Question: A mutual fund plans to purchase $500,

> Characterize the risk exposure(s) of the following FI transactions by choosing one or more of the following: a. Credit risk b. Interest rate risk c. Off-balance-sheet risk d. Foreign exchange rate risk e. Country/sovereign risk f. Technology risk (1) A b

> What is the difference between technology risk and operational risk? How does internationalizing the payments system among banks increase operational risk?

> What is country or sovereign risk? What remedy does an FI realistically have in the event of a collapsing country or currency?

> If you expect the Swiss franc to depreciate in the near future, would a U.S.-based FI in Basel, Switzerland, prefer to be net long or net short in its asset positions? Discuss.

> A U.S. insurance company invests $1,000,000 in a private placement of British bonds. Each bond pays £300 in interest per year for 20 years. If the current exchange rate is £1.5612 for US$1, what is the nature of the insurance company’s exchange rate risk

> An FI has a $100 million portfolio of six-year Eurodollar bonds that have an 8 percent coupon. The bonds are trading at par and have a duration of five years. The FI wishes to hedge the portfolio with T-bond options that have a delta of –0.625. The under

> If an FI has the same amount of foreign assets and foreign liabilities in the same currency, has that FI necessarily reduced the risk involved in these international transactions to zero? Explain.

> What is the difference between firm-specific credit risk and systemic credit risk? How can an FI alleviate firm-specific credit risk?

> If the Swiss franc is expected to depreciate in the near future, would a U.S.-based FI in Bern City, Switzerland, prefer to be net long or net short in its asset positions? Discuss.

> What two factors provide potential benefits to FIs that expand their asset holdings and liability funding sources beyond their domestic borders?

> What is foreign exchange risk? What does it mean for an FI to be net long in foreign assets? What does it mean for an FI to be net short in foreign assets? In each case, what must happen to the foreign exchange rate to cause the FI to suffer losses?

> What is the nature of an off-balance-sheet activity? How does an FI benefit from such activities? Identify the various risks that these activities generate for an FI and explain how these risks can create varying degrees of financial stress for the FI at

> Consider again the two bonds in Question 13. If the investment goal is to leave the assets untouched until maturity, such as for a child’s education or for one’s retirement, which of the two bonds has more interest rate risk? What is the source of this r

> Consider two bonds, a 10-year premium bond with a coupon rate higher than its required rate of return and a zero coupon bond that pays only a lump sum payment after 10 years with no interest over its life. Which do you think would have more interest rate

> How does a policy of matching the maturities of assets and liabilities work (a) to minimize interest rate risk and (b) against the asset-transformation function for FIs?

> How can interest rate risk adversely affect the economic or market value of an FI?

> Village Bank has $240 million worth of assets with a duration of 14 years and liabilities worth $210 million with a duration of four years. In the interest of hedging interest rate risk, Village Bank is contemplating a macrohedge with interest rate T-bon

> What is credit risk? Which types of FIs are more susceptible to this type of risk? Why?

> Describe the different pension funds sponsored by the federal government.

> Describe the “pay as you go” funding method that is used by many federal and state or local government pension funds. What is the problem with this method that may damage the long-term viability of such funds?

> What is the difference between an IRA and a Keogh account?

> What have the trends been for assets invested in defined benefit versus defined contribution pension funds in the last three decades?

> What are the three types of formulas used to determine pension benefits for defined benefit pension funds? Describe each.

> Describe the difference between a defined benefit pension fund and a defined contribution pension fund.

> Describe the difference between an insured pension fund and a noninsured pension fund. What type of financial institutions would administer each of these?

> What types of pension reforms have countries tried as their populations age and contributions to pension funds decrease?

> Describe the major features of ERISA.

> Refer to Problem 12. How does consideration of basis risk change your answers? a. Compute the number of T-bond futures contracts required to construct a macrohedge if T-bond futures are priced at 96 and the duration of the T-bond underlying the futures c

> What was the motivation for the passage of ERISA?

> Describe the issues associated with the long-term viability of the Social Security fund.

