Bank Management 4th Edition Koch, Timothy W., MacDonald, S. Scott - Solutions

Explain how it is possible for a firm to report rising net income each year yet continue to need more working capital financing from a bank.
Standard ratio analysis distinguishes between four categories of ratios. Describe how ratios in each category indicate strength or weakness in the underlying firm’s performance.
Which of the following loan requests by an off-campus pizza parlor would be unacceptable, and why?. to buy cheese for inventory. to buy a pizza heating oven. to buy a car for the owner. to repay the original long-term mortgage used to buy the pizza ovens. to pay employees due to a temporary cash
Explain why collateral alone does not justify extending credit. Cite examples using real estate or agriculture products as collateral.
Rank the importance of the five basic credit issues described in the text.
Suppose that the typical publishing firm in this industry has just one-half the amount of equity that RSM has. How will this affect key industry ratios and the estimate of working capital needs by this procedure, in general?
What general concerns might you have regarding this loan request?
Assuming a 365-day year, calculate the firm's asset cash-to-cash cycle, liabil- ity cash-to-cash cycle, and days deficiency. Using this information and the procedure described in the text, estimate the firm's working capital loan needs.
What fraction of the firm's current assets is being funded with long-term debt or equity?
Describe how each of the following helps a bank control its credit risk.a. Loan covenantsb. Risk rating systemsc. Position limits?
The firm's daily average cost of goods sold is $50,000. What does this mean?
Suppose that you are considering making a working capital loan to a busi- ness customer of your bank. You do the cash-to-cash cycle analysis and de- termine that the days cash-to-cash for assets is 35 while the days cash- to-cash for liabilities is
Many banks compete aggressively for business in consumer credit cards. What is the particular attraction of this type of lending?
Why do firms or individuals involved in farming need to borrow? What type of inventory does a farmer need? What type of receivables does a farmer typically have? What collateral is typically available? In addition to general economic conditions, what should a banker be watchful of before extending
Describe the basic features of:a. Open credit linesb. Asset-based loansc. Term commercial loansd. Short-term real estate loans
Discuss whether each of the following types of loans can be easily securi- tized. Explain why or why not.a. Residential mortgagesb. Small business loansc. Pools of credit card loansd. Pools of home equity loanse. Loans to farmers for production
You are considering making a working capital loan to a company that manufactures and distributes fad items for convenience and department stores. The loan will be secured by the firm's inventory and receivables. What risks are associated with this type of collateral? How would you minimize the risk
What motivation encourages commercial banks to make adjustable-rate mortgages? Why are adjustable mortgage rates normally below fixed mort- gage rates? As the level of rates declines, would you expect banks to increase or decrease the adjustable rate proportion of their mortgage portfolios?
Explain how banks move loans off the balance sheet. What motivates dif- ferent types of off-balance sheet activities? Discuss the risks these actions involve.
Explain how a company’s permanent working capital needs differ from its seasonal working capital needs.
Discuss reasons why banks might choose to include the following covenants in a loan agreement:a. Cash dividends cannot exceed 60 percent of pretax incomeb. Interim financial statements must be provided monthlyc. Inventory turnover must be greater than five times annuallyd. Capital expenditures may
How does a bank make a profit on loans? Discuss the importance of loans in attracting a borrower’s other business with a financial institution.
What are the five Cs of credit? Discuss their importance in credit analysis.Describe the five Cs of bad credit introduced in the text.
Describe the basic features of the three functions underlying the credit process at commercial banks.
Discuss the importance of a bank’s credit culture in managing credit risk.
Discuss the relative importance of liquidity versus capital problems in causing bank failures. Explain the normal sequence of events leading to failure and the importance of market value measures.
What are the conceptual differences between the trend, seasonal, and cyclical components of a bank's loans and deposits? Discuss why a bank should examine each component rather than simply look at total loans and deposits.
Your bank's estimated liquidity gap over the next 90 days equals $180 mil- lion. You estimate that projected funding sources over the same 90 days will equal only $150 million. What planning and policy requirements does this impose on your $3 billion bank?
What can a bank do to increase its core deposits? What are the costs and benefits of such efforts? Generally, how might management estimate the relative interest elasticity of various deposit liabilities of a bank?
A traditional measure of liquidity risk is a bank's loan-to-deposit ratio. Give two reasons why this is a poor measure of risk. Give one reason why it is a good measure.
