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Questions and Answers of Banking

Consider the following.a. Calculate the leverage-adjusted duration gap of an FI that has assets of $ 1 million invested in 30-year, 10 percent semiannual coupon Treasury bonds selling at par and
Use the data provided for Gotbucks Bank, Inc., to answer this question.Notes to the balance sheet: Currently, the fed funds rate is 8.5 percent. Variable-rate loans are priced at 4 percent over LIBOR
An insurance company issued a $ 90 million one- year, zero-coupon note at 8 percent add- on annual interest (paying one coupon at the end of the year) and used the proceeds plus $ 10 million in
Use the following balance sheet information to answer this question.a. What is the average duration of all the assets?b. What is the average duration of all the liabilities?c. What is the FI’s
Two banks are being examined by regulators to determine the interest rate sensitivity of their balance sheets. Bank A has assets composed solely of a 10-year $ 1 million loan with a coupon rate and
What are some of the major differences between futures and forward contracts?
What is a naive hedge? How does a naive hedge protect an FI from risk?
Suppose that you purchase a Treasury bond futures contract at $ 95 per $ 100 of face value. a. What is your obligation when you purchase this futures contract? b. If an FI purchases this contract, in
What are the differences between a microhedge and a macrohedge for an FI? Why is it generally more efficient for FIs to employ a macrohedge than a series of microhedges?
Answer the following: a. What are the two ways to use call and put options on T-bonds to generate positive cash flows when interest rates decline? b. When and how can an FI use options on T-bonds to
How does hedging with options differ from hedging with forward or futures contracts?
In each of the following cases, identify what risk the manager of an FI faces and whether the risk should be hedged by buying a put or a call option. a. A commercial bank plans to issue CDs in three
Suppose that an FI manager writes a call option on a T-bond futures contract with an exercise price of 114 at a quoted price of 0-55. What type of opportunities or obligations does the manager have?
How can caps, floors, and collars be used to hedge interest rate risk?
Explain the similarity between a swap and a forward contract.
What is a total return swap?
How does a pure credit swap differ from a total return swap?
Why is the credit risk on a swap lower than the credit risk on a loan?
In each of the following cases, indicate whether it would be appropriate for an FI to buy or sell a forward contract to hedge the appropriate risk. a. A commercial bank plans to issue CDs in three
What is basis risk? What are the sources of basis risk?
Consider Table. What are the prices paid for the following futures options: a. March U. S. Treasury-Bond calls at 13400. b. December 5-year Treasury puts at 12075. c. December Eurodollar calls at
Give two reasons why credit swaps have been the fastest-growing form of swaps in recent years.
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
An insurance company owns $ 50 million of floating- rate bonds yielding LIBOR plus 1 percent. These loans are financed by $ 50 million of fixed-rate guaranteed investment contracts (GICs) costing 10
A commercial bank has $ 200 million of floating-rate loans yielding the T-bill rate plus 2 percent. These loans are financed by $ 200 million of fixed-rate deposits costing 9 percent. A savings
A British bank issues a $ 100 million, three-year Eurodollar CD at a fixed annual rate of 7 percent. The proceeds of the CD are lent to a British company for three years at a fixed rate of 9 percent.
