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financial institutions management
ISE Financial Institutions Management A Risk Management Approach 10th International Edition Anthony Saunders Professor, Marcia Millon Cornett, Otgo Erhemjamts - Solutions
24. Based on the data in Table 4–7, what were the largest single asset and the largest single liability of securities firms in 2016? Are these asset and liability categories related? Exactly how does a repurchase agreement work?
23. How do the operating activities and thus the balance sheet structures of securities firms differ from the operating activities of depository institutions? How are the balance sheet structures of securities firms similar to depository institutions?
22. How did the financial crisis affect the performance of securities firms and investment banks?
21. Using Table 4–6, which type of security accounts for most underwriting in the United States? Which is likely to be more costly to underwrite: corporate debt or equity? Why?
20. What factors are given credit for the resurgence of profitability in the securities industry beginning in 1991? Are firms that trade in fixed-income securities more or less likely to have volatile profits?Why?
19. What three factors are given credit for the steady decline in brokerage commissions as a percentage of total revenues over the period beginning in 1977 and ending in 1991?
18. An investor notices that an ounce of gold is priced at $1,018 in London and $1,025 in New York.a. What action could the investor take to try to profit from the price discrepancy?b. Under which of the four trading activities would this action be classified?c. If the investor is correct in
17. If an investor observes that the price of a stock trading in one exchange is different from the price in another exchange, what form of arbitrage is applicable, and how can the investor participate in that arbitrage?
16. One of the major activity areas of securities firms is trading.a. What is the difference between pure arbitrage and risk arbitrage?b. What is the difference between position trading and program trading?
15. How do agency transactions differ from principal transactions for market makers?
14. What are the advantages and disadvantages to a new or small firm of getting capital funding from a venture capital firm?
13. What are the different types of venture capital firms? How do institutional venture capital firms differ from angel venture capital firms?
12. What is venture capital?
11. XYZ Inc. has issued 10 million new shares of stock. An investment bank agrees to underwrite these shares on a best-efforts basis. The investment bank is able to sell 8.4 million shares for $27 per share, and it charges XYZ $0.675 per share sold.How much money does XYZ receive? What is the
10. An investment bank pays $23.50 per share for 4 million shares of JCN Company. It then sells those shares to the public for $25 per share. How much money does JCN receive? What is the profit to the investment bank? What is the stock price of JCN?
9. An investment bank agrees to underwrite a $500 million, 10-year, 8 percent semiannual bond issue for KDO Corporation on a firm commitment basis. The investment bank pays KDO on a Thursday and plans to begin a public sale the next day. What type of interest rate movement does the investment bank
8. An investment bank agrees to underwrite an issue of 15 million shares of stock for Looney Landscaping Corp.a. If the investment bank underwrites the stock on a firm commitment basis, it agrees to pay $12.50 per share to Looney Landscaping Corp. for the 15 million shares of stock. It can then
7. What are the risk implications to an investment bank from underwriting on a best-efforts basis versus a firm commitment basis? If you operated a company issuing stock for the first time, which type of underwriting would you prefer? Why? What factors might cause you to choose the alternative?
6. What is the difference between a private placement and a public offering?
5. What is the difference between an IPO and a secondary issue?
4. What are the key activity areas for investment banks and securities firms? How does each activity area assist in the generation of profits and what are the major risks for each area?
3. What are the different types of firms in the securities industry and how does each type differ from the others?
2. In what ways have changes in the investment banking industry mirrored changes in the commercial banking industry?
1. Explain how securities firms differ from investment banks. In what ways are they financial intermediaries?
3. Why do foreign banks operating in the United States compete with both U.S. commercial banks and investment banks?
2. What were the trends in international securities offerings in the late 1990s through 2010s?
1. What were the trends in foreign transactions in U.S.securities and U.S. transactions in foreign securities in the 1990s through 2010s?
