Questions and Answers of Financial Institutions Management

What are the major functions of investment banks?
Explain equity underwriting and debt underwriting.
What is the book building process?
What are the main challenges in investment banking?
What are the different types of finance companies?
Discuss the roles of the major stakeholders of a mutual fund.
Discuss the different types of mutual funds.
Explain the different mutual fund expenses and fees.
What are major categories of mutual funds?
What are alternative types of funds?
Explain the problems of adverse selection and moral hazard in the insurance industry.
Discuss the major types of insurance.
What are the different types of property and casualty insurance?
Explain the underwriting cycle.
What are the major risks faced by insurance companies?
What are the risk mitigation strategies in insurance?
What are the sources and uses of funds in insurance?
Explain the significance of valuation of insurance companies with ratio analysis.
What are the different types of pension plans?
Discuss the major regulations for mutual funds, insurance, and pension funds.
Discuss private equity and hedge funds.
Explain the structure and strategy of PE funds.
What are the different types of PE funds?
Differentiate between mutual funds and hedge funds.
Explain the different strategies adopted by hedge funds.
What are the main features of Islamic finance?
Explain the different debt instruments in Islamic finance.
What are the different types of equity-like instruments in Islamic finance?
Explain the different types of risk in Islamic finance.
Distinguish between takaful insurance and conventional insurance.
Discuss the basic reasons for consolidation in the finance sector.
Discuss the major mergers that occurred in the banking sector.
Go to the Insurance Information Institute’s website at www.iii.org and use the following steps to find the most recent data on the largest life insurance companies by total revenue. From the
Go to the Federal Reserve Board’s website at www.federalreserve.gov and find the most recent distribution of life insurance industry assets for Table 6–2. Click on “Data.” Click on
Go to the U.S. Treasury website at www.treasury.gov and find the most recent data on foreign transactions in U.S. securities and U.S. transactions in foreign securities using the following steps.
Go to the website of the Bank for International Settlements at www.bis.org. Under “Basel Committee on Bank Supervision,” click on “Basel III.” This will download a file onto your computer
Go to the Federal Reserve Board’s website at www.federalreserve.gov and click on “Data.” Click on “Selected Interest Rates-H.15.” In this file, find the most recent values for the fed funds
Go to the Fidelity Investments website and look up the annual 1-, 5-, and 10-year returns on the Fidelity Select Biotechnology Fund using the following steps. The website is www.fidelity.com. In the
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
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
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.
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
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
Go to the Investment Company Institute website and look up the most recent data on the asset values and number of short-term and long-term mutual funds using the following steps. The website is
Go to the Securities Industry and Financial Markets Association website at www.sifma.org and find the most recent data on U.S. corporate underwriting activity using the following steps. Click on
What is FinTech?
What is the spread effect?
What are fintech risks?
What are the risks associated with DLT?
Describe applications of the Internet of things (IoT) in financial services industry.
What is a fintech sandbox?
Go to the Federal Deposit Insurance Corporation’s website at www.fdic.gov and update Tables 19–5 and 19–6 using the following steps. Click on “Researchers & Analysts.” Click on
How do restrictions on product diversification reduce the profitability and risk of FIs?
What are the reasons why an FI may prefer the use of either pass-through securities or CMOs to the use of MBBs?
What does an FI mean when it states that its mortgage pool prepayments are assumed to be 100 percent PSA equivalent?
What is a possible reason why the spreads on HLT loans perform differently than do the spreads on high-yield bonds?
What is a digital default option?
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
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 is
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
A pension fund manager anticipates the purchase of a 20-year, 8 percent coupon Treasury bond at the end of two years. Interest rates are assumed to change only once every year at year-end, with an
Dudley Hill Bank has the following balance sheet:The interest rate on both the assets and the liabilities is 8 percent. The bank manager receives information from an economic forecasting unit that
An FI is planning to hedge its $100 million bond instruments with a hedge using Eurodollar interest rate futures. How would the FI estimate br = [ΔRf/(1+Rf)
Refer again to problem 21. How does consideration of basis risk change your answers to problem 21?a. Compute the number of futures contracts required to construct a macrohedge if [ΔRf/(1+Rf) /
For a given change in interest rates, why is the sensitivity of the price of a Treasury bond futures contract greater than the sensitivity of the price of a Treasury bill futures contract?
An FI holds a 15-year, $10 million par value bond that is priced at 104 with a yield to maturity of 7 percent. The bond has a duration of eight years and the FI plans to sell it after two months.
What are derivative contracts? What is the value of derivative contracts to the managers of FIs? Which type of derivative contracts had the highest notional value outstanding among all U.S. banks as
What factors affected the proportion of U.S. banking assets that were controlled by foreign banks during the 1990s through 2015?
What effect have the problems of emerging market economies in the late 1990s and 2000s had on the global expansion of traditional banking activities by U.S. banks?
