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financial institutions management
Financial Institutions Management A Risk Management Approach 6th Edition Anthony Saunders, Marcia Cornett - Solutions
Why is the measurement of market risk important to the manager of a financial institution?
What is meant by market risk?
Go to Standard & Poor's Market Insight Web site at www.mhhe.com/edu- marketinsight and find the most recent balance sheet for Capital One Financial Corp (COF) and American Express (AXP) using the following steps. Click on "Educational Version of Market Insight." Enter your site ID and click on
Go to Standard & Poor's Market Insight Web site at www.mhhe.com/edu- marketinsight and identify the industry constituents for Capital One Financial Corp. through the related links using the following steps. Click on "Educational Version of Market Insight." Enter your site ID and click on "Login."
Go to the Federal Reserve's Web site at www.federalreserve.gov and get the latest information on finance company consumer, real estate, and business lending using the following steps. Click on "Economic Research and Data." Click on "Statistics: Releases and Historical Data." Under "Business
How does the amount of equity as a percentage of total assets compare for finance companies and commercial banks? What accounts for this difference?
Compare Tables 6-1 and 4-6. Which firms have higher ratios of capital to total assets: finance companies or securities firms? What does this comparison indi- cate about the relative strengths of these two types of firms?
What advantages do finance companies have over commercial banks in offer- ing services to small business customers? What are the major subcategories of business loans? Which category is the largest?
What have been the major changes in the accounts receivable balances of fi- nance companies over the 29-year period 1977-2006?
What is the primary function of finance companies? How do finance companies differ from commercial banks?
Go to the Standard & Poor's Market Insight Web site at www.mhhe.com/ edumarketinsight. Find the most recent balance sheets for Washington Mutual (WM) and Astoria Financial (AF) using the following steps. Click on "Educational Version of Market Insight." Enter your site ID and click on "Login."
Go to the Standard & Poor's Market Insight Web site at www.mhhe. com/edumarketinsight. Find the most recent balance sheets for Bank of America (BAC) and Suntrust Banks (STI) using the following steps. Click on "Educational Version of Market Insight." Enter your site ID and click on "Login." Click
Go to the Standard & Poor's Market Insight Web site at www.mhhe.com/edu- marketinsight. Look up the industry financial highlights for banks as posted by S&P using the following steps. Click on "Educational Version of Market Insight." Enter your site ID and click on "Login." Click on "Industry."
Go to the Standard & Poor's Market Insight Web site at www.mhhe.com/edu- marketinsight. Identify the industry description and industry constituents for banks using the following steps. Click on "Educational Version of Market Insight." Enter your site ID and click on "Login." Click on "Industry."
Go to the National Credit Union Association Web site 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. Under "Resources," click on "Reports, Plans, and Statistics." Click on "Credit
Go to the Federal Reserve Board's Web site at www.federalreserve.gov and find the most recent balance sheet information for the credit union industry using the following steps. Click on "Economic Research and Data." Click on "Statistics: Releases and Historical Data." Click on "Flow of Funds
Go to the FDIC Web site at www.fdic.gov and find the most recent break- down of U.S. bank asset concentrations using the following steps. Click on "Analysts." From there click On "FDIC Quality Banking Profile" and then click on "Quarterly Banking Profile." Click on "Commercial Bank Section." Then
Compare and contrast the performance of the U.S. depository institution in- dustry with those of Japan and China.
What are the operating advantages of credit unions that have caused concern among commercial bankers? What has been the response of the Credit Union National Association to the banks' criticism?
How do savings banks differ from savings institutions? Differentiate in terms of risk, operating performance, balance sheet structure, and regulatory responsibility.
How did two pieces of regulatory legislation-the DIDMCA in 1980 and the DIA in 1982-change the operating 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
What happened in 1979 to cause the failure of many savings institutions dur- ing the early 1980s? What was the effect of this change on the operating state- ments of savings institutions?
What are the main features of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994? What major impact on commercial banking activity is expected from this legislation?