Rank the following types of depositors by the liquidity risk they typically pose for a bank.a. A CD depositor attracted through a stockbrokerb. Foreign investors trading with a local corporationc. Local schoolchildrend. A two wage earner family with $38,000 in annual salaries and with three children
Explain how a bank's credit risk and interest rate risk can affect its liquid- ity risk.
Banks must pledge collateral against four different types of liabilities. Which liabilities require collateral, what type of collateral is required, and what impact do the pledging requirements have on a bank's asset liquidity?
Explain how each of the following will affect a bank's deposit balances at the Federal Reserve:a. The bank ships excess vault cash to the Federal Reserve.b. The bank buys U.S. government securities in the open market.c. The bank realizes a surplus in its local clearinghouse processing.d. The bank
Liquidity measures and potential sources of liquidity differ for large multi- national banks and small community banks. List the key differences and explain why they appear.
What do the terms core deposits and volatile, or noncore, deposits mean? Explain how a bank might estimate the magnitude of each.
Liquidity planning requires monitoring deposit outflows. In each of the fol- lowing situations, which of the outflows are discretionary and which are not? If the outflow is not discretionary, is it predictable or unexpected?a. In April a farmer draws down his line of credit in order to purchase
What are the fundamental differences and similarities between the com- mercial loan theory, shiftability theory, anticipated income theory, and lia- bility management theory regarding liquidity?
A corporate customer borrows $150,000 against the firm's credit line at a lo- cal bank. Indicate with a T-account how the transaction will affect the bank's deposit balances held at the Federal Reserve when the firm spends the proceeds.
What is the difference between a correspondent, respondent, and bankers' bank?
Define a daylight overdraft and outline the nature of the risks it poses to the Federal Reserve System. What policies might be implemented to control these risks? How does a daylight overdraft differ from float?
In many cases, banks do not permit depositors to spend the proceeds of a deposit until several days have elapsed. What risks do banks face in the check-clearing process? Does this justify holds on checks?
Which of the following activities will affect a bank's required reserves?a. The local Girl Scout troop collects coins and currency to buy a new camping stove. They deposit $250 in coins and open a small time deposit.b. You decide to move $200 from your MMDA to your NOW account.c. You sell your car
Under a contemporaneous reserve accounting, Federal Reserve open mar- ket operations affect a bank's required reserves and actual reserves simul- taneously. Explain how and why this improves the Federal Reserve's abil- ity to influence general economic conditions. Why is the Fed hampered under
Monetary theory examines the role of excess reserves (actual reserves mi- nus required reserves) in influencing economic activity and Federal Re- serve monetary policy. Viewed in the context of a single bank, excess re- serves are difficult to measure. Explain what amount of a bank's actual reserve
What are the advantages and disadvantages for a bank contemplating holding more cash?
The determination of cash requirements is closely associated with a bank's liquidity requirements. Explain why.
What are the different types of cash assets and the basic objectives for hold- ing each?
Although FDICIA calls for risk-based insurance premiums, why do many argue that we still have a flat deposit insurance system?
Using the data from Regional National Bank (RNB) in exhibit 13.2, calcu- late the banks' deposit insurance assessment if it is in Supervisory Subgroup A. What would the deposit insurance assessment be if it was in Supervisory Subgroup C?
FDICIA imposes increasingly severe operating restrictions on undercapi- talized banks (those in zones 3, 4, and 5). Explain why these restrictions are appropriate. Describe how managers should respond to these restrictions if they manage an undercapitalized bank.
What is the leverage capital ratio and why do regulators specify a mini- mum for it?
A bank has decided it must raise external capital. Discuss the advantages and disadvantages of each of the following choices:a. subordinated debt at 7.7 percentb. preferred stock at a 10 percent dividend yieldc. common stock
Risk-based capital requirements may induce bank managers to change their asset composition. Explain why. Determine how a shift from any of the following should affect a bank's required capital. How will each shift affect the bank's profit potential?a. from consumer loans to 1-4 family mortgagesb.
Explain why increased regulatory capital requirements lead to a greater consolidation of banking firms via mergers and acquisitions.
Two competing commercial banks situated in the same community have comparable asset portfolios, but one operates with a total capital ratio of 8 percent, while the other operates with a ratio of 10 percent. Compare the opportunities and risk profiles of the two banks.