How did the Overseas Direct Investment Control Act of 1964 assist in the growth of global banking activities? How much growth in foreign assets occurred from 1980 to 2015?
How are insurance companies able to offer services in states beyond their state of incorporation?
An investment bank subsidiary of a financial services holding company agrees to underwrite a debt issue for one of its clients. It has suggested a firm commitment offering for issuing 100,000 shares
A property-casualty insurance company has estimated the following required charges for its various risk classes (in millions):a. What is the RBC charge as per the model recommended by the NAIC?b. If
A securities firm has the following balance sheet (in millions):The debt securities have a coupon rate of 6 percent, 20 years remaining until maturity, and trade at a yield of 8 percent. The equity
What is the countercylical capital buffer? If the home country set a countercyclical capital buffer of 2.5 percent, how would this buffer affect your answers to question 18?
How is the leverage ratio for an DI defined?
Two depository institutions have composite CAMELS ratings of 1 or 2 and are “well capitalized.” Thus, each institution falls into the FDIC Risk Category I deposit insurance assessment scheme.
Million Bank has a composite CAMELS rating of 2, a total risk-based capital ratio of 9.8 percent, a Tier I risk-based capital ratio of 6.8 percent, a CET1 capital ratio of 6.0 percent, and a Tier I
Webb Bank has a composite CAMELS rating of 2, a total risk-based capital ratio of 10.2 percent, a Tier I risk-based capital ratio of 6.2 percent, a CET1 capital ratio of 5.0 percent, and a Tier I
Under what conditions may the implementation of minimum capital guidelines, either risk-based or non-risk-based, fail to impose stockholder discipline as desired by the regulators?
How does a risk-based deposit insurance program solve the moral hazard problem of excessive risk taking by DIs? Is an actuarially fair premium for deposit insurance always consistent with a
What is moral hazard? How did the fixed-rate deposit insurance program of the FDIC contribute to the moral hazard problem of the depository institution industry?
What trends have been observed between 1960 and 2015 in regard to liquidity and liability structures of commercial banks? What changes have occurred in the management of assets that may cause
Rank the following liabilities, with respect, first, to funding risk and second to funding cost: Funding Risk Funding Cost a. Money market deposit account. b. Demand deposits. c. Certificates of
What is the relationship between funding cost and funding or withdrawal risk?
If over the first 12 days of the current reserve maintenance period the average daily reserves held by the bank in problem (12) were $56 million (or 12 x $56m = $672 m cumulative total over the 12
A bank has an average balance of transactions accounts, July 14 to 27, of $850.55 million. The average balance in the cash account is $20.150 million over this period. The bank is carrying forward a
Rank these financial assets according to their liquidity: cash, corporate bonds, NYSE-traded stocks, and T-bills.
Buy Bank had $130 million in assets and $20 million in expenses before the acquisition of Sell Bank, which had assets of $50 million and expenses of $10 million. After the merger, the bank had $180
City Bank upgrades its computer equipment every five years to keep up with changes in technology. Its next upgrade is two years from today and is budgeted to cost $1 million. Management is
Table 17-1 shows data on earnings, expenses, and assets for all insured banks. Calculate the annual growth rates in the various income, expense, earnings, and asset categories from 1991 to 2014. If
What role does Schedule L play in reporting off-balance-sheet activities? Refer to Table 16-4. What was the annual growth rate over the 21-year period 1992-2015 in the notional value of
What factors explain the growth of off-balance-sheet activities in the 1980s through the 2000s among U.S. FIs? What factors explain the decrease in off-balance-sheet activities in the 2010s?
In its trading portfolio, an FI holds 5,000 shares of HSBC at a share price of $43.50, 4,000 shares of China Construction Bank at a price of $16.40, and 2,500 shares of Whirlpool at $170.00. The FI
In its trading portfolio, an FI holds 2,000 shares of Under Armour at a share price of $84.50, 3,000 shares of BT Group (British telecommunication firm) at a price of $68.50, and 4,500 shares of
An FI has ¥750 million in its trading portfolio on the close of business on a particular day. The current exchange rate of yen for dollars is ¥120.00/$, or dollars for yen is $0.00833, at the
Export Bank has a trading position in euros and Australian dollars. At the close of business on October 20, the bank had €22 million and A$40 million. The exchange rates for the most recent six
Bank of Southern Vermont has determined that its inventory of 20 million euros (€) and 25 million British pounds (£) is subject to market risk. The spot exchange rates are $1.20/€ and $1.60/£,
Bank Beta has an inventory of AAA-rated, zero-coupon bonds with a maturity of 13.42 years and a face value of $127,503,041. The modified duration of these bonds is 12.5 years, the DEAR is
The mean change in the daily yields of a 15-year, zero-coupon bond has been five basis points (bp) over the past year with a standard deviation of 15 bp. Use these data and assume that the yield

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