What factors are given credit for the strong performance of commercial banks in the early 2000s?
What factors normally are given credit for the revitalization of the banking industry during the 1990s? How is Internet banking expected to provide benefits in the future?
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 1992-2006?b. What categories of contingencies have had the highest annual growth rates?c. What factors are credited for the significant growth in
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 struc- ture, would you classify this bank as a community bank,
What are the major sources of funds for commercial banks in the United States? How is the landscape for these funds changing and why?
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 use of funds? Which of the risks is most critical to the continuing operation of a bank?
What factors have 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 early 2000s? What strategic changes have banks
Use the data in Table 2-4 for the banks in the two asset size groups (a) $100 million-$1 billion and (b) over $10 billion to answer the following questions.a. Why have the ratios for ROA and ROE tended to increase for both groups over the 1990-2006 period? Identify and discuss the primary variables
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.
= Go to the World Bank Web site at www.worldbank.org and find the amount of Brady bonds currently outstanding in Brazil using the following steps. Click on “Data and Research.” Under “Data Programs,” click on “Joint external debt hub.” Click on “Go.” Click on “Creditor/Market.”
= Go to the Heritage Foundation Web site at www.heritage.org and find the most recent Economic Freedom Index for the United States using the following steps. Click on “20XX Index of Economic Freedom.” Click on “Countries.” Click on “United States.” This will bring the file onto your
= What are the major costs and benefits of converting debt to Brady bonds for an FI?
= A bank was expecting to receive $100,000 from its customer based in Great Britain. Since the customer has problems repaying the loan immediately, the bank extends the loan for another year at the same interest rate of 10 percent. However, in the rescheduling agreement, the bank reserves the right
= A $20 million loan outstanding to the Nigerian government is currently in arrears with City Bank. After extensive negotiations, City Bank agrees to reduce the interest rate from 10 percent to 6 percent and to lengthen the maturity of the loan to 10 years from the present 5 years remaining to
= A bank is in the process of renegotiating a three-year nonamortizing loan. The principal outstanding is $20 million, and the interest rate is 8 percent. The new terms will extend the loan to 10 years at a new interest rate of 6 percent. The cost of funds for the bank is 7 percent for both the old
= A bank is in the process of renegotiating a loan. The principal outstanding is $50 million and is to be paid back in two installments of $25 million each, plus interest of 8 percent. The new terms will stretch the loan out to five years with only interest payments of 6 percent, no principal
= How would the restructuring, such as rescheduling, of sovereign bonds affect the interest rate risk of the bonds? Is it possible that such restructuring would cause the FI’s cost of capital not to change? Explain.
= Which variables typically are negotiation points in an LDC multiyear restructuring agreement (MYRA)? How do changes in these variables provide benefits to the borrower and to the lender?
= Zlick Company plans to invest $20 million in Chile to expand its subsidiary’s manufacturing output. Zlick has two options. It can convert the $20 million at the current exchange rate of 410 pesos to a dollar (i.e., P410/$), or it can engage in a debt-for-equity swap with its bank, City Bank, by
= Chase Bank holds a $200 million loan to Argentina. The loans are being traded at bid-offer prices of 91–93 per 100 in the London secondary market. If Chase has an opportunity to sell this loan to an investment bank at a 7 percent discount, what are the savings after taxes compared with the
= The following questions and problems are based on material presented in Appendix 15A. What are the risks to an investing company participating in a debt-for-equity swap?
= Identify and describe the four market segments of the secondary market for LDC debt
= who are the primary sellers of LDC debt? Who are the buyers? Why are FIs often both sellers and buyers of LDC debt in the secondary markets?
= What are the benefits and costs of rescheduling to the following? A borrower. A lender.
