Bank Management 5th Edition Timothy W. Koch, S. Scott Macdonald - Solutions

4. 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.
3. Which of the following loan requests by ax 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
2. Explain why collateral alone does not justify extending credit. Cite examples using real estate or agriculture products as collateral.
1. Rank the importance of the five basic credit issues described in the text.
5. WfoNFOa . What is the secondary source of repayment; i.e., what collateral or guarantees are available?
4. What is the primary source of repayment, and when will the loan be repaid?
3. How much does the customer need to borrow?
2. What are the loan proceeds going to be used for?
1. What is the character of the borrower and quality of information provided?
1. Obtain copies of the annual reports for several community banks in your area and at least one large regional or nationwide bank. Compare the size of the loan portfolios as a fraction of total assets. Compare the composition of their loan portfolios. What impact should the differences have on
15. Describe how each of the following helps a bank control its credit risk.a. Loan covenants b Risk rating systemsc. Position limits
14. Suppose that you are considering making a working capital loan to a business cus-tomer of your bank. You do the cash-to-cash cycle analysis and determine that the days cash-to-cash for assets is 35 while the days cash-to-cash for liabilities is 48. The firm's daily average cost of goods sold is
13. Many banks compete aggressively for business in consumer credit cards. What is the particular attraction of this type of lending?
12. Why do firms or individuals involved in farming need to borrow? What type of inven-tory 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
11. Describe the basic features of:a. Open credit linesb. Asset-based loansc. Term commercial loansd. Short-term real estate loans
10. Discuss whether each of the following types of loans can be easily securitized. 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
9. 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
8. What motivation encourages commercial banks to make adjustable-rate mortgages?Why are adjustable mortgage rates normally below fixed mortgage rates? As the level of rates declines, would you expect banks to increase or decrease the adjustable rate proportion of their mortgage portfolios?
7. Explain how banks move loans off the balance sheet. What motivates different types of off-balance sheet activities? Discuss the risks these actions involve.
6. Explain how a company’s permanent working capital needs differ from its seasonal working capital needs.
5. Discuss reasons why banks might choose to include the following covenants in a loan agreement:a. Cash dividends cannot exceed 60 percent of pretax income.b. Interim financial statements must be provided monthly.c. Inventory turnover must be greater than five times annually.d. Capital
4. 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.
3. What are the five Cs of credit? Discuss their importance in credit analysis. Describe the five Cs of bad credit introduced in the text.
2. Describe the basic features of the three functions underlying the credit process at commercial banks.
1. Discuss the importance of a bank’s credit culture in managing credit risk.
Il. EXPLAIN BOND RISKS Obtain a copy of The Wall Street Journal. Compare the price and yield characteristics of corporate bonds, municipal bonds, Treasury bonds, and mortgage-backed securities in the Money and Investing section under “Interest Rates and Bonds.” Explain what general risks are
I. LEARN MORE ABOUT YOUR LOCAL BANK Obtain a copy of a local community bank’s annual report and the annual report of a large bank i2.3.4.Di. Determine the extent to which each of the banks:Operates a trading account Reports gains or losses on securities trades Invests in municipal securities
20. Large banks often borrow heavily in the federal funds market and maintain small investment portfolios relative to their asset size. Are these offsetting risk positions?Why do large banks organize themselves this way?
19. Explain how a bank's loan-to-deposit ratio is likely to affect both the size and compo-sition of the investment portfolio. Does management first decide how many loans to make, and then allocate remaining funds to investments?
18. What group within a bank sets the investment policy? What issues does the policy address?
17. Explain why municipal securities have default risk if they are issued by government units.
16. Using the data in Exhibit 19.13, explain what a CAR is in terms of an asset-backed security. Why is the spread (0.48 percent) on the Class A security lower than the spread(0.63 percent) on the Class B security in terms of the features of the two instruments?
