versus book value of capital? (LG 22-5)
16. 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)
4. A bank has the following balance sheet: ( LG 22-1 )Avg. Liabilities/ Avg.Assets Rate Equity Rate Rate Rate sensitive $ 550,000 7.75% sensitive $ 375,000 6.25%Fixed rate 755,000 8.75 Fixed rate
10. Use the following balance sheet information to answer this question. ( LG 22-3 )Balance Sheet ($ thousands)and Duration (in years)Duration Amount T-bills 0.5 $ 90 T-notes 0.9 55 T-bonds 4.393 176
1. How have prime rates and CD rates changed since early 2010, as reported in Figure 22–1 ?Go to the Federal Reserve Board’s Web site at www.federalreserve.gov and find the latest information
2. Calculate the spread between the prime rate and CD rate since early 2010. How has the spread changed over the last several years?Go to the Federal Reserve Board’s Web site at
LG 23-1. Know how risk can be hedged with forward contracts.
LG 23-2. Know how risk can be hedged with futures contracts.
LG 23-3. Distinguish a microhedge from a macrohedge.
LG 23-4. Recognize how risk can be hedged with option contracts.
LG 23-5. Comprehend how risk can be hedged with swap contracts.
LG 23-6. Understand how the different hedging methods compare.
1. The difference between a futures contract and a forward contract?
2. The major differences between a spot contract and a forward contract?
3. How a naive hedge works?
4. What is meant by the phrase,“an FI has immunized its portfolio against a particular risk”?
5. The difference between routine hedging and selective hedging?
6. How interest rate increases affect the payoff from buying a call option on a bond? How they affect the payoff from writing a call option on a bond?
7. How interest rate increases affect the payoff from buying a put option on a bond? How they affect the payoff from writing a put option on a bond?
8. What the outcome is if an FI hedges by buying put options on futures and interest rates rise (i.e., bond prices fall)?
9. The difference between a cap, a floor, and a collar used to hedge interest rate risk?
10. The risks involved with hedging with forwards, futures, and options?
12. What the major differences are between the credit risk on swaps and the credit risk on loans?
13. The economic reasons why FIs do not write options?
14. The regulatory reasons why an FI might choose to buy options rather than write them?
15. What the differences are between swap, forward, futures, and option contracts in hedging risk exposure on an FI’s balance sheet?
16. The three levels of regulation to which derivatives are subject?
17. Who the main regulators of derivative trading by FIs are?
7. What is basis risk? What are the sources of basis risk? (LG 23-2)
11. How does hedging with options differ from hedging with forward or futures contracts? (LG 23-6)
16. Explain the similarity between a swap and a forward con- tract. (LG 23-6)
17. Distinguish between a swap seller and a swap buyer. (LG 23-5)
18. Give two reasons why credit swaps have been the fastest- growing form of swaps in recent years. (LG 23-5)
19. What is a total return swap? (LG 23-5)
20. How does a pure credit swap differ from a total return swap? (LG 23-5)
21. Why is the credit risk on a swap lower than the credit risk on a loan? (LG 23-5)
1. A bank purchases a six-month $1 million Eurodollar deposit at an interest rate of 6.5 percent per year. It invests the funds in a six-month Swedish krona bond paying 7.5 percent per year. The
2. What is the duration of a 20-year 8 percent coupon (paid semiannually) Treasury bond (deliverable against the Treasury bond futures contract) selling at par?What is the impact on the Treasury bond
9. Refer to Problem 8. How does consideration of basis risk change your answers? ( LG 23-2 )Compute the number of futures contracts required to construct a macrohedge if [⌬ R f /(1 ⫹ R f )/⌬ R
18. Bank 1 can issue five-year CDs at an annual rate of 11 percent fixed or at a variable rate of LIBOR ⫹ 2 percent. Bank 2 can issue five-year CDs at an annual fixed rate of 13 percent or at a
LG 24-1. Understand the purposes of loan sales and securitizations.
LG 24-2. Identify characteristics that describe the bank loan sales market.
LG 24-3. Discuss factors that encourage and deter loan sales growth.