= Explain the following relation: p f IR INVR (, ) , or where p IR Probability of rescheduling Total imports/Total foreign exchange reserves INVR Real investment/GNP
= The average ER 2 (or VAREX variance of export revenue) of a group of countries has been estimated at 20 percent. The individual VAREXes of two countries in the group, Holland and Singapore, have been estimated at 15 percent and 28 percent, respectively. The regression of individual country
= Countries A and B have exports of $2 billion and $6 billion, respectively. The total interest and amortization on foreign loans for both countries are $1 billion and $2 billion, respectively. What is the debt service ratio (DSR) for each country? Based only on this ratio, to which country should
= An FI manager has calculated the following values and weights to assess the credit risk and likelihood of having to reschedule the loan. From the Z score calculated from these weights and values, is the manager likely to approve the loan? Validation tests of the Z score model indicated that
= What types of variables normally are used in a CRA Z score model? Define the following ratios and explain how each is interpreted in assessing the probability of rescheduling. Debt service ratio. Import ratio. Investment ratio. Variance of export revenue. Domestic money supply growth.
= Go to the FDIC Web site at www.fdic.gov and find the most recent values for foreign exchange trading revenue at J. P. Morgan Chase and Citigroup using the following steps. Click on “Analysts.” Click on “Statistics on Depository Institutions (SDI).” Click on “ID Home.” Click on “Find
= Go to the Web site of the U.S. Treasury at www.ustreas.gov and update Table 14–3 using the following steps. Click on “Bureaus.” Click on “Financial Management Service (FMS).” Under “Statements & Reports,” click on “Treasury Bulletin.” Click on “Foreign Currency Positions.”
= A money market mutual fund manager is looking for some profitable investment opportunities and observes the following one-year interest rates on government securities and exchange rates: rUS 12%, rUK 9%, S $1.50/£, F $1.60/£, where S is the spot exchange rate and F is the forward
= An FI has $100,000 of net positions outstanding in British pounds (£) and $30,000 in Swiss francs (SF). The standard deviation of the net positions as a result of exchange rate changes is 1 percent for the SF and 1.3 percent for the £. The correlation coefficient between the changes in
= What is the relationship between the real interest rate, the expected inflation rate, and the nominal interest rate on fixed-income securities in any particular country? Refer to Table 14–5. What factors may be the reasons for the relatively high correlation coefficients?
= 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 $0.60/¥. If the forward rate is $0.64/¥, how could the FI arbitrage using a sum of $1 million? What is the
= Suppose that the current spot exchange rate of U.S. dollars for Australian dollars, SUS$/A$, is .7590 (i.e., 0.759 dollars, or 75.9 cents, can be received for 1 Australian dollar). The price of Australian-produced goods increases by 5 percent (i.e., inflation in Australia, iA , is 5 percent), and
= How does the lack of perfect correlation of economic returns between international financial markets affect the risk-return opportunities for FIs holding multicurrency assets and liabilities? Refer to Table 14–5. Which country pairings seem to have the highest correlation of returns on
= A bank purchases a six-month $1 million Eurodollar deposit at an annual interest rate of 6.5 percent. It invests the funds in a six-month Swedish krone AA-rated bond paying 7.5 percent per year. The current spot rate is $0.18/SK. The six-month forward rate on the Swedish krone is being quoted at
= North Bank has been borrowing in the U.S. markets and lending abroad, thus incurring foreign exchange risk. In a recent transaction, it issued a one-year $2 million CD at 6 percent and funded a loan in euros at 8 percent. The spot rate for the euro was @1.45/$ at the time of the transaction.
= Bank USA recently made a one-year $10 million loan that pays 10 percent interest annually. The loan was funded with a Swiss franc–denominated oneyear deposit at an annual rate of 8 percent. The current spot rate is SF 1.60/$. What will be the net interest income in dollars on the one-year
= Sun Bank USA has purchased a 16 million one-year Swiss franc loan that pays 12 percent interest annually. The spot rate for Swiss franc’s is SF1.60/$. Sun Bank has funded this loan by accepting a British pound–denominated deposit for the equivalent amount and maturity at an annual rate of 10
= City Bank issued $200 million of one-year CDs in the United States at a rate of 6.50 percent. It invested part of this money, $100 million, in the purchase of a one-year bond issued by a U.S. firm at an annual rate of 7 percent. The remaining $100 million was invested in a one-year Brazilian
= What are the four FX trading activities undertaken by FIs? How do FIs profit from these activities? What are the reasons for the growth in FX profits at major U.S. banks even though volatility in FX rates among major European countries has decreased?