> What are some of the arguments for and against the use of market value versus book value of capital?

> What are the differences between the economist’s definition of capital and the accountant’s definition of capital? a. How does economic value accounting recognize the adverse effects of credit risk? b. How does book value accounting recognize the advers

> What is the difference between book value accounting and market value accounting? How do interest rate changes affect the value of bank assets and liabilities under the two methods?

> What is convexity?

> What are the criticisms of using the duration model to immunize an FI’s portfolio?

> If a bank manager was quite certain that interest rates were going to rise within the next six months, how should the bank manager adjust the bank’s duration gap to take advantage of this anticipated rise? What if the manager believed rates would fall?

> If you use duration only to immunize your portfolio, what three factors affect changes in an FI’s net worth when interest rates change?

> How is duration related to the interest elasticity of a fixed income security? What is the relationship between duration and the price of the fixed-income security?

> Consider the following balance sheet (in millions) for an FI: a. What is the FI’s duration gap? b. What is the FI’s interest rate risk exposure? c. How can the FI use futures and forward contracts to create a macrohe

> Consider the re pricing gap model. a. What are some of its weaknesses? b. How have large banks solved the problem of choosing the optimal time period for re pricing?

> What is the spread effect?

> What is the gap-to-total-assets ratio? What is the value of this ratio to interest rate risk managers and regulators?

> If a bank manager was quite certain that interest rates were going to rise within the next six months, how should the bank manager adjust the bank’s re pricing gap to take advantage of this anticipated rise? What if the manager believed rates would fall?

> Which of the following is an appropriate change to make on a bank’s balance sheet when GAP is negative, spread is expected to remain unchanged, and interest rates are expected to rise? a. Replace fixed-rate loans with rate-sensitive loans. b. Replace mar

> What is the CGAP effect? According to the CGAP effect, what is the relation between changes in interest rates and changes in net interest income when CGAP is positive? When CGAP is negative?

> What is a maturity bucket in the re pricing gap model? Why is the length of time selected for re pricing assets and liabilities important when using the re pricing gap model?

> What is the re pricing gap? In using this model to evaluate interest rate risk, what is meant by rate sensitivity? On what financial performance variable does the re pricing gap model focus? Explain.

> How do monetary policy actions by the Federal Reserve impact interest rates?

> The average daily net transaction accounts 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 $24.60 million, and the average daily v

> City Bank has estimated that its average daily net transaction accounts balance over the recent 14-day computation period was $225 million. The average daily balance with the Fed over the 14-day maintenance period was $8 million, and the average daily ba

> Disregarding the capital conservation buffer, what is the bank’s capital adequacy level (under Basel III) if the par value of its equity is $225,000, surplus value of equity is $200,000, retained earnings is $565,545, qualifying perpetu

> What is the contribution to the 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 UK governme

> Financial Fitness Bank reported a debt-to-equity ratio of 1.75× at the end of 2018. If the firm’s total assets at yearend were $25 million, how much of its assets are financed with debt? How much with equity?

> Third Fifth Bank has the following balance sheet (in millions), with the risk weights in parentheses. In addition, the bank has $20 million in commercial direct-credit substitute standby letters of credit to a public corporation and $40 million in 10-y

> 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. Further, the institutions

> What is the bank’s risk-adjusted asset base? Data for Problem 12: A bank’s balance sheet information is shown below (in $000). On-Balance-Sheet Items Face Value $ 121,600 5,400 414,400 9,800 159,000 Cash Shor

> Dudley Bank has the following balance sheet and income statement. For Dudley Bank, calculate: a. Return on equity b. Return on assets c. Asset utilization d. Equity multiplier e. Profit margin f. Interest expense ratio g. Provision for loan loss rati

> Third Bank has the following balance sheet (in millions), with the risk weights in parentheses. The cumulative preferred stock is qualifying and perpetual. In addition, the bank has $30 million in performance-related standby letters of credit (SLCs) to

> 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, T

> Megalopolis Bank has the following balance sheet and income statement. For Megalopolis, calculate: a. Return on equity b. Return on assets c. Asset utilization d. Equity multiplier e. Profit margin f. Interest expense ratio g. Provision for loan loss