LG 24-4. Describe the major forms of asset securitization.
LG 24-5. Determine whether all assets can be securitized.
1. What the reasons are for the rapid growth and subsequent decline in loan sales over the last three decades?
2. Which loans should have the highest yields—loans sold with recourse or loans sold without recourse?
3. What the two basic types of loan sales contracts by which loans can be transferred between seller and buyer are? Describe each.
5. What some of the economic and regulatory reasons are that FIs choose to sell loans?
6. What some of the factors are that will likely encourage loan sales growth in the future?
7. What some of the factors are that will likely deter the growth of the loan sales market in the future?
8. What the three forms of asset securitization are? What are the major differences in the three forms?
9. How a simple bank balance sheet changes when a pass-through mortgage is securitized?Assume the mortgage is funded with demand deposits and capital and reserve regulations are in force.
10. Why an investor in a securitized asset who is concerned about prepayment risk would prefer a CMO over a pass-through security?
11. Why an AAA-rated FI would ever issue mortgage-backed bonds? Explain your answer.
12. Whether or not all assets and loans can be securitized?Explain your answer.
7. What are the three levels of regulatory taxes faced by Fls when making loans? How does securitization reduce the levels of taxation? (LG 24-3)
10. How do loan sales and securitization help an FI manage its interest rate and liquidity risk exposures? (LG 24-4)
11. What are the differences between CMOs and MBBS? (LG 24-4)
12. How do Fls use securitization to manage their interest rate, credit, and liquidity risks? (LG 24-4)
13. Why do buyers of class C tranches of collateralized mort- gage obligations (CMOS) demand a lower retum than pur- chasers of class A tranches? (LG 24-4)
1. How has the dollar volume of secondary market loan market trading changed since 2010, as reported in Figure 24–1 ?Go to the Loan Pricing Corporation Web site at www.loanpricing.com , and find
2. What is the percentage of distressed versus par secondary loan market volume?Go to the Loan Pricing Corporation Web site at www.loanpricing.com , and find the most recent information on secondary
3. Who are the lead arrangers of secondary loan market trading, and what percentage of the total market does each one possess?Go to the Loan Pricing Corporation Web site at www.loanpricing.com , and
6. The recent performance of savings institutions?
7. The ways that profit trends for savings institutions have been similar to those of commercial banks in the 1990s and 2000s?
8. How credit unions differ from commercial banks and savings institutions?
9. Why credit unions have prospered in recent years in comparison to savings institutions?
10. How the credit union industry is organized?
11. Why commercial banks and savings institutions claim that credit unions have an unfair advantage in providing bank services?
12. The main assets and liabilities credit unions hold?
13. What the three major types of finance companies are? What types of customers does each serve?
14. What a captive finance company is?
15. How the major assets held by finance companies have changed in the last 35 years?
16. How subprime lender finance company customers differ from consumer loan customers at commercial banks?
17. What advantages finance companies offer over commercial banks to smallbusiness customers?
18. Why finance companies are not subject to the same regulations as banks even though they seem to compete in the same lending markets as banks?
19. How finance companies signal solvency and safety to investors?
1. How do the balance sheets of savings institutions differ from those of commercial banks? How do their sizes compare? (LG 14-1)
5. Who the regulators of savings institutions are?
4. What the major assets and liabilities of savings institutions are?
1. How have these values changed since 2010 as reported in the chapter?Go to the FDIC Web site at www.fdic.gov . Find the most recent reserve balance and reserve ratios held by DIF using the
2. What is the total reserve funds held by DIF and the reserve ratio?Go to the FDIC Web site at www.fdic.gov . Find the most recent reserve balance and reserve ratios held by DIF using the following
LG 14-1. Recognize the differences between a savings institution, a credit union, and a finance company.
LG 14-2. Identify the main assets and liabilities held by savings institutions.
LG 14-3. Know who regulates savings institutions.
LG 14-4. Discuss how savings institutions performed in the 2000s.
LG 14-5. Describe how credit unions are different from other depository institutions.
LG 14-6. Identify the main assets and liabilities held by credit unions.

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