= The following are the foreign currency positions of an FI, expressed in dollars. Currency Assets Liabilities FX Bought FX Sold Swiss francs (SF) British pound (£) Japanese yen (¥) $125,000 50,000 75,000 $50,000 22,000 30,000 $10,000 15,000 12,000 $15,000 20,000 88,000 What is the FI’s net
= X-IM Bank has ¥14 million in assets and ¥23 million in liabilities and has sold ¥8 million in foreign currency trading. What is the net exposure for X-IM? For what type of exchange rate movement does this exposure put the bank at risk?
= On October 19, 2006, you convert $500,000 U.S. dollars to Japanese yen in the spot foreign exchange market and purchase a one-month forward contract to convert yen into dollars. How much will you receive in U.S. dollars at the end of the month? Use the data in Table 14–1 for this problem.
= Refer to Table 14–1. On September 19, 2006, you purchased a British pound–denominated CD by converting $1 million to pounds at a rate of .5410 pound for U.S. dollars. It is now October 19, 2006. Has the U.S. dollar appreciated or depreciated in value relative to the pound? Using the
= Refer to Table 14–1. What was the spot exchange rate of Canadian dollars for U.S. dollars on October 19, 2006? What was the six-month forward exchange rate of Canadian dollars for U.S. dollars on October 19, 2006? What was the three-month forward exchange rate of U.S. dollars for Swiss francs
= What is the spot market for FX? What is the forward market for FX? What is the position of being net long in a currency?
= Go to the Federal Reserve Board’s Web site at www.federalreserve.gov and update Table 11–7 using the following steps. Click on “Economic Research and Data.” Click on “Statistics: Releases and Historical Data.” Click on “Consumer Credit.” Click on the most recent date. This
= Go to the Federal Housing Finance Board’s Web site at www.fhfb.gov and find the most recent data on the percentage of conventional single-family mortgages with adjustable rates using the following steps. Under “Monthly Interest Rates” click on “View Summary Tables.” Click on “Monthly,
= Go to the Federal Reserve Board’s Web site at www.federalreserve.gov and update the data in Table 11–1 using the following steps. Click on “Economic Research and Data.” Click on “Statistics: Releases and Historical Data.” Click on “Assets and Liabilities of Commercial Banks in the
= Industrial Corporation has an income-to-sales (profit margin) ratio of .03, a sales-to-assets (asset utilization) ratio of 1.5, and a debt-to-asset ratio of .66. What is Industrial’s return on equity?
= Consider the following company balance sheet and income statement. 37. 38. 39. Job stability Score 5 years 50 Credit history Score No record 0 Missed a payment in last 5 years −15 Met all payments 40 Balance Sheet Assets Liabilities and Equity Cash Accounts receivable Inventory Total current
= How does ratio analysis help to answer questions about the production, management, and marketing capabilities of a prospective borro
= Suppose you are a loan officer at Carbondale Local Bank. Joan Doe listed the following information on her mortgage application. Characteristic Value Annual gross income TDS Relations with FI Major credit cards Age Residence Length of residence Job stability Credit history $45,000 10% Checking
= Carman County Bank (CCB) has a $5 million face value outstanding adjustable-rate loan to a company that has a leverage ratio of 80 percent. The current risk-free rate is 6 percent, and the time to maturity on the loan is exactly ½ year. The asset risk of the borrower, as measured by the
= firm has assets of $200,000 and total debts of $175,000. With an option pricing model, the implied volatility of the firm’s assets is estimated at $10,730. Under the KMV method, what is the expected default frequency (assuming a normal distribution for assets)?
