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

1. When confronted with runaway noninterest expense, management's first impulse is to cut costs. What are the advantages and disadvantages of this approach? What other approaches are possible?
2. Take a survey of local banks regarding the pricing of transactions accounts. Include a list of all fees associated with these account relationships. Compare the different types of pricing strategies and identify the type of customer (low/high balance, low/high activity, etc.) that each bank
1. Evaluate the activity you generated in your checking account last month. How many home debits, transit checks, and deposits did you create? Include an estimate of how many times you used an automated teller machine (ATM). What interest did you earn |on your balance and what fees did you pay? Use
Il. WEIGHTED MARGINAL COST OF FUNDS The table below provides information that can be used to estimate Northwestern National Bank’s weighted marginal cost of funds for 2001. The estimates represent a best-guess forecast of the funding sources and associated costs for the year. Follow the format in
2. The typical high-balance NOW account customer at your bank maintains a monthly balance of $1,250 net of float, writes 34 checks or withdrawals (21 electronic), four transit checks deposited, two transit checks cashed, two deposits (one electronic), and one on-us check cashed per month. Assume
I. ANALYZING PROFITABILITY A senior bank officer has asked you to analyze the profitability of selected customer deposit relationships. The procedure is to estimate the total expense associated with account activity and compare this with projected revenues. Use the data from Exhibit 12.3 to answer
18. 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% S&P 500 rate = 12%Bank’s CD rate = 5.5% Bank’s stock price = $30 Bank’s bond
17. 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?
16. 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
15. 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 following estimates apply relative to the balance obtained:Acquisition costs = 1/8 of 1 percent FDIC insurance = 1/12 of 1 percent Required reserves
14. What types of bank liabilities generate the highest servicing costs? What types gener-ate the highest acquisition costs?
13. What are the consequences of a bank mistakenly pricing loans based on the histori-cal cost of funds? Do they differ in a rising rate environment versus a falling rate environment?
12. Identify whether you should use an average cost of bank funds or a marginal cost of funds in the following situations.a. Setting the rate on a new loanb. Evaluating the profitability of a long-standing customer's relationshipc. Calculating the bank's income tax liabilityd. Deciding whether to
11. 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
10. 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
9. 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.
8. Many banks compete aggressively for retail time deposits. What marketing strategies will attract large volumes of deposits from individuals? Why are retail deposits attrac-tive to banks?
7. 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?
6. Assume the following transactions occur sequentially:a. The TIB Corp ., based in New Orleans, converts a $3 million demand deposit held at the New York Money Center Bank to a $3 million Eurodollar deposit held at Barclays Bank in London.b. Barclays Bank opens a $3 million Eurodollar deposit at
5. True or false: Federal funds transactions involve an exchange of bank reserves held at Federal Reserve Banks. Explain your reasoning.
4. Explain why it is or is not reasonable for a bank to charge an explicit fee for balance inquiries (calling to request balance verification).
3. Using the data from Exhibit 12.3, determine the average monthly cost of servicing the typical student’s demand deposit account, which generates 27 withdrawals (15 electronic), two transit checks deposited, two transit checks cashed, two deposits (one electronic), and one on-us check cashed per
2. 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 important to attracting and retaining core deposits as compared to purchased funds?
1. 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 thie bank. Explain why they vary.DDAs NOW accounts MMDAs small time deposits jumbo CDs Federal funds
1. The following data are taken from the 2001 annual report for Southtrust Corporation, which reported $1.53 billion in net interest income before provisions and almost $49 billion in assets for the year. Review the information and determine the bank’s risk exposure at the end of the year.
15. Given the following information for E-Bank, calculate its Income Statement(Effective) GAP. How much will net interest income change if the 1-year Treasury rate falls 1 percent?Rate-Sensitive Assets 1-Year Balance Sheet GAP ECR Loans $55,120,000 82%Securities $28,615,000 67%Rate-Sensitive
14. Interpret the following earnings-at-risk data. What does it suggest regarding the bank’s risk exposure?Earnings-at-Risk Interest Rate Change (%) 1 Year 2 Years+1% shock +2.4% +4.9%—1% shock —1.7% =5:5%—1% yield curve inversion +1.1% —2.6%
13. Exhibit 8.9 demonstrates that ABC Bank loses in year two if rates either rise or fall sharply from the most likely scenario. Explain why in terms of when embedded options are expected to be exercised and what happens to spreads.
