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financial institutions management
Financial Institutions Management A Risk Management Approach 6th Edition Anthony Saunders, Marcia Cornett - Solutions
An investment bank specializing in fixed-income assets has the following balance sheet (in millions). Amounts are in market values and all interest rates are annual unless indicated otherwise.Assume that the haircut for all assets is 15 basis points and for all liabilities, 25 basis points (per
Third Bank has the following balance sheet (in millions), with the risk weights in parentheses.Assets Liabilities and Equity Cash (0%) $ 21 Deposits $176 OECD interbank deposits (20%) 25 Subordinated debt (5 years) 2 Mortgage loans (50%) 70 Cumulative preferred stock 2 Consumer loans (100%) 70
What is the contribution to the credit risk–adjusted asset base of the following items under the Basel III requirements?a. $10 million cash reserves.b. $50 million 91-day U.S. Treasury bills.c. $25 million cash items in the process of collection.d. $5 million U.K. government bonds, OECD CRC rated
Onshore Bank has $20 million in assets, with risk-adjusted assets of $10 million. CET1 capital is $500,000, additional Tier I capital is $50,000, and Tier II capital is $400,000. How will each of the following transactions affect the value of the CET1, Tier I, and total capital ratios? What will
National Bank has the following balance sheet (in millions) and has no offbalance-sheet activities.Assets Liabilities and Equity Cash $ 20 Deposits $ 980 Treasury bills 40 Subordinated debentures 25 Residential mortgages 600 Common stock 45(category 1, loan-to-value ratio 70%)Retained earnings
Under Basel III, how are risk weights for sovereign exposures are determined?
Under Basel III, how are residential 1–4 family mortgages assigned to a credit risk class?
What is the Basel Agreement?9 What are the major features of the Basel III capital requirements?
State Bank has the following year-end balance sheet (in millions):Assets Liabilities and Equity Cash $ 10 Deposits $ 90 Loans 90 Equity 10 Total assets $100 Total liabilities and equity $100 The loans primarily are fixed-rate, medium-term loans, while the deposits are either short-term or
Go to the Federal Reserve Board’s website at www.federalreserve.gov and click on “Economic Research and Data.” Click on “Selected Interest Rate.”Click on the most recent date. In this file find the most recent values for the fed funds rate and the discount window rate. What is the
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. Institution A has average total assets of$750 million and average Tier I equity of $75 million.
Increased regulator discipline
Increased depositor discipline
Increased stockholder discipline
Match the following policies with their intended consequences:Policies:a. Lower FDIC insurance levelsb. Stricter reporting standardsc. Risk-based deposit insurance Consequences:
The following is a balance sheet of a commercial bank (in millions of dollars):Assets Liabilities and Equity Cash $ 5 Insured deposits $30 Loans 40 Uninsured deposits 10 Equity 5 Total assets $45 Total liabilities and equity $45 The bank experiences a run on its deposits after it declares that it
Go to the Federal Deposit Insurance Corporation’s website at www.fdic.gov and update Tables 18–5 and 18–6 using the following steps. Click on “Analysts.” Click on “Statistics on Banking.” Click on “Assets and Liabilities.”Click on “Run Report.” How have the assets and
Rank the following liabilities with respect, first, to funding risk and, second, to funding cost.a. Money market deposit account.b. Demand deposits.c. Certificates of deposit.d. Federal funds.e. Bankers’ acceptances.f. Eurodollar deposits.g. NOW accounts.h. Wholesale CDs.i. Passbook savings.j.