Regulators put great pressure on banks to reduce their common dividend payments when asset problems appear. Discuss the costs and benefits of cutting dividends.
Many regulators would like to see bank capital requirements raised. Con- sider a proposal to increase the minimum Tier 1 and total capital ratios to 6 percent and 12 percent, respectively. What impact would this have on bank risk? Would small banks and large banks have equal opportunity in meeting
Suppose that a bank wants to grow during the next year but does not want to issue any new external capital. Its current financial plan projects a return on assets of 1.25 percent, a dividend payout rate of 35 percent, and an equity-to-asset ratio of 8 percent. Calculate the allowable growth in the
Many analysts argue that risk-based capital requirements should force banks to raise loan rates. Explain this by assuming that a bank's manage- ment sets loan rates to earn a 16 percent return on equity. How does the al- location of equity to a loan affect loan pricing?
Explain how capital reduces banking risks. Discuss the importance of cash flows and economic value rather than accounting value.
Provide the general outline of existing risk-based capital requirements. Is there a difference between default risk, interest rate risk, and liquidity risk?
What are the advantages and disadvantages of using financial leverage? Answer from the banker's view and then from a bank regulator's view.
You have collected the following information, at least some of which you think will be useful in estimating the pretax cost of issuing new common stock for your bank. What is that estimated cost? T-bill rate = 5% Bank's CD rate = 5.5% Bank's bond rate = 7.1% Bank's marginal tax rate = 34% S&P 500
The weighted marginal cost of funds is used in pricing decisions. Explain how it should be used if the loan being priced exhibits average risk. How should the weighted marginal cost of funds be used if the loan carries above-average risk?
Calculate the following single source marginal costs.a. A bank plans to issue $20 million in 10-year subordinated notes. The issue is priced at a discount to provide $19.3 million to the bank. The notes will pay $1.4 million in coupon interest at the end of each year. Flotation costs will total
Use the following information to estimate the marginal cost of issuing a $100,000 CD paying 6.2 percent interest. It has a 1-year maturity and the fol- lowing estimates apply relative to the balance obtained: Acquisition costs = 1/8 of 1 percent FDIC insurance=1/12 of 1 percent Required reserves
What types of bank liabilities generate the highest servicing costs? What types generate the highest acquisition costs?
What are the consequences of a bank mistakenly pricing loans based on the historical cost of funds? Do they differ in a rising rate environment versus a falling rate environment?
Identify whether you should use an average cost of bank funds or a mar- ginal cost of funds in the following situations.a. Setting the rate on a new loan?
When a bank fails, regulators have a choice of ways to resolve all claims. In one type of resolution uninsured depositors get full reimbursement of their deposits, but in another type they only receive their share of residual claims beyond the insured deposit amount.a. Explain how the two different
How large would Barnett's uninsured deposits be in these FDIC insured banks if the funds were held at the same point in time?a. Barnett owns a joint account with his sister for $175,000 in Metro Bank.b. Barnett owns an account in his name only for $80,000 in Metro Bank.c. Barnett owns a joint
As the FDIC fund dropped in size, regulators and Congress realized that there were basic problems with deposit insurance. With perfect hindsight, identify these problems and recommend policies to correct the problems.
Many banks compete aggressively for retail time deposits. What marketing strategies will attract large volumes of deposits from individuals? Why are retail deposits attractive to banks?
As a potential jumbo CD depositor, what would your circumstances have to be for you to prefer a variable-rate CD over a fixed-rate CD? What would the circumstances be for you to prefer a zero coupon CD over a variable-rate CD?
Assume the following transactions occur sequentially:a. The TIB Corp., based in New Orleans, converts a $3 million demand de- posit held at the New York Money Center Bank to a $3 million Eurodol- lar deposit held at Barclays Bank in London.b. Barclays Bank opens a $3 million Eurodollar deposit at
True or false: Federal funds transactions involve an exchange of bank re- serves held at Federal Reserve Banks. Explain your reasoning.
Explain why it is or is not reasonable for a bank to charge an explicit fee for balance inquiries.