15. Consider = $100 million pool of conventional mortgages paying 8 percent interest.Suppose that you create one PO and one IO for this entire pool. Describe what a PO and IO would look like for this mortgage pool.
14. Suppose that you own a 4-year maturity Treasury bond that pays $100,000 in princi-pal at maturity and $3,000 every six months in coupon interest. Use the features of the bond to explain what Treasury IOs and POs are.
13. Explain how the design of a CMO supposedly helps to manage prepayment risk for investors. What is a tranche?
12. Discuss the impact of each of the following on prepayment risk for a mortgage-backed pass-through security (MBS).a. High coupon interest MBS versus low coupon interest MBS.b. MBS issued six years prior versus MBS issued this year.c. Demographic trends in different areas of the country.
11. FASB 115 requires certain classifications within a bank’s securities portfolio. What is the accounting treatment of securities within each classification? Describe why full market value accounting might adversely affect a bank’s reported capital. How should management classify the bank’s
10. How do banks judge the credit risk in the investment portfolio? What information is available that helps?
9. Explain how a reverse RP differs from federal funds sold as an income producing asset.
8. List the objectives that banks have for buying securities. Explain the motive for each.
7. What is the option in a callable agency bond? What impact does the call deferment period have on a callable bond’s promised yield? What is the primary advantage of a discount callable bond versus one trading at par?
6. Examine the data in Exhibit 19.2. Identify key trends and explain the driving force behind each. Why might banks prefer agency securities over Treasury securities?
5. Explain how the composition of a small community bank’s investment portfolio differs, in general, from the composition of a large bank’s portfolio. Why might mutual funds be attractive to banks?
4. What types of securities are banks prohibited from buying for investment purposes?
3. Explain how zero coupon securities differ from coupon securities. Which are more liguid, in general? Which are more price sensitive? What is the advantage of a zero coupon security in terms of total return?
2. Explain why bank managers often refuse to sell securities at a loss relative to book value. What is the cost of continuing to hold discount instruments? What are the costs of selling securities at a gain?
1. Describe how a bank makes a profit with its securities trading account. What are the risks?
6. What is the convexity of specific mortgage-backed securities, and how does it vary according to the underlying coupon rate on the mortgages?
5. What prepayment probabilities are associated with specific mortgage-backed securities?
4. To what extent should the bank purchase discount (or zero coupon) securities?
3. What planned holding period is desirable?
2. What duration characteristics are desirable?
1. What maturity distribution of Treasuries, agencies, and municipals (separately) is desired?
6. Should the bank purchase insured municipals?
5. Which issuer’s securities should be avoided?
4, What information should credit files for nonrated municipals and all corporate and foreign bonds contain?
3. What is the maximum amount that can be invested in any one issuer’s securities?
2. How much (what percentage) should the bank hold in each of the top four rating categories?
1. What amount of municipal, corporate, and foreign securities is optimal?
5. With which banks or securities dealers should the bank establish a trading relationship?
4. What amount of short-term securities (under one year) should be held as a potential liquidity reserve?
3. Which Treasury, agency, or municipal securities should the bank pledge as collateral?
2. To what financial institutions should the bank sell federal funds, and from what institutions should the bank purchase security RPs?
1. What volume of federal funds transactions is desirable?
1. Determine how long it takes your bank to process your checks. Find some old checks you wrote to people locally and in a different Federal Reserve district. Note the date on which you wrote the check and then find the date on your monthly account statement when the bank deducted the amount from
Il. PRICING CORRESPONDENT SERVICES In addition to his other duties, Gene Wandling is responsible for analyzing the profitability of Hawkeye National Bank’s respondent bank account relationships. Like most of its competitors, Hawkeye priced correspondent services monthly, using cost allocations
I. CALCULATION OF REQUIRED RESERVES At the close of business on Wednesday, Gene Wandling was reviewing whether Hawkeye National Bank was successful in meeting its legal reserve requirements at the Federal Reserve. The bank had just completed the 2-week reserve maintenance period, during which it
23. 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.