12. What information is available from earnings sensitivity analysis that is not provided by static GAP analysis?
11. Each of the following potentially alters the rate sensitivity of the underlying instrument.Presumably there is an embedded option associated with each. Indicate when the option is typically exercised and how it affects rate sensitivity.a. Fixed-rate mortgage loan with a yield of 8 percent and
10. Management at Bay Bank expects its net interest margin to equal 4.8 percent during the next year. It will allow variation in NIM of just 10 percent during the year and expects interest rates to either rise or fall by 2 percent. If management expects the bank to have $400 million in earning
9. Assume that you manage the interest rate risk position for your bank. Your bank currently has a positive cumulative GAP for all time intervals through one year. You expect that interest rates will fall sharply during the year and want to reduce your bank’s risk position. The current yield
8. Consider the Rate Sensitivity Report in Exhibit 8.6.a. Is Security Bank positioned to profit or lose if interest rates rise over the next 90 days? .b. Suppose that management has misstated the rate sensitivity of the bank’s money market deposit accounts because the bank has not changed the
7. Consider the following asset and liability structures: .County Bank BM Asset: $10 million in a 1-year, fixed-rate commercial loan Liability: $10 million in a 3-month CD City Bank \Asset: $10 million in a 3-year, fixed-rate commercial loan Liability: $10 million in a 6month CDa. Calculate each
6. Discuss the problems that loans tied to a bank’s base rate present in measuring interest rate risk where the base rate is not tied directly to a specific market interest rate that changes on a systematic basis.
5. What is the fundamental weakness of the GAP ratio compared with GAP as a measure of interest rate risk?
4. Suppose that your bank buys a T-bill that matures in six months and finances the purchase with a 3-month time deposit.a. Calculate the 6-month GAP associated with this transaction. What does this GAP measure indicate about interest rate risk in this transaction?b. Calculate the 3-month GAP
3. Consider the following bank balance sheet and associated average interest rates. The time frame for rate sensitivity is one year.Assets Amount Rate Liabilities & Equity Amount Rate Rate Sensitive $3,300 7.3% Rate Sensitive $2,900 - 3.8%Fixed-rate 1,400 8.7% Fixec-rate 1,650 | 6.1%Nonearning 500
2. Are the following assets rate sensitive within a six-month time frame? Explain.a. 3-month T-bill |b. federal funds sold (daily repricing)c. 2-year Treasury bond with semiannual coupon paymentsd. 4-year fully amortized car loan with $450 monthly payments including both principal and intereste.
1. List the basic steps in static GAP analysis. What is the objective of each?
2- Locate the first General Electric (GE) corporate bond maturing after the year 2004 as reported in the Wall Street Journal. What is its coupon rate, maturity, and stream of coupon and principal payments? At the rate of return earned most recently on the DJ 20 Bond Index, what price would you be
1, Rates for the most popular financial instruments can be found in the Wall Street Journal.Collect the rates for the following securities. This information can be found on the front of the “Money and Investing” section as well as in the “Credit Markets” column.3-month T-bill 3-month
26. You buy 100 shares in Bondex Corp. for $25 a share. Each share pays $1 in dividends every three months. You have a 5-year holding period and expect to invest all divi-dends received in the first two years at 6 percent, and all dividends received the next three years at 9 percent. Calculate your
25. You are planning to buy a corporate bond with a 7-year maturity that pays 7 percent coupon interest. The bond is priced at $108,500 per $100,000 par value. You expect to sell the bond in two years when a similar risk 5-year bond is priced to yield 7.2 per-cent annually to maturity. Assuming
24. You have just purchased a 5-year maturity bond for $10,000 par value that pays $610 in coupon interest annually ($305 every six months). You expect to hold the bond until maturity. Calculate your expected total return if you can reinvest all coupon payments at 5 percent (2.5 percent
23. You would like to purchase a T-bill that has a $10,000 face value and 270 days to maturity.The current price of the T-bill is $9,620. What is the discount rate on this security?What is its bond equivalent yield?
22. For which money market instruments are rates calculated based on par value rather than purchase price?
21. What is the bond equivalent yield of a 180-day, $1 million face value Treasury bill with a discount rate of 4.5 percent?