2. What regulatory changes resulted from the financial crisis?
1. What is the major result of the NSMIA?
3. Why do broker–dealers tend to hold less equity capital than do commercial banks and thrifts?
2. What are the major assets held by broker–dealers?
1. Describe the trend in profitability in the securities industry over the past 10 years.
4. What are the trading activities performed by securities firms and investment banks?
3. Describe the difference between a best-efforts offering and a firm commitment offering.page 100
2. What are the key areas of activities for securities firms and investment banks?
1. Describe the difference between brokerage services and underwriting services.
11. Go to the Federal Reserve’s website at www.federalreserve.gov and get the latest information on finance company consumer, real estate, and business lending using the following steps. Click on“Data.” Under “Business Finance,” click on “Finance Companies.”This downloads a file onto
10. Why do finance companies face less regulation than do commercial banks? How does this advantage translate into performance advantages? What is the major performance disadvantage?
9. Compare Tables 3–2 and 2–5. Which firms have higher ratios of capital to total assets: finance companies or commercial banks?What does this comparison indicate about the relative strengths of these two types of firms?
8. How do finance companies make money? What risks does this process entail? How do these risks differ for a finance company versus a commercial bank?
7. What have been the primary sources of financing for finance companies?
6. What advantages do finance companies have over commercial banks in offering services to small business customers? What are the major subcategories of business loans? Which category is the largest?
5. Why have home equity loans become popular? What are securitized mortgage assets?
4. What are the major types of consumer loans? Why are the rates charged by consumer finance companies typically higher than those charged by commercial banks?
3. What have been the major changes in the accounts receivable balances of finance companies over the 41-year period 1977–2018?
2. What are the three major types of finance companies? To which market segments does each of these types of companies provide service?
1. What is the primary function of finance companies? How do finance companies differ from depository institutions?
2. How do finance companies signal solvency and safety to investors?
1. Since finance companies seem to compete in the same lending markets as banks, why are they not subject to the same regulations as banks?
3. What advantages do finance companies offer over commercial banks to small business customers?.
2. How do subprime lender finance company consumer loan customers differ from consumer loan customers at banks?
1. How have the major assets held by finance companies changed in the last 41 years?
2. What is a captive finance company?
1. What are the three major types of finance companies?What types of customers does each serve?
29. Go to the National Credit Union Administration website at www.ncua.gov to collect the most recent information on number of credit unions, assets of credit unions, and membership in credit unions using the following steps. Click on “Analysis.” Click on “Credit Union & Corporate Call Report
28. Go to the Federal Deposit Insurance Corporation website at www.fdic.gov and find the latest balance sheet information available for savings institutions using the following steps. Click on “Researchers & Analysts.” Click on “Statistics on Banking.”Under “Standard Report #2,” click
27. Go to the FDIC website at www.fdic.gov and find the most recent breakdown of U.S. bank asset concentrations using the following steps. Click on “Researchers & Analysts.” From there click on“FDIC Quarterly Banking Profile” and then click on “Quarterly Banking Profile.” Select the
26. Megalopolis Bank has the following balance sheet and income statement.For Megalopolis, calculate:a. Return on equityb. Return on assetsc. Asset utilizationd. Equity multipliere. Profit marginf. Interest expense ratio g. Provision for loan loss ratio h. Noninterest expense ratio i. Tax ratio
25. The financial statements for First National Bank (FNB) are shown below.a. Calculate the dollar value of FNB’s earning assets.b. Calculate FNB’s ROA.c. Calculate FNB’s asset utilization ratio.d. Calculate FNB’s spread.Income Statement—First National Bank Interest Income $2,600 Interest
24. Compare and contrast the performance of worldwide depository institutions during and after the financial crisis.The questions and problems that follow refer to Appendix 2B.
23. How does the asset structure of credit unions compare with the asset structure of commercial banks and savings institutions? Refer to Tables 2–5, 2–9, and 2–12 to formulate your answer.
22. What is the “common bond” membership qualification under which credit unions have been formed and operated? How does this qualification affect the operational objective of a credit union?
21. How has the savings institution industry performed over the last several decades?
20. How did the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 and the Federal Deposit Insurance Corporation Improvement Act of 1991 reverse some of the key features of earlier legislation?
19. How did two pieces of regulatory legislation—the DIDMCA in 1980 and the DIA in 1982—change the profitability of savings institutions in the early 1980s? What impact did these pieces of legislation ultimately have on the risk posture of the savings institutions industry? How did the FSLIC
18. What happened in 1979 to cause the failure of many savings institutions during the early 1980s? What was the effect of this change on the financial statements of savings institutions?
17. How do savings banks differ from savings associations?Differentiate in terms of risk, operating performance, balance sheet structure, and regulatory responsibility.