Using the data from Exhibit 12.3, determine the average monthly cost of servicing the typical student’s demand deposit account, which generates 27 home debits, four transit checks, and two deposits per month. Assume that the bank can invest 85 percent of the deposit balance at 7 percent and
Indicate how a bank’s core deposits differ from its hot money or volatile liabilities in terms of interest elasticity. What factors are relatively more im- portant to attracting and retaining core deposits as compared to purchased funds?
Rank the following types of bank liabilities first according to their level of liquidity risk, and then according to their interest rate risk. Then rank them according to their current cost to the bank. Explain why they vary.DDAs NOW accounts MMDAs small time deposits jumbo CDs Federal funds
Describe what position you would take with an interest rate cap. Which index (prime or LIBOR) would you use? Explain why. Which strike rate would you use? Explain why. Assume that the bank takes this position.a. Suppose that LIBOR and the prime rate rise by 1 percent after one year and remain at
Are there margin requirements for the following positions? Explain why or why not.a. Buy an interest rate capb. Sell a put option on Eurodollar futures:c. Sell an interest rate floord. Sell a Eurodollar futures contract
Suppose that you buy an interest rate cap on 3-month LIBOR with a 2-year maturity and simultaneously sell a floor on 3-month LIBOR with a 2-year maturity. Ignore the premiums. Draw a profit diagram that indi- cates when you will gain and lose on the combined positions. Compare this to different
Explain why any market participant would:a. sell a call option on Eurodollar futuresb. sell a put option on Eurodollar futuresc. sell an interest rate capd. sell an interest rate floor
Who controls option exercise with a:a. callable swapb. putable swap ?
Your bank is asset sensitive and management wants to protect against loss from interest rate changes.a. Would an interest rate cap or floor serve as a better hedge? Explain.b. Would a collar or reverse collar serve as a better hedge? Explain.c. Why would the bank choose a collar or reverse collar
Assume that you bought an interest rate cap on 3-month LIBOR with a 5.50 percent strike rate. The current rate for 3-month LIBOR is 5.35 percent.a. What will happen to the premium (value) on this cap if LIBOR rises to 6.2 percent? Explain.b. What will happen to the premium (value) on this cap if
Suppose that the yield curve on Eurodollars is sharply upsloping.a. Will premiums on interest rate floors on 3-month LIBOR be high or low? Explain.b. Will premiums on interest rate caps on 3-month LIBOR be high or low? Explain.
In each of the following cases, indicate whether an interest rate cap, floor, collar, or reverse collar is an appropriate position for a hedge. Recommend a specific position.a. A bank loan customer wants to borrow at a fixed 8 percent rate and the bank only lends at floating rates.
Explain how the outcome from using a basic interest rate swap to hedge borrowing costs will generally differ from using an interest rate cap and an interest rate collar as hedges. Why is there a difference?
Use the data from Exhibit 11.11 to answer the following questions:a. When will the buyer of a 5-year cap on 3-month LIBOR with a 7 percent strike price expect to receive cash? What is the cap premium?b. When will the buyer of a 3-year floor on 3-month LIBOR with a 5.25 per- cent strike price expect
In each of the following situations, indicate whether a bank should buy a call option on Eurodollar futures or buy a put option on Eurodollar futures to hedge interest rate risk.a. In five months the bank expects to sell $5 million of securities from its investment portfolio to meet liquidity
As a call or put option’s expiration date gets farther into the future, what should happen to:a. time value of options with the same strike priceb. option premiums for the same strike price
As the strike price of put options with the same expiration increases, what should happen to:a. intrinsic value of optionsb. premiumc. time value
As the strike price of call options with the same expiration increases, what should happen to:a. intrinsic value of optionsb. premiumc. time value
Calculate the intrinsic value and time value of the December call options and December put options from Exhibit 11.2 at the different strike prices.Compare the time values to those of the September call and put options with the same strike prices. Why is there a difference?
Using the data from Exhibit 11.2, draw the profit diagram for:. long December put option at 95.00 strike price. sell a September call at 94.00 _ short December Eurodollar futures position. long December call at 94.50
Once a bank buys a call option on Eurodollar futures as a hedge, how might it get out of its position? Once a bank buys a put option on Eurodollar futures, how might it exit its position?
Explain how the buyer of an option on Eurodollar futures can limit loss, but the buyer of Eurodollar futures cannot.

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Bank Management 4th Edition Koch, Timothy W., MacDonald, S. Scott - Solutions

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