= A firm is issuing two-year debt in the amount of $200,000. The current market value of the assets is $300,000. The risk-free rate is 6 percent, and the standard deviation of the rate of change in the underlying assets of the borrower is 10 percent. Using an options framework, determine the
= A bank is planning to make a loan of $5,000,000 to a firm in the steel industry. It expects to charge a servicing fee of 50 basis points. The loan has a maturity of 8 years with a duration of 7.5 years. The cost of funds (the RAROC benchmark) for the bank is 10 percent. Assume the bank has
= What is RAROC? How does this model use the concept of duration to measure the risk exposure of a loan? How is the expected change in the credit premium measured? What precisely is LN in the RAROC equation?
= The table below shows the dollar amounts of outstanding bonds and corresponding default amounts for every year over the past five the default figures are in millions, while those outstanding are in billions. The outstanding figures reflect default amounts and bond redemptions. Years after
= The following is a schedule of historical defaults (yearly and cumulative) experienced by an FI manager on a portfolio of commercial and mortgage loans. Years after Issuance Loan Type 1 Year 2 Years 3 Years 4 Years 5 Years Commercial: Annual default 0.00% 0.50% 0.30% Cumulative default 0.10%
= The bond equivalent yields for U.S. Treasury and A-rated corporate bonds with maturities of 93 and 175 days are given below: 93 Days 175 Days U.S. Treasury 8.07% 8.11% A-rated corporate 8.42 8.66 Spread 0.35 0.55
= Calculate the term structure of default probabilities over three years using the following spot rates from the Treasury and corporate bond (pure discount) yield curves. Be sure to calculate both the annual marginal and the cumulative default probabilities. Spot 1 Year Spot 2 Year Spot 3 Year
= Assume that a one-year T-bill is currently yielding 5.5 percent and an AAArated discount bond with similar maturity is yielding 8.5 percent. If the expected recovery from collateral in the event of default is 50 percent of principal and interest, what is the probability of repayment of the
= bank has made a loan charging a base lending rate of 10 percent. It expects a probability of default of 5 percent. If the loan is defaulted, the bank expects to recover 50 percent of its money through the sale of its collateral. What is the expected return on this loan?
= If the rate on one-year T-bills currently is 6 percent, what is the repayment probability for each of the following two securities? Assume that if the loan is defaulted, no payments are expected. What is the market-determined risk premium for the corresponding probability of default for each
= Consider the coefficients of Altman’s Z score. Can you tell by the size of the coefficients which ratio appears most important in assessing creditworthiness of a loan applicant? Explain.
= MNO, Inc., a publicly traded manufacturing firm in the United States, has provided the following financial information in its application for a loan. All numbers are in thousands of dollars. Assets Liabilities and Equity Cash $ 20 Accounts payable $ 30 Accounts receivable 90 Notes payable 90
= Describe how a linear discriminant analysis model works. Identify and discuss the criticisms which have been made regarding the use of this type of model to make credit risk evaluations.
= Suppose the estimated linear probability model is PD .3 X1 + .2 X2 − 0.5 X3 + error, where X1 0.75 is the borrower’s debt/equity ratio, X2 0.25 is the volatility of borrower earnings, and X3 0.10 is the borrower’s profit ratio. What is the projected probability of default for the
= What are the purposes of credit scoring models? How do these models assist an FI manager in better administering credit?
= Why is the degree of collateral as specified in the loan agreement of importance to the lender? If the book value of the collateral is greater than or equal to the amount of the loan, is the credit risk of the lender fully covered? Why or why not?
= Identify and define the borrower-specific and market-specific factors that enter into the credit decision. What is the impact of each type of factor on the risk premium? Which of these factors is more likely to adversely affect small businesses rather than large businesses in the credit
= What are covenants in a loan agreement? What are the objectives of covenants? How can these covenants be negative? Positive?
= Why are most retail borrowers charged the same rate of interest, implying the same risk premium or class? What is credit rationing? How is it used to control credit risks with respect to retail and wholesale loans?
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