20. Which money market instruments are typically quoted on a discount basis?
19. If interest rates fall from 6 percent to 5 percent, the price of the bond in the above prob-lem will increase. Will the change in price (regardless of sign) be smaller or larger than in the above problem? Show how much by using the present value formula and Equation 6.14. How does this
18. Suppose that a zero coupon bond selling at $1,000 par has a duration of four years. If interest rates increase from 6 percent to 7 percent annually, the value of the bond will fall by what amount using Equation 6.14? Use semiannual compounding. Then, use the present value formula to determine
17. One author says that duration is the weighted average life of a financial instrument. A different one says that duration is a measure of elasticity. Which of the authors is cor-rect? Or, are they both correct?
16. In each of the following financial situations, fill in the blank with the terms high duration, low duration, or zero duration, as appropriate.a. If you were considering buying a bond and you expected interest rates to increase, you would prefer a bond with ab. Relative to a bond with a high
15. Guess the duration of the following investment. Is it less than two years, two to three years, three to four years, or greater than four years? After your guess, use a discount rate of 6 percent and calculate the present value of the cash flows and then duration.Years from now 12 34 Cash
14. What is the duration of a bond with a par value of $10,000 that has a coupon rate of 6.5 percent annually and a final maturity of two years? Assume that the required rate of return is 6 percent compounded semiannually. What is the duration of a 2-year zero coupon bond that pays $10,000 at
13. Lamar Briggs purchased a 7 percent coupon corporate bond that matured in 10 years and paid interest semiannually. He paid $2,800 and six months later, immediately fol-lowing an interest payment, he sold the bond. At the time of sale, the market interest rate on bonds of this type was 6 percent.
12. A Treasury security carries a fixed 6 percent annual coupon rate and matures in exactly two years. The Treasury is currently priced at $10,000 par value to yield 6 percent to maturity. Assume that you can buy the bond and strip the coupons and final principal payment and sell each of them as a
11. Consider a 7 percent coupon U.S. Treasury note that has a $10,000 face value and matures 10 years from today. This note pays interest semiannually. The current mar-ket interest rate on this bond is 6 percent. Would you expect the bond to be a discount, premium, or par bond? Calculate the actual
10. You want to buy a new car, but you know that the most you can afford for payments is $375 per month. You want 48-month financing, and you can arrange such a loan at 12 percent compounded monthly. You have nothing to trade and no down payment.The most expensive car you can purchase is: (1) an
9. Three local banks pay different interest rates on time deposits with 1-year maturities.Rank the three banks from highest to lowest in terms of the depositor's return.Bank 1-4.5 percent per year compounded annually Bank 2- 4.3 percent per year compounded quarterly Bank 3- 4.1 percent per year
8. Suppose a customer's house increased in value over five years from $150,000 to$250,000. What was the annual growth rate of the property value during this five-year interval?
7. If you invest $9,000 today at 8 percent compounded annually, but after three years the interest rate increases to 10 percent compounded semiannually, what is the investment worth seven years from today?
6. Six years ago you placed $250 in a savings account which is now worth $1,040.28.When you put the funds into the account, you were told it would pay 24 percent inter-est. You expected to find the account worth $908.80. What compounding did you think this account used, and what did it actually use?
5. How much would you be willing to pay today for an investment that will return$6,800 to you eight years from today if your required rate of return is 12 percent?
4. Consider a $15,000 loan with interest at 12 percent compounded monthly and 24 monthly payments. How much will the loan payment be? Set up an amortization schedule for the first four months, indicating the amount and timing of principal and interest payments.
3. What is the effective interest rate of 10 percent compounded quarterly, versus 10 percent compounded monthly?
2. If you invest $20,000 in a security today, how much will it be worth in six years? The security pays 6 percent compounded monthly.
1. If you invest $1,000 today in a security paying 8 percent compounded quarterly, how much will the investment be worth seven years from today?
Il. ONE-YEAR BANK GROWTH Consider a bank with $500 million in assets and $30 million in total capital. Its minimum total capital-to-asset ratio must equal 6 percent. At the beginning of the year, senior management and the board of directors project that the bank will likely earn 0.86 percent on
1. FIRST STUDENT BANK First Student Bank (FSB) has the following balance sheet:Assets Liabilities and Equity Cash $100 Transactions accounts $700 Treasury bills (30 days) $190 CDs $220 Treasury bonds (5 years) $30 Subordinated debt $7 Repos $10 Preferred stock $5 Student tuition loans $500 Retained
14. Although FDICIA calls for risk-based insurance premiums, why do many argue that we still have a flat deposit insurance system?