16. How do the asset and liability structures of a savings institution compare with the asset and liability structures of a commercial bank? How do these structural differences affect the risks and operating performance of a savings institution? What is the QTL test?
15. What factors are given credit for the weak performance of commercial banks in the late 2000s?
14. What factors are given credit for the strong performance of commercial banks in the early and mid-2000s?
13. What factors normally are given credit for the revitalization of the banking industry during the 1990s?
12. What are the main features of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994? What major impact on commercial banking activity occured from this legislation?
11. Who are the major regulators of commercial banks? Which banks does each agency regulate?
10. Use the data in Table 2–6 to answer the following questions.a. What was the average annual growth rate in OBS total commitments over the period 1992–2018?b. What categories of contingencies have had the highest annual growth rates?c. What factors are credited for the significant growth in
9. What types of activities are normally classified as off-balance-sheet(OBS) activities?a. How does an OBS activity move onto the balance sheet as an asset or liability?b. What are the benefits of OBS activities to a bank?c. What are the risks of OBS activities to a bank?
8. The following balance sheet accounts (in millions of dollars) have been taken from the annual report for a U.S. bank. Arrange the accounts in balance sheet order and determine the value of total assets. Based on the balance sheet structure, would you classify this bank as a community bank,
7. How does the liability maturity structure of a bank’s balance sheet compare with the maturity structure of the asset portfolio? What risks are created or intensified by these differences?
6. What are the three major segments of deposit funding? How are these segments changing over time? Why? What strategic impact do these changes have on the profitable operation of a bank?
5. What are the major sources of funds for commercial banks in the United States? How does this differ for small versus large banks?
4. What are the major uses of funds for commercial banks in the United States? What are the primary risks to a bank caused by each of these? Which of the risks is most critical to the continuing operation of a bank?
3. What factors caused the decrease in loan volume relative to other assets on the balance sheets of commercial banks? How has each of these factors been related to the change and development of the financial services industry during the 1990s and 2000s? What strategic changes have banks
2. Use the data in Table 2–4 for banks in the two asset size groups (a)$100 million–$1 billion and (b) more than $10 billion to answer the following questions.a. Why were ROA and ROE strong for both groups over the 1990–2006 period? Why did ROA and ROE decrease over the period 2007–2009?
1. What are the differences between community banks, regional banks, and money center banks? Contrast the business activities, location, and markets of each of these bank groups.
6. Describe the ways that profit trends for savings institutions have been similar to those of commercial banks in the 1990s through the 2010s.
5. Describe the recent performance of savings institutions.
4. Why could it be argued that the QTL test makes savings institutions more rather than less risky?
3. Why should savings institutions with little or no equity capital seek to take more risk than well-capitalized savings institutions?
2. How do adjustable-rate mortgages help savings institutions?
1. Are savings institutions likely to be more or less exposed to interest rate risk than are banks? Explain your answer.
5. What has the trend in ROA and ROE been in the commercial banking industry over the last decade?
4. What are the major regulations that have affected the operations of U.S. commercial banks?page 50
3. Describe the responsibilities of the three federal regulatory agencies in the United States.
2. What are the major sources of funding for commercial banks?
1. What are the major assets held by commercial banks?
41. Go to the Federal Reserve Board’s website at www.federalreserve.gov. Find the latest figures for financial assets outstanding at various types of financial institutions using the following steps. Click on “Data.” Click on “Financial Accounts of the United States-Z.1.” Click on
40. Go to the Federal Reserve Board’s website at www.federalreserve.gov. Find the latest figures for M1 and M2 using the following steps. Click on “Data.” Click on “Money Stock Measures.” This downloads a file onto your computer that contains the relevant data. By what percentage have
39. Describe how expansionary activities conducted by the Federal Reserve impact credit availability, the money supply, interest rates, and security prices. Do the same for contractionary activities.
38. Which of the monetary tools available to the Federal Reserve is most often used? Why?
37. Bank Three currently has $600 million in transaction deposits on its balance sheet. The Federal Reserve has currently set the reserve requirement at 10 percent of transaction deposits.a. Suppose the Federal Reserve decreases the reserve requirement to 8 percent. Show the balance sheet of Bank
36. What changes did the Fed implement to its discount window lending policy in the early 2000s?
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