8.

A thrift makes long term fixed rate mortgages funded with short term deposits and then interest rates rise. Which of the following is true?

A) Profitability would decline

B) Profitability would increase

C) The market value of equity increases

D) Interest income would fall

E) Answer:

Both B and C would occur

9.

A bank has $5 million in liquid assets and $95 million in nonliquid assets. Large depositors unexpectedly withdraw $9 million in deposits. To cover the withdrawals the bank sells all of its liquid assets at book value but must sell $7

million at less than their book value of their nonliquid assets to raise the additional funds needs. As a result the bank's equity will _____________.

A) Remain unchanged

B) Fall $3 million

C) Fall $4 million

D) Fall $7 million

E) Rise $5 million

10. The largest asset category in U.S. savings and loans portfolios as of December a. cash.

b. investment securities.

c. mortgage loans.

d. deposits.

e. consumer loans.

II. Please answer the following questions.

1. Why is a banks moral hazard more severe when its capital ratio is low?

2. Use the following market-value balance sheet information to answer the following questions.

Assets (in thousands) Liab&NW

Amount Amount

Duration Duration__ 1-yr CD

Cash C&I Loans Mortgage loans

$100 $400

0.00 1.25

6-yr CD NW

$600 1.00 $300 5.00

$100______________

$500

7.00 $1000

$1000

a. What is the institution's leverage-adjusted duration gap?

b. Now the interest rate is 6%. If next year the interest rate shifts upward 40 basis points, what is the impact on the FI's market value of equity?

c. Suppose the bank wants to use 6-month T-bill futures contracts to macrohedge its interest-rate risk, T-bill futures are currently priced at 97, and one Treasury bond futures contract has face value $100,000. How many T-bill futures contracts would be needed?

3.

An FI has the following Balance Sheet (in millions of dollars):

Assets Cash Loans Securities

$20

$80 $10

Liabilities and Equity Deposits $100

Equity $10

The FI is expecting a $25 million net deposit drain. Show the FI's new balance sheet if:

a. The Stored Liquidity method is used to meet the liquidity shortfall. b. The FI purchases liabilities to offset this expected drain.

4. TransAmerica Bank has estimated its previous days DEAR to be $1.28 million. What is the 10-day VAR using the previous days DEAR estimate?

5. A bank has a $5 million market value position in a 8-year, zero coupon bond. The bond is yielding 8%. The mean change in the daily yields of the 8-year, zero coupon bond has been 5 basis points over the past year with a standard deviation of 10 basis points. Using these data and assuming the yield changes are normally distributed:

(a) (4 points) What is the highest yield change expected if a 99 percent confidence level is required?

(b) (4 points) What is the daily earnings at risk (DEAR) using a 99 percent confidence level?

6. What are the sources of operational risk?

7. A bank has the following capital structure: Item $millions

Notes and debentures $13 Perpetual preferred stock 2 Common Stock 52

Paid in Surplus Retained Earnings Loan-loss reserve

80 405

Calculate its Tier 1 and Tier 2 capital.

8. Given the following pro forma information for a bank, determine its required risk- based capital, both core and supplementary, using the 1992 standards.

Balance-sheet items:

cash and equivalents (0% risk category) $3,000 short-term loans (20% risk category) 40,000 one-four family mortgages (50% risk category) commercial loans (100% risk category) 30,000 Off-balance-sheet items:

Commercial letters of credit (20% risk category) 5,000