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 variable
Answer the following.a. 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?b. What is the
An FI holds a 15-year, $ 10,000,000 par value bond that is priced at 104 and yields 7 percent. The FI plans to sell the bond but for tax purposes must wait two months. The bond has a duration of 9.4
Hedge Row Bank has the following balance sheet (in millions):The duration of the assets is six years and the duration of the liabilities is four years. The bank is expecting interest rates to fall
Tree Row Bank has assets of $ 150 million, liabilities of $ 135 million, and equity of $ 15 million. The asset duration is six years and the duration of the liabilities is four years. Market interest
A mutual fund plans to purchase $ 500,000 of 30-year Treasury bonds in four months. These bonds have a duration of 12 years and are priced at 96- 08 (32nds). The mutual fund is concerned about
Consider the following balance sheet (in millions) for an FI:a. What is the FI€™s duration gap? b. What is the FI€™s interest rate risk exposure? c. How can the FI use futures
Refer to Problem 12. How does consideration of basis risk change your answers? a. Compute the number of T-bond futures contracts required to construct a macrohedge if T-bond futures are priced at 96
An FI has a $ 100 million portfolio of six-year Eurodollar bonds that have an 8 percent coupon. The bonds are trading at par and have a duration of five years. The FI wishes to hedge the portfolio
Corporate Bank has $ 840 million of assets with a duration of 12 years and liabilities worth $ 720 million with a duration of seven years. Assets and liabilities are yielding 7.56 percent. The bank
An FI has a $ 200 million asset portfolio that has an average duration of 6.5 years. The average duration of its $ 160 million in liabilities is 4.5 years. Assets and liabilities are yielding 10
A mutual fund plans to purchase $ 10 million of 20-year T-bonds in two months. The bonds are yielding 7.68 percent. These bonds have a duration of 11 years. The mutual fund is concerned about
An FI has purchased a $ 200 million cap of 9 percent at a premium of 0.65 percent of face value. A $ 200 million floor of 4 percent is also available at a premium of 0.69 percent of face value.a. If
How would your answer for part (b) in Problem 9 change if the relationship of the price sensitivity of futures con-tracts to the price sensitivity of underlying bonds were [∆Rf/(1 + Rf)/∆R/(1 +
Village Bank has $ 240 million worth of assets with a duration of 14 years and liabilities worth $ 210 million with a duration of four years. In the interest of hedging interest rate risk, Village
Why have FIs been very active in loan securitization issuance of pass-through securities while they have reduced their volume of loan sales? Under what circumstances would you expect loan sales to
What is the difference between loans sold with recourse and without recourse from the perspective of both sellers and buyers?
What are some of the key features of short-term loan sales?
Why are yields higher on loan sales than they are for similar maturity and issue size commercial paper issues?
What is the difference between loan participations and loan assignments?
What are highly leveraged transactions? What constitutes the federal regulatory definition of an HLT?
Who are the buyers and sellers of U.S. loans? Why do they participate in this activity?
In addition to managing credit risk, what are some other reasons for the sale of loans by FIs?
What are the three levels of regulatory taxes faced by FIs when making loans? How does securitization reduce the levels of taxation?
What specific changes occur on the balance sheet at the completion of the securitization process? What adjustments occur to the risk profile of the FI?
What is prepayment risk? How does prepayment risk affect the cash flow stream on a fully amortized mortgage loan? What are the two primary factors that cause early payment?
What is a collateralized mortgage obligation (CMO)? How is it similar to a pass-through security? How does it differ? In what way does the creation of a CMO use market segmentation to redistribute
What are the differences between CMOs and MBBs?
How do FIs use securitization to manage their interest rate, credit, and liquidity risks?
Why do buyers of class C tranches of collateralized mortgage obligations (CMOs) demand a lower return than purchasers of class A tranches?
Can all assets and loans be securitized? Explain your answer.
A bank has made a three-year, $ 10 million dollar loan that pays annual interest of 8 percent. The principal is due at the end of the third year.a. The bank is willing to sell this loan with recourse
City Bank has made a 10-year, $ 2 million loan that pays annual interest of 10 percent per year. The principal is expected at maturity. a. What should it expect to receive from the sale of this loan
An FI is planning the purchase of a $ 5 million loan to raise the existing average duration of its assets from 3.5 years to 5 years. It currently has total assets worth $ 20 million, $ 5 million in
An FI is planning to issue $ 100 million in commercial loans. It will finance all of it by issuing demand deposits. a. What is the minimum capital required if there are no reserve requirements? b.
Consider $ 200 million of 30-year mortgages with a coupon of 10 percent paid quarterly.a. What is the quarterly mortgage payment?b. What are the interest repayments over the first year of life of the
Consider $ 100 million of 30-year mortgages with a coupon of 5 percent per year paid quarterly.a. What is the quarterly mortgage payment?b. What are the interest and principal repayments over the
What is the impact on GNMA pricing if a pass-through is not fully amortized? What is the present value of a $ 10 million pool of 15-year mortgages with an 8.5 percent per year monthly mortgage coupon
Consider a GNMA mortgage pool with principal of $ 20 million. The maturity is 30 years with a monthly mortgage payment of 10 percent per year. Assume no prepayments.a. What is the monthly mortgage
Assume an FI originates a pool of short- term real estate loans worth $ 20 million with maturities of five years and paying interest rates of 9 percent (paid annually).a. What is the average payment
Calculate the value of (a) The mortgage pool (b) The GNMA pass-through security in Problem 9 if market interest rates increase 50 basis points. Assume no prepayments.