> A bank purchases a six-month $1 million Eurodollar deposit at an interest rate of 6.5 percent per year. It invests the funds in a six-month Swedish krona bond paying 7.5 percent per year. The current spot rate of U.S. dollars for Swedish krona is $0.18/S

> Jeff Krause purchased 1,000 shares of a speculative stock on January 2 for $2.00 per share. Six months later on July 1, he sold them for $9.50 per share. He uses an online broker that charges him $10 per trade. What was Jeff’s annualized HPR on this inve

> John Reardon purchased 100 shares of Tomco Corporation in December 2016 at a total cost of $1,762. He held the shares for 15 months and then sold them, netting $2,500. During the period he held the stock, the company paid him $3 per share in cash dividen

> Referring to Problem 13.18, assume you are using a constant-ratio plan with a rebalance trigger of speculative-to-conservative of 1.25. What action, if any, should you take in time period 2? Be specific. Problem 13.18: Using the data in the following t

> Your portfolio returned 13% last year, with a beta equal to 1.5. The market return was 10%, and the risk-free rate 4%. Did you earn more or less than the required rate of return on your portfolio? (Use Jensen’s measure.)

> During the year just ended, Anna Schultz’s portfolio, which has a beta of 0.90, earned a return of 8.6%. The risk-free rate is currently 3.3%, and the return on the market portfolio during the year just ended was 9.2%. a. Calculate Treynor’s measure for

> Your portfolio has a beta equal to 1.3. It returned 12% last year. The market returned 10%; the risk-free rate is 2%. Calculate Treynor’s measure for your portfolio and the market. Did you earn a better return than the market given the risk you took?

> Congratulations! Your portfolio returned 11% last year, 2% better than the market return of 9%. Your portfolio’s return had a standard deviation equal to 18%, and the risk-free rate is 3%. Calculate Sharpe’s measure for your portfolio. If the market’s Sh

> Refer to the table below: Between Investor A and Investor B, which is more likely to represent a retired couple? Why? Fund A Fund B Beta 1.8 1.1 Investor A 20% 80% Investor B 80% 20%

> Three years ago, you invested in the Future Investco Mutual Fund by purchasing 1,000 shares of the fund at a net asset value of $20.00 per share. Because you did not need the income, you elected to reinvest all dividends and capital gains distributions.

> The Well-Managed Closed-End Fund turned in the following performance for the year 2016. a. Based on this information, what was the NAV-based HPR for the WMCEF in 2016? b. Find the percentage (%) premium or discount at which the fund was trading at the be

> Match the specific ratios in the left-hand column with the category in the right-hand column to which it belongs. a. Inventory turnover b. Debt-equity ratio c. Current ratio d. Net profit margin e. Return on assets f. Total asset turnover g. Price-to-ear

> You purchased 1,000 shares of Mutual Magic one year ago for $20.00 per share. During the year, you received $2.00 in dividends, half of which was from dividends on stock the fund held and half of which was from interest earned on bonds in the fund portfo

> You are considering the purchase of shares in a closed-end mutual fund. The NAV is equal to $22.50 and the latest close is $20.00. Is this fund trading at a premium or a discount? How big is the premium or discount?

> Refer to Problem 12.11. If Oh Yes was a load fund with a 2% front-end load, what would be the HPR? Problem 12.11: You invested in the no-load Oh Yes Mutual Fund one year ago by purchasing 1,000 shares of the fund at the net asset value of $25.00 per sh

> You invested in the no-load Oh Yes Mutual Fund one year ago by purchasing 1,000 shares of the fund at the net asset value of $25.00 per share. The fund distributed dividends of $1.50 and capital gains of $2.00. Today, the NAV is $26. What was your holdin

> Refer to Problem 12.9. If there were a 3% load on this fund, assuming you purchased the same number of shares, what would your rate of return be? Problem 12.9: Three years ago, you invested in the Future Investco Mutual Fund by purchasing 1,000 shares

> A $1,000 par value bond with a 7.25% coupon rate (semiannual interest) matures in seven years and currently sells for $987. What is the bond’s yield to maturity and bond equivalent yield?