13. FDICIA imposes increasingly severe operating restrictions on undercapitalized 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.
12. What is the leverage capital ratio and why do regulators specify a minimum for it?
11. 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
10. 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
9. Explain why increased regulatory capital requirements lead to a greater consolidation of banking firms via mergers and acquisitions.
8. 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.
7. Regulators put great pressure on banks to reduce their common dividend payments when asset problems appear. Discuss the costs and benefits of cutting dividends.
6. Many regulators would like to see bank capital requirements raised. Consider 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
5. 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
4. Many analysts argue that risk-based capital requirements should force banks to raise loan rates. Explain this by assuming that a bank’s management sets loan rates to earn a 16 percent return on equity. How does the allocation of equity to a loan affect loan pricing?
3. Explain how capital reduces banking risks. Discuss the importance of cash flows and economic value rather than accounting value.
2. Provide the general outline of existing risk-based capital requirements. Is there a difference between default risk, interest rate risk, and liquidity risk?
1. What are the advantages and disadvantages of using financial leverage? Answer from the banker’s view and then from a bank regulator’s view.
2. The summary UBPR page for Citibank, NA is shown on the following page. Average total assets for Citibank were $404,102 million as of December 31, 2001. Use the data from December 31, 2001, to explain whether this bank was a high or low performance bank. Discuss specifically (1) financial
1. Evaluate the performance of Community National Bank relative to peer banks using the data in Exhibits 3.2, 3.4, 3.6, 3.7, and 3.8. Did the bank perform above or below average that year? Did it operate with more or less relative risk?a. Conduct a return on equity decomposition analysis for the
15. Explain how each of the following potentially affects a bank’s liquidity risk:a. Most (95 percent) of the bank’s securities holdings are classified as held-to-maturity.b. The bank’s core deposit base is a low (35 percent) fraction of total assets.c. The bank’s securities all mature
14. Suppose that your bank had reported a substantial loss during the past year. You are meeting with the bank’s board of directors to discuss whether the bank should make its traditional (25 years straight) dividend payment to common stockholders. Provide several arguments that the bank should
13. In some instances, when a bank borrower cannot make the promised principal and interest payment on a loan, the bank will extend another loan for the customer to make the payment.a. Is the first loan classified as a nonperforming loan?b. What is the rationale for this type of lending?c. What are
12. What ratios on common-sized financial statements would indicate a small bank versus a large, multibank holding company? Cite at least five.
11. In each pair below, indicate which asset exhibits the greatest credit risk. Describe why.a. Commercial loan to a Fortune 500 company or a loan to a corner grocery storeb. Commercial loans to two businesses in the same industry; one is collateralized by accounts receivable from sales, while the
10. Rank the following assets from lowest to highest liquidity risk:3-month Treasury bills 1-year construction loan 4-year car loan with monthly payments 5-year Treasury bond 5-year municipal bond 1-year individual loan to speculate in stocks 3-month Treasury bill pledged as collateral
9. Regulators use the CAMELS system to analyze bank risk. What does CAMELS stand for and what financial ratios might best capture each factor?
8. Explain why profitability ratios at small banks typically differ from those at the largest money center banks.
7. Define each of the following components of the Return on Equity model and discuss their interrelationships:a. ROEb. ROAc. EMd. ERe. AU
6. Bank L operates with an equity-to-asset ratio of 5 percent, while Bank S operates with a similar ratio of 8 percent. Calculate the equity multiplier for each bank and the corresponding return on equity if each bank earns 1.5 percent on assets. Suppose, instead, that both banks report an ROA of
5. What are the primary sources of risk facing bank managers? Describe how each potentially affects bank performance. Provide one financial ratio to measure each type of risk and explain how to interpret high versus low values.
4. Arrange the following items into an income statement. Label each item, place it in the appropriate category, and determine the bank’s bottom line net income.Interest paid on time deposit under $100,000 Interest paid on jumbo CDs $101,000 Interest received on U.S. Treasury and agency securities
3. Using PNC in Exhibit 3.2 as a typical large bank, which balance sheet accounts would be affected by the following transactions? Indicate at least two accounts with each transaction.a. Arturo Rojas opens a money market deposit account with $5,000. The funds are loaned in the overnight market for
2. Banks typically differentiate between interest and noninterest income and expense.What are the primary components of each? Define net interest income and burden.What does a bank’s efficiency ratio measure?

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

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