Match the following dates with the associated events: 2000 2001 2006 2007-08 2008-09
The U.S. financial system is comprised of:(1) Policy makers,(2) A Monetary system,(3) Financial institutions, and(4) Financial markets.Indicate which of these components is associated with each of
Financial markets may be categorized as:(1) Debt securities markets,(2) Equity securities markets,(3) Derivative securities markets, and(4) Foreign exchange markets.Indicate in which of these markets
In business, ethical dilemmas or situations occur frequently. Laws and regulations exist to define unethical behavior. However, the practicing of high quality ethical behavior often goes beyond
Obtain several recent issues of The Wall Street Journal or Business Week (now called Bloomberg Businessweek). Identify, read, and be prepared to discuss at least one article
Obtain several recent issues of The Wall Street Journal or Business Week (now called Bloomberg Business week). Identify, read, and be prepared to discuss at least one article relating to one of the
Briefly describe how the financial environment has changed during the past few years.
What are the three areas of finance?
Briefly describe the terms entrepreneurial finance and personal finance.
Identify and briefly describe several reasons for studying finance.
Indicate some of the career opportunities in finance available to business students today.Financial managementDepository financial institutionsContractual savings and real property
What are the six principles of finance?
Describe what is meant by ethical behavior.
What are the basic requirements of an effective financial system?
Identify and briefly describe the financial functions in the U.S. financial system.
Identify the four types of major financial markets.
Match the following money market securities with their issuers. Securities ......... Issuers a. Treasury bill ....... 1. Depository institutions b. negotiable CDs ..... 2. U.S. government c.
Match the following money market securities with the level of secondary market activity.a. Treasury bills ..... 1. No activityb. commercial paper .... 2. Low activityc. federal funds ..... 3.
We are faced with ethics decisions involving money almost every day. For example, we all probably have seen money in the form of coin or currency lying on the ground or floor somewhere. We also may
Determine the size of the M1 money supply using the following information. Currency plus Traveler’s checks ... $25 million Negotiable CDs ........ $10 million Demand deposits ......... $13
Determine the size of the M1 money supply using the following information. Currency ........... $700 billion Money market mutual funds . $2,000 billion Demand deposits ....... $300 billion Other
Determine the size of the demand deposits component of the M1 money supply using the following information. Currency ......... $350 million Traveler’s checks ....... $10 million Other
Following are components of the M1 money supply at the end of last year. What will be the size of the M1 money supply at the end of next year if currency grows by 10 percent, demand deposits grow
The following information is available to you: travelers checks = $1 million; coin and paper currency = $30 million; repurchase agreements and Eurodollars = $15 million; demand deposits = $25
A country’s gross domestic product (GDP) is $20 billion and its money supply (MS) is $5 billion. a. What is the country’s velocity of money (VM)? b. If the MS stays at the same level
Assume that the real output (RO) for a country is expected to be 2.4 million products. a. If the price level (PL) is $250 per product, what will be the amount of the gross national product (GDP)? b.
Assume that a country estimates its M1 money supply at $20 million. A broader measure of the money supply, M2, is $50 million. The country’s gross domestic product (GDP) is $100 million.
Using the data in Problem 8, along with the monetarists’ view of the relationship between money supply and GDP, answer the following: a. If the M1 money supply increases by 10 percent and the M1
The following information was gathered for the XYZ economy: velocity of money = 3.8 times; average price level = $85; and real output = 10,000 units. a. What is the nominal GDP for
The One Product economy which produces and sells only personal computers (PCs), expects that it can sell 500 more or 12,500 PCs next year. Nominal GDP was $20,000,000 this year and the money supply
The following problem requires a basic knowledge about probabilities and the calculation of expected values. In addition, the problem is more easily solved using Excel spreadsheet software.a.
Briefly discuss the developments that led to the 2007-2008 financial crisis.
Describe the three basic ways whereby money is transferred from savers to investors.

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