The following net transaction accounts and cash reserves at the Fed have been documented by a bank for computation of its reserve requirements (in millions) under lagged reserve accounting.April Monday 10th Tuesday 11th Wednesday 12th Thursday 13th Friday 14th Net transaction accounts $200 $300
The average daily net transaction accounts balance of a local bank during the most recent reserve computation period is $325 million. The amount of average daily reserves at the Fed during the reserve maintenance period is $24.6 million, and the average daily vault cash corresponding to the
Consider the assets (in millions) of two banks, A and B. Both banks are funded by $120 million in deposits and $20 million in equity. Which bank has the stronger liquidity position? Which bank probably has a higher profit?Questions and Problems Bank A Assets Bank B Assets Cash $ 10 Cash $ 20
Go to the BIS website at www.bis.org and find the most recent data on the volume and value of worldwide wire transfer systems ( Table 17–4 ). Under“Statistics,” click on “Payment systems.” Click on “ Statistics .” Click on the most recent document “Statistics on payment, clearing
Go to the BIS website at www.bis.org and find the most recent data on the volume and value of payment system transactions in the United States( Table 17–2 ) using the following steps. Under “Statistics,” click on “Payment Systems.” Click on “Statistics.” Click on the most recent
Go to the website of the Office of the Comptroller of the Currency at www.occ. treas.gov and update Table 16–5 using the following steps. Click on“Publications.” Click on “Quarterly Report on Bank Derivatives Activities.” Click on the most recent date. Under “Bookmarks,” click on
Go to the FDIC website at www.fdic.gov and find the total amount of unused commitments and letters of credit and the notional value of interest rate swaps of FDIC-insured commercial banks for the most recent quarter available using the following steps. Click on “Analysts.” From there click on
Use the following information on a one-year loan commitment to calculate the return on the loan commitment.BR FI’s base interest on the loans 8% Risk premium on loan commitment 2.5%f1 Up-front fee on the whole commitment 25 basis points f2 Back-end fee on the unused commitment 50 basis points b
In its trading portfolio, an FI holds 10,000 ExxonMobil (XOM) shares at a share price of $86.50 and has sold 5,000 General Electric (GE) shares under a forward contract that matures in one year. The current share price for GE is $20.50. The shift risk factor (i.e., standard deviation) for level 1
An FI has ¥500 million in its trading portfolio on the close of business on a particular day. The current exchange rate of yen for dollars is ¥80.00/$, or dollars for yen is $0.0125, at the daily close. The volatility, or standard deviation( ), of daily percentage changes in the spot ¥/$
Calculate the one-day VAR and ES from this position.
An FI has £5 million in its trading portfolio on the close of business on a particular day. The current exchange rate of pounds for dollars is £0.6400/$, or dollars for pounds is $1.5625, at the daily close. The volatility, or standard deviation ( ), of daily percentage changes in the spot £/$
Consider the following discrete probability distribution of payoffs for two securities, A and B, held in the trading portfolio of an FI:Probability A Probability B 55.00% $120m 55.00% $120m 44.00 95m 44.00 100m 1.00 1,100m 0.30 1,100m 0.70 1,414m Which of the two securities will add more
Consider the following discrete probability distribution of payoffs for two securities, A and B, held in the trading portfolio of an FI:Exchange Rates per U.S. Dollar at the Close of Business 10/20 10/19 10/18 10/17 10/16 10/15 Euros 0.8000 0.7970 o.7775 0.7875 0.7950 0.8115 Australian $s 0.9700
Export Bank has a trading position in euros and Australian dollars. At the close of business on October 20, the bank had :20 million and A$30 million.The exchange rates for the most recent six days are given below:Exchange Rates per U.S. Dollar at the Close of Business 10/20 10/19 10/18 10/17 10/16
Export Bank has a trading position in Japanese yen and Swiss francs. At the close of business on February 4, the bank had ¥300 million and SF10 million.The exchange rates for the most recent six days are given below.Exchange Rates per U.S. Dollar at the Close of Business 2/4 2/3 2/2 2/1 1/29 1/28
Go to the World Bank website at www.worldbank.org and find the amount of bank loans currently outstanding in Brazil using the following steps. Click on “Research.” Under “Key Statistics,” click on “Online Data Bases.” Click on“GO.” Click on “Quarterly External Debt
Explain the following relation:p f IR INVR (, ), or where pIR INVR Probability of rescheduling Total imports/Total foreign exchange reserves Real investment/GNP
An FI manager has calculated the following values and weights to assess the credit risk and likelihood of having to reschedule a loan. From the Z -score calculated using these weights and values, is the manager likely to approve the loan? Validation tests of the Z -score model indicated that scores
Suppose that instead of funding the $300 million investment in 8 percent British loans with CDs issued in the United Kingdom, the FI manager hedges the foreign exchange risk on the British loans by immediately selling its expected oneyear pound loan proceeds in the forward FX market. The current
Using the information in part 4, calculate the return on the FI’s loan portfolio, the average cost of funds, and the net interest margin for the FI if the pound spot foreign exchange rate rises to $1.70/£1 and the lira spot foreign exchange rate falls to $0.58/TRY1 over the year.
Using the information in part 4, calculate the return on the FI’s loan portfolio, the average cost of funds, and the net interest margin for the FI if the pound spot foreign exchange rate falls to $1.45/£1 and the lira spot foreign exchange rate falls to $0.52/TRY1 over the year.
Suppose that instead of funding the $300 million investment in 8 percent British loans with U.S. CDs, the FI manager funds the British loans with $300 million equivalent one-year pound CDs at a rate of 5 percent and that instead of funding the $200 million investment in 10 percent Turkish loans
Calculate the dollar proceeds from the FI’s loan portfolio at the end of the year, the return on the FI’s loan portfolio, and the net interest margin for the FI if the pound spot foreign exchange rate rises to $1.70/£1 and the lira spot foreign exchange rate rises to $0.58/TRY1 over the year.