> A bond is priced in the market at $1,150 and has a coupon of 8%. Calculate the bond’s current yield.

> Three years ago you purchased a 10% coupon bond that pays semiannual coupon payments for $975. What would be your bond equivalent yield if you sold the bond for current market price of $1,050?

> A 20-year bond has a coupon of 10% and is priced to yield 8%. Calculate the price per $1,000 par value using semiannual compounding. If an investor purchases this bond two months before a scheduled coupon payment, how much accrued interest must be paid t

> You have the opportunity to purchase a 25-year, $1,000 par value bond that has an annual coupon rate of 9%. If you require a YTM of 7.6%, how much is the bond worth to you?

> Given the information in Figure 6.4, answer the following questions for Abercrombie & Fitch Co. a. On what day did the trading activity occur? b. At what price did the stock sell when the market closed? c. What is the firm’s price-to-earnings ratio? What

> An investor wants to find the duration of a 25-year, 6% semiannual-pay, noncallable bond that’s currently priced in the market at $882.72, to yield 7%. Using a 50 basis point change in yield, find the effective duration of this bond. (H

> A bond has a Macaulay duration equal to 9.5 and a yield to maturity of 7.5%. What is the modified duration of this bond?

> Assume that an investor pays $800 for a long-term bond that carries an 8% coupon. In three years, he hopes to sell the issue for $950. If his expectations come true, what yield will this investor realize? (Use annual compounding.) What would the holding

> What is the price of a zero-coupon ($1,000 par value) bond that matures in 20 years and has a promised yield of 9.5%?

> A zero-coupon bond that matures in 15 years is currently selling for $209 per $1,000 par value. What is the promised yield on this bond?

> You are evaluating an outstanding issue of $1,000 par value bonds with an 8.75% coupon rate that mature in 25 years and make quarterly interest payments. If the current market price for the bonds is $865, what is the quoted annual yield to maturity for t

> A bond is currently selling in the market for $1,098.62. It has a coupon of 9% and a 20-year maturity. Using annual compounding, calculate the yield to maturity on this bond.

> You notice in the WSJ a bond that is currently selling in the market for $1,070 with a coupon of 11% and a 20-year maturity. Using annual compounding, calculate the promised yield on this bond.

> You are considering the purchase of a $1,000 par value bond with an 6.5% coupon rate (with interest paid semiannually) that matures in 12 years. If the bond is priced to provide a required return of 8%, what is the bond’s current price?

> Buck buys a 7.5% corporate bond with a current yield of 4.8%. How much did he pay for the bond?

> Using settlement or closing prices from Figures 15.3 and 15.4, find the value of the following commodities and financial futures contracts. Figures 15.3: Figures 15.4: a. March 2013 corn b. July 2013 corn c. December 2013 corn d. December 2012 Treas

> A certain bond has a current yield of 6.5% and a market price of $846.15. What is the bond’s coupon rate?

> Nate purchased an interest-bearing security last year, planning to hold it until maturity. He received interest payments and, to his surprise, a sizable amount of the principal was paid back in the first year. This happened again in year two. What type o

> Rhett purchased a 13%, zero-coupon bond with a 15-year maturity and a $20,000 par value 15 years ago. The bond matures tomorrow. How much will Rhett receive in total from this investment, assuming all payments were made on these bonds as expected?

> Caleb buys an 8.75% corporate bond with a current yield of 5.6%. When he sells the bond 1 year later, the current yield on the bond is 6.6%. How much did Caleb make on this investment?

> A 9%, 20-year bond is callable in 12 years at a call price of $1,090. The bond is currently priced in the market at $923.68. What is the issue’s current yield?

> You have collected the following NH-NL indicator data: Day NH-NL Indicator 1 (yesterday) 100 2 ………………………………………….……………………………………………………. 95 3 …………………………………………………..…………………………………………. 61 4 …………………………………………………..…………………………………………. 43 5 …………………………………