1) a) What is the "maturity" of a bank asset or liability? Why can this sometimes be difficult to measure?

*b) How do non-financial firms tend to structure the maturities of their assets relative to bonds used to fund the asset purchases (I.e., do they match maturities, use S-T debt to fund L-T assets, or visa versa?

c) How does your answer to "b" differ for commercial banks? What is the reason for this difference?

2) *a) Why do banks have low levels of equity compared to non-financial firms?

b) How does proportionally low equity financing affect shareholder profitability (i.e., ROE)?

* c) How does low equity affect a bank's risk-taking incentives?

d) What did regulators decide to focus on increasing bank equity requirements instead of restricting bank activities/products to only those with low risk?

3) * (all of below) Identify the following as a source or use of funds (or neither) for a bank?

a) A bank originates a new loan

b) A bank repurchases shares of its stock

c) A bank retains earnings

d) A bank obtains "purchased CDs" (That is, a bank obtains deposits obtained by another bank - this is a purchased liability for the purchasing bank. The purchasing bank obtains the deposit, and all of the obligations associated with that deposit).

e) A bank sells government securities from their asset security portfolio

f) The federal reserve bank increases their reserve requirement

g) A bank issues new bonds

h) A bank increases their federal funds sold

i) A bank originates a mortgage loan

4)Who, if anyone, pays for bank deposit insurance? Why is it called "government" deposit insurance?

5) What problems can banks have in complying with the "Community Reinvestment Act"?

6) a) What is the primary asset of an unconsolidated balance sheet of a bank holding company?

b) What is "double leverage"?

* 7) What is the reason that banks are exposed to liquidity risk more than most non-financial firms?

8) A banks uses of funds exceeds its sources of funds. List two ways banks can quickly remedy this imbalance.

* 9) You have $100,000 deposited in checking in the Loveland branch of Fifth-Third Bank. You also have $400,000 in another account (a savings account) opened at the Montgomery branch of Fifth-Third Bank.

Finally, you have $300,000 deposited in a CD with PNC bank.You have no other bank deposits. Assume these banks are not "Too Big to Fail."

a) If none of the accounts is a joint account, how much of your money is FDIC-insured?

b) If all of the accounts are held by both you, and the same joint owner (assume it is your mother) and your joint owner has no other money deposited in any FDIC bank, how much of this money is FDIC-insured?

c) (Bonus - research this) If you have $750,000 deposited in a CD of a single bank, but the account is owned by three different people, how much of the $750,000 is government insured?

* 10)ABC bank has many branches; XYZ bank has relatively few branches. Both banks are the same size - $100 billion in assets - and operate in a five state region.Compare/contrast likely differences in the expenses incurred by ABC relative to XYZ.

11) a) What are the reasons for the trend of "consolidation" in the financial services industry? b) When a low-risk firm combines with a high-risk firm, what can we say about the risk of the conglomerate? (For simplicity, assume that the low-risk and high-risk firm each comprise 50% of the business of the conglomerate.)

12) List at least two sources of "economies of scale" in banking. (In other words, what would make a larger bank have a relative (per unit) cost advantage?

13) A bank has $20 million in assets (market value), $18 million in government-insured liabilities (market value), and $2 million in equity (market value). The above bank is considering a project, funded with $10 million in cash (an asset) that has a 20% chance of increasing the market value of the bank's assets to $40 million and an 80% chance of decreasing the value of assets to $10 million.

a)What is the expected NPV of the project?

b)Sketch out the bank's market value balance sheets both scenarios.

a.What is the expected value of the equity if the project is accepted?

b.What is the value of the equity if the bank does nothing (i.e., from the original balance sheet?)

14) Consider the advantages and disadvantages of combining commercial bank products and services with investment banking products and services. (You might refer back to the discussion of KeyCorp). Provide a list of the advantages and disadvantages, and state whether the given advantage or disadvantage you list is from the perspective of (1) bank shareholders, (2) regulatory agents seeking to protect the economy, or (3) the bank customer.

* 15) What affects the book value of bank equity? What affects its market value?

16) Briefly, define the following:

a) Wholesale banking

b) Trust Department

c) Basel Accords

d) Fringe bank

e) Commercial Paper

17) a) Compute the monthly payments required on a 30-year bank loan (requiring 360 monthly payments.)The loan amount is $300,000, and the ANNUAL interest rate is 3%.

b) Compute the new market value of the above loan if, immediately after the loan is originated, interest rates (on similar loans) increase to 4%.

18) What is the most commonly used form of payment in the US?: Cash, Debit Card, Credit Card, Paper Check?

19) What activities can a financial holding company perform that a bank holding company cannot?

20) What is the advantage of being a Subchapter S banking firm?

21) What is relationship banking?