Calculate the dollar proceeds from the FI’s loan portfolio at the end of the year, the return on the FI’s loan portfolio, and the net interest margin for the FI if the pound spot foreign exchange rate falls to $1.45/£1 and the lira spot foreign exchange rate falls to $0.52/TRY1 over the year.
Calculate the dollar proceeds from the FI’s loan portfolio at the end of the year, the return on the FI’s loan portfolio, and the net interest margin for the FI if the spot foreign exchange rate has not changed over the year.
Go to the website of the U.S. Treasury at www.treas.gov and update Table 13–3 using the following steps. Under “Bureaus,” click on “Financial Management Service.” Under “Reports,” click on “Treasury Bulletin.” Click on “Foreign Currency Positions.” This will bring the file
Assume that annual interest rates are 8 percent in the United States and 4 percent in Japan. An FI can borrow (by issuing CDs) or lend (by purchasing CDs)at these rates. The spot rate is $0.0125/¥.a. If the forward rate is $0.0135/¥, how could the FI arbitrage using a sum of$1 million? What is
Suppose that instead of funding the $200 million investment in 10 percent German loans with CDs issued in Germany, the FI manager in problem 19 hedges the foreign exchange risk on the German loans by immediately selling its expected one-year euro loan proceeds in the forward FX market. The current
Suppose that instead of funding the $200 million investment in 10 percent German loans with U.S. CDs, the FI manager in problem 18 funds the German loans with $200 million equivalent one-year euro CDs at a rate of 7 percent.Now the balance sheet of the FI would be as follows:Assets Liabilities$300
Suppose that a U.S. FI has the following assets and liabilities:Assets Liabilities$300 million $500 million U.S. loans (one year)in dollars U.S. CDs (one year)in dollars$200 million equivalent German loans (one year)(loans made in euros)The promised one-year U.S. CD rate is 4 percent, to be paid in
Suppose that instead of funding the $100 million investment in 12 percent British loans with CDs issued in the United Kingdom, the FI manager in problem 16 hedges the foreign exchange risk on the British loans by immediately selling its expected one-year pound loan proceeds in the forward FX
Suppose that instead of funding the $100 million investment in 12 percent British loans with U.S. CDs, the FI manager in problem 15 funds the British loans with $100 million equivalent one-year pound CDs at a rate of 8 percent.Now the balance sheet of the FI would be as follows:Assets
Suppose that a U.S. FI has the following assets and liabilities:Assets Liabilities$100 million $200 million U.S. loans (one year)in dollars U.S. CDs (one year)in dollars$100 million equivalent U.K. loans (one year)(loans made in pounds)The promised one-year U.S. CD rate is 5 percent, to be paid in
The following are the foreign currency positions of an FI, expressed in the foreign currency:Currency Assets Liabilities FX Bought FX Sold Swiss francs (SF) SF 134,394 SF 53,758 SF 10,752 SF 16,127 British pound (£) £ 30,488 £ 13,415 £ 9,146 £ 12,195 Japanese yen (¥) ¥ 7,075,472 ¥ 2,830,189
In the event of an unexpected and severe drain on deposits in the next 3 days, and 10 days, the DI will liquidate assets in the following manner:Calculate the 3-day and 10-day liquidity index for the DI.1 . What are four FX risks faced by FIs?
The DI expects a net deposit drain of $20 million. Show the DI’s balance sheet if the following conditions occur:a. The DI purchases liabilities to offset this expected drain.b. The stored liquidity management method is used to meet the expected drain (the DI does not want the cash balance to
What is the financing requirement?
Calculate the financing gap.
What is the net liquidity of the DI?
What is the DI’s current total uses of liquidity?
What is the DI’s total available (sources of)liquidity?
Go to the Federal Deposit Insurance Corporation’s website ( www.fdic.gov ) and Click on “Analysts.” Click on “Statistics on Banking.” Click on “Assets and Liabilities,” and then “Run Report.” Using information in this file update Table 12–1 . How have the assets and liabilities
Conglomerate Corporation has acquired Acme Corporation. To help finance the takeover, Conglomerate will liquidate the overfunded portion of Acme’s pension fund. The face values and current and one-year future liquidation values of the assets that will be liquidated are given below.Liquidation
AllStarBank has the following balance sheet (in millions):Assets Liabilities and Equity Cash $ 30 Deposits $110 Loans 90 Borrowed funds 40 Securities 50 Equity 20 Total assets $170 Total liabilities and equity $170 AllStarBank’s largest customer decides to exercise a $15 million loan commitment.
