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Questions and Answers of Banking

Spiro Savings Bank currently holds a government bond valued on the day of its purchase at $5 million, with a promised interest yield of 6 percent, whose current market value is $3.9 million.
What factors affect a financial-service institution’s decision regarding the different maturities of securities it should hold?
A 20-year U.S. Treasury bond with a par value of $1,000 is currently selling for $1,025 from various securities dealers. The bond carries a 6 percent coupon rate with payments made annually. If
A municipal bond has a $1,000 face (par) value. Its yield to maturity is 5 percent, and the bond promises its holders $60 per year in interest (paid annually) for the next 10 years before it matures.
Calculate the yield to maturity of a 20-year U.S. government bond that is selling for $975 in today’s market and carries a 5 percent coupon rate with interest paid semiannually.
A corporate bond being seriously considered for purchase by Old Dominion Financial will mature 20 years from today and promises a 7 percent interest payment once a year. Recent inflation in the
Forever Savings Bank regularly purchases municipal bonds issued by small rural school districts in its region of the state. At the moment, the bank is considering purchasing an $8 million general
Forever Savings Bank also purchases municipal bonds issued by the city of Richmond. Currently the bank is considering a nonqualified general obligation municipal issue. The bonds, which mature in 15
Lakeway Thrift Savings and Trust is interested in doing some investment portfolio shifting. This institution has had a good year thus far, with strong loan demand; its loan revenue has increased by
Current market yields on U.S. government securities are distributed by maturity as follows:Draw a yield curve for these securities. What shape does the curve have? What significance might this yield
A bond possesses a duration of 8.89 years. Suppose that market interest rates on comparable bonds were 7.5 percent this morning, but have now shifted downward to 7.25 percent. What percentage change
The investments officer for Sillistine Savings is concerned about interest rate risk lowering the value of the institution’s bonds. A check of the bond portfolio reveals an average duration of 4.5
A bank’s economics department has just forecast accelerated growth in the economy, with GDP expected to grow at a 4.5 percent annual growth rate for at least the next two years. What are the
Contrary to the exuberant economic forecast described in problem 11, suppose a bank’s economics department is forecasting a significant recession in economic activity. Output and employment are
Arrington Hills Savings Bank, a $3.5 billion asset institution, holds the investment portfolio outlined in the following table. This savings bank serves a rapidly growing money center into which
What are the principal sources of liquidity demand for a financial firm?
Suppose that a bank faces the following cash inflows and outflows during the coming week:(a) Deposit withdrawals are expected to total $33 million, (b) Customer loan repayments are expected to
When is a financial institution adequately liquid?
Why do financial firms face significant liquidity management problems?
What are the principal differences among asset liquidity management, liability management, and balanced liquidity management?
What guidelines should management keep in mind when it manages a financial firm’s liquidity position?
How does the sources and uses of funds approach help a manager estimate a financial institution’s need for liquidity?
Suppose that a bank estimates its total deposits for the next six months in millions of dollars to be, respectively, $112, $132, $121, $147, $151, and $139, while its loans (also in millions of
What steps are needed to carry out the structure of funds approach to liquidity management?
Suppose that a thrift institution’s liquidity division estimates that it holds $19 million in hot money deposits and other IOUs against which it will hold an 80 percent liquidity reserve, $54
What is the liquidity indicator approach to liquidity management?
First National Bank posts the following balance sheet entries on today’s date: Net loans and leases, $3,502 million; cash and deposits held at other banks, $633 million; Federal funds sold, $48
How can the discipline of the marketplace be used as a guide for making liquidity management decisions?
What is money position management?
What is the principal goal of money position management?
Exactly how is a depository institution’s legal reserve requirement determined?
First National Bank finds that its net transaction deposits average $140 million over the latest reserve computation period. Using the reserve requirement ratios imposed by the Federal Reserve as
A U.S. savings bank has a daily average reserve balance at the Federal Reserve bank in its district of $25 million during the latest reserve maintenance period. Its vault cash holdings averaged $1
What factors should a money position manager consider in meeting a deficit in a depository institution’s legal reserve account?