22. 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.
21. Your bank’s estimated liquidity gap over the next 90 days equals $180 million.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?
20. 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?
19. 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.
18. Rank the following types of depositors by the liquidity risk they typically pose for a bank.a. ACD 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
17. Explain how a bank’s credit risk and interest rate risk can affect its liquidity risk.
16. 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?
15. Explain how each of the following will affect a bank’s deposit balances at the Federal Reserve:The bank ships excess vault cash to the Federal Reserve.. The bank buys U.S. government securities in the open market.The bank realizes a surplus in its local clearinghouse processing.. The bank
14. Liquidity measures and potential sources of liquidity differ for large multinational banks and small community banks. List the key differences and explain why they appear.
13. What do the terms core deposits and volatile, or noncore, deposits mean? Explain how a bank might estimate the magnitude of each.
12. Liquidity planning requires monitoring deposit outflows. In each of the following situations, which of the outflows are discretionary and which are not? If the outflow is not discretionary, is it predictable or unexpected?. In April, a farmer draws down his line of credit in order to purchase
11. What are the fundamental differences and similarities between the commercial loan theory, shiftability theory, anticipated income theory, and liability management theory regarding liquidity?
10. A corporate customer borrows $150,000 against the firm’s credit line at a local 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.
9. What is the difference between a correspondent, respondent, and bankers’ bank?
8. 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?
7. 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?
6. 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
5. Under a contemporaneous reserve accounting, Federal Reserve open market operations affect a bank’s required reserves and actual reserves simultaneously. Explain how and why this improves the Federal Reserve's ability to influence general economic conditions. Why is the Fed hampered under
4. Monetary theory examines the role of excess reserves (actual reserves minus required reserves) in influencing economic activity and Federal Reserve monetary policy.Viewed in the context of a single bank, excess reserves are difficult to measure. Explain what amount of a bank’s actual reserve
3. What are the advantages and disadvantages for a bank contemplating holding more cash?
2. The determination of cash requirements is closely associated with a bank’s liquidity requirements. Explain why.
1. What are the different types of cash assets and the basic objectives for holding each?
1. Suppose that you operate a large bank, the performance of which is closely followed by a large number of stock analysts. You have just received a summary of five different analysts’reviews of your bank’s performance. The essence of each report is that the bank must lower its efficiency ratio
10. Your bank has just calculated the profitability of two small business customers. In both instances the bank earned a monthly profit of $375 from both Detail Labs and The Right Stuff. Detail Labs had a large loan with the bank and small balances. Its principals bought no other services from the
9. Describe the strengths and weaknesses of expense reduction, revenue enhancement, and contribution growth strategies.
8. What impact will online brokerages have on traditional commercial banks? Why?
7. Suppose that your bank imposes the following fees and/or service charges. Explain the bank’s rationale and describe how you would respond as a customer.a. $3 per item for use of an ATM run by an entity other than your own bankb. $5 per transaction for using a live teller rather than an ATM or
6. Canadian Imperial Bank of Commerce (CIBC) reports that just 20 percent of its customers were profitable. Assuming that this applies to individuals’ account relationships, make three recommendations to increase the profitability of these accounts.
5. Which of the following banks evidences the better productivity? Both banks have $700 million in assets and conduct the same volume and type of business off-balance sheet.Tri-Cities Bank Pacific Rail Bank Assets per employee $1,530,000 $1,880,000 Personnel expense per employee $ 33,750 $ 42,600
4, Describe why the efficiency ratio is a meaningful measure of cost control. Describe why it may not accurately measure cost control.
3. What are the components of noninterest expense?
2. What are the primary sources of noninterest income for both a small community bank and a large bank with many subsidiaries and global operations?

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Bank Management 5th Edition Timothy W. Koch, S. Scott Macdonald - Solutions

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