A DI with the following balance sheet (in millions) expects a net deposit drain of $15 million.Questions and Problems Liquidity risk, as a result of heavier-than-anticipated liability withdrawals or loan commitment exercise, is a common problem faced by FI managers. Well-developed policies for
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. Click on “Facts & Statistics.” Click on “Life Insurance.”This will bring the file onto your computer that
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 “Economic Research and Data.” Click on “Flow of Fund Accounts of the United States.” Click on the most recent date. Click
Contrast the balance sheet of a life insurance company ( Table 6–3 ) with the balance sheet of a commercial bank (Table 2–6) and with that of a savings institution (Table 2–10). Explain the balance sheet differences in terms of the differences in the primary functions of the three
a. Calculate the annual cash flows from a $1 million, 20-year fixed-payment annuity earning a guaranteed 10 percent per year if payments are to begin at the end of the current year.b. Calculate the annual cash flows from a $1 million, 20-year fixed-payment annuity earning a guaranteed 10 percent
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 www.ici.org . Click on “Publications.” Click on “Fact Books.” Click on the most recent year for
Go to the Fidelity Investments website and look up the annual 1-, 5-, and 10-year returns on Fidelity Select Biotechnology Fund using the following steps. The website is www.fidelity.com . Click on “Investment Products.”Click on “Mutual Funds.” Click on “Fidelity Funds.” Click on
Suppose today a mutual fund contains 2,000 shares of J.P. Morgan Chase, currently trading at $46.75; 1,000 shares of Walmart, currently trading at $70.10;and 2,500 shares of Pfizer, currently trading at $27.50. The mutual fund has no liabilities and 10,000 shares outstanding held by investors.a.
Why did the proportion of equities in long-term funds increase from 38.3 percent in 1990 to more than 70 percent by 2000 and then decrease to 54 percent in 2012? How might an investor’s preference for a mutual funds objective change over time?
What are the three major risks to household savers from direct security purchases?
What are two major differences between brokers (such as security brokers) and depository institutions (such as commercial banks)?
What are primary securities and secondary securities?
What is the link between asset diversification and the liquidity of deposit contracts?
Why should more regulation be imposed on FIs than on other types of private corporations?
Define the concept of net regulatory burden.
What six major types of regulation do FIs face?
Is the share of bank and thrift assets growing as a proportion of total FI assets in the United States?
What are the fastest growing FIs in the United States?
What were the causes of the financial crisis?
Describe the global challenges facing U.S. FIs in the early 2000s.
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 “Economic Research and Data.” Click on “View All.” Click on “Money Stock Measures.” This downloads a file onto your computer that contains
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 “Economic Research and Data.”Click on “Flow of Funds Accounts of the United
The financial statements for First National Bank (FNB) are shown below:Balance Sheet - First National Bank Assets Liabilities and Equity Cash $ 450 Demand deposits $ 5,510 Demand deposits from other FIs 1,350 Small time deposits 10,800 Investments 4,050 Jumbo CDs 3,200 Federal funds sold 2,025
Megalopolis Bank has the following balance sheet and income statement.Balance Sheet (in millions)Assets Liabilities and Equity Cash and due from banks $ 9,000 Demand deposits $ 19,000 Investment securities 23,000 NOW accounts 89,000 Repurchase agreements 42,000 Retail CDs 28,000 Loans 90,000
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 “Analysts.” Click on “Statistics on Banking.” Select“Savings Institutions,” then click on “Run
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“Regulations, Publications and Reports.” Under “Reports, Plans,
Go to the U.S. Treasury website at www.ustreas.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. Under “Bureaus,” click on “Financial Management Services.” Under “Publications,” click on
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 “Research.” Click “Statistics and Data.” Click on “US Key Stats.” This will download an
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 “ All Statistical Releases. ” Under“Business Finance,” click on “Finance Companies.” This
Compare Tables 3–1 and 2–6. 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?
What have been the major changes in the accounts receivable balances of finance companies over the 35-year period 1977–2012?
1. Go to the Federal Reserve Board’s Web site at www.federalreserve.gov . From there, click on “Economic Research and Data,” then click on “Statistics: Releases and Historical Data.” Click on “Flow of Funds Accounts of the United States Releases,“ then click on the most recent date.
1. How does an FI use loan sales and securitization to manage interest rate, credit, and liquidity risks? Summarize how each of the possible methods of securitization products affects the balance sheet and profitability of an FI in the management of these risks.
1. What are the factors that, in general, allow assets to be securitized? What are the costs involved in the securitization process?
1. What is the market value of IOs and POs if the market interest rates for instruments of similar risk decline to 8 percent?
1. Assume that the payments are separated into interest only (IO) and principal only (PO) payments, that prepayments of 5 percent occur at the end of years 3 and 4, and that the payment of the remaining principal occurs at the end of year 5. What are the expected annual payments for each
1. If the loans are converted into pass-through certificates and the FI charges a servicing fee of 50 basis points, including insurance, what is the payment amount expected by the holders of the pass-through securities if no prepayment is expected?
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