What are clearing balances? Of what benefit can clearing balances be to a depository that uses the Federal Reserve System’s check-clearing network?
Suppose a bank maintains an average clearing balance of $5 million during a period in which the Federal funds rate averages 6 percent. How much would this bank have available in credits at the
What are sweep accounts? Why have they led to a significant decline in the total legal reserves held at the Federal Reserve banks by depository institutions operating in the United States?
What impact has recent financial reform legislation had on raising short-term cash?
What are the principal sources from which the supply of liquidity comes?
Ocean View State Bank estimates that over the next 24 hours the following cash inflows and outflows will occur (all figures in millions of dollars):What is this bank€™s projected net
Mountain Top Savings is projecting a net liquidity deficit of $10 million next week partially as a result of expected quality loan demand of $32 million, necessary repayments of previous borrowings
First National Bank of Belle Mead has forecast its checkable deposits, time and savings deposits, and commercial and household loans over the next eight months. The resulting estimates (in millions)
Queen Savings is attempting to determine its liquidity requirements today (the last day in August) for the month of September. September is usually a month of heavy loan demand due to the beginning
Using the following financial information for Wilson National Bank, calculate as many of the liquidity indicators discussed in this chapter for Wilson as you can. Do you detect any significant
The Bank of Your Dreams has a simple balance sheet. The figures are in millions of dollars as follows:Although the balance sheet is simple, the bank€™s manager encounters a liquidity
The liquidity manager for the Bank of Your Dreams needs cash to meet some unanticipated loan demand. The loan officer has $600 million in loans that he wants to make. Use the simplified balance sheet
Suppose Abigail Savings Bank's liquidity manager estimates that the bank will experience a $375 million liquidity deficit next month with a probability of 15 percent, a $200 million liquidity deficit
First Savings of Rainbow, Iowa, reported transaction deposits of $75 million (the daily average for the latest two-week reserve computation period). Its nonpersonal time deposits over the most recent
Elton Harbor Bank has a cumulative legal reserve deficit of $44 million as of the close of business this Tuesday. The bank must cover this deficit by the close of business tomorrow
Gwynn’s Island Building and Loan Association estimates the following information regarding this institution’s reserve position at the Federal Reserve for the reserve maintenance period that
Parvis Bank and Trust Co. has calculated its daily average deposits and vault cash holdings for the most recent two-week computation period as follows:Net transaction deposits.......... = $
Frost Street National Bank currently holds $750 million in transaction deposits subject to reserve requirements but has managed to enter into sweep account arrangements with its transaction deposit
Bridgewater Savings Association maintains a clearing account at the Federal Reserve Bank and agrees to keep a minimum balance of $30 million in its clearing account. Over the two-week reserve
What are the major types of deposit plans that depository institutions offer today?
How has the composition of deposits changed in recent years?
What are the consequences for the management and performance of depository institutions resulting from recent changes in deposit composition?
Describe the essential differences between the following deposit pricing methods in use today: cost-plus pricing, conditional pricing, and relationship pricing.
A bank determines from an analysis of its cost-accounting figures that for each $500 minimum-balance checking account it sells, account processing and other operating costs will average $4.87 per
To price deposits successfully, service providers must know their costs. How are these costs determined using the historical average cost approach? The marginal cost of funds approach? What are the
How can the historical average cost and marginal cost of funds approaches be used to help select assets (such as loans) that a depository institution might wish to acquire?
What factors do household depositors rank most highly in choosing a financial firm for their checking account? Their savings account? What about business firms?
What does the 1991 Truth in Savings Act require financial firms selling deposits inside the United States to tell their customers?
Use the APY formula required by the Truth in Savings Act for the following calculation. Suppose that a customer holds a savings deposit in a savings bank for a year. The balance in the account stood
What is lifeline banking? What pressures does it impose on the managers of banks and other financial institutions?
Should lifeline banking be offered to low-income customers? Why or why not?
What are core deposits, and why are they so important today?
Which deposits are the least costly for depository institutions? The most costly?
Rhinestone National Bank reports the following figures in its current Report of Condition:a. Evaluate the funding mix of deposits and nondeposit sources of funds employed by Rhinestone. Given the mix
Kalewood Savings Bank has experienced recent changes in the composition of its deposit. What changes have recently occurred in Kalewood€™s deposit mix? Do these changes suggest possible
First Metrocentre Bank posts the following schedule of fees for its household and small-business transaction accounts:(For average monthly account balances over $1,500, there is no monthly
Fine-Tuned Savings Association finds that it can attract the following amounts of deposits if it offers new depositors and those rolling over their maturing CDs at the interest rates indicated
New Day Bank plans to launch a new deposit campaign next week in hopes of bringing in from $100 million to $600 million in new deposit money, which it expects to invest at a 4.25 percent yield.
R&R Savings Bank finds that its basic transaction account, which requires a $1,000 minimum balance, costs this savings bank an average of $3.25 per month in servicing costs (including labor and
Lucy Lane maintains a savings deposit with Monarch Credit Union. This past year Lucy received $10.75 in interest earnings from her savings account. Her savings deposit had the following average
The National Bank of Mayville quotes an APY of 2.75 percent on a one-year money market CD sold to one of the small businesses in town. The firm posted a balance of $2,500 for the first 90 days of the
What is the customer relationship doctrine, and what are its implications for fund-raising by lending institutions?
Chequers State Bank loans $50 million from its reserve account at the Federal Reserve Bank of Philadelphia to First National Bank of Smithville, located in the New York Federal Reserve Bank's
Hillside Savings Association has an excess balance of $35 million in a deposit at its principal correspondent, Sterling City Bank, and instructs the latter institution to loan the funds today to
Compare and contrast Fed funds transactions with RPs.
What are the advantages of borrowing from the Federal Reserve banks or other central banks? Are there any disadvantages? What is the difference between primary, secondary, and seasonal credit? What
Posner State Bank borrows $10 million in primary credit from the Federal Reserve Bank of Cleveland. Can you show the correct entries for granting and repaying this loan?
Suppose a customer purchases a $1 million 90-day CD, carrying a promised 6 percent annualized yield. How much in interest income will the customer earn when this 90-day instrument matures? What total
How does a bank gain access to funds from the Eurocurrency markets?
Suppose that JP Morgan Chase Bank in New York elects to borrow $250 million from Barclays Bank in London and loans the borrowed funds for a week to a security dealer, and then returns the borrowed
What is commercial paper? What types of organizations issue such paper?
Suppose that the finance company affiliate of Citigroup issues $325 million in 90 day commercial paper to interested investors and uses the proceeds to purchase loans from Citibank. What accounting
Suppose J.P. Morgan Chase Bank of New York discovers that projected new loan demand next week should total $325 million and customers holding confirmed credit lines plan to draw down $510 million in
What factors must the manager of a financial institution weigh in choosing among the various nondeposit sources of funding available today?
What is liability management?
What advantages and risks does the pursuit of liability management bring to a borrowing institution?
For what kinds of funding situations are Federal funds best suited?
What are the principal advantages to the borrower of funds under an RP agreement?
How is a discount window loan from the Federal Reserve secured? Is collateral really necessary for these kinds of loans?
Which institutions are allowed to borrow from the Federal Home Loan Banks? Why is this source so popular for many institutions?
Why were negotiable CDs developed?
What are the advantages and disadvantages of CDs as a funding source?
Where do Eurodollars come from?
What long-term nondeposit funds sources do banks and some of their closest competitors draw upon today? How do these interest costs differ from those costs associated with most money market
What is the available funds gap?
Robertson State Bank decides to loan a portion of its reserves in the amount of $70 million held at the Federal Reserve Bank to Tenison National Security Bank for 24 hours. For its part, Tenison

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