Distinguish between a swap seller and a swap buyer.
> An insurance company issued a $90 million one-year, zero coupon note at 8 percent add-on annual interest (paying one coupon at the end of the year) and used the proceeds plus $10 million in equity to fund a $100 million face value, two-year commercial lo
> Calculate the re pricing gap and impact on net interest income of a 1 percent increase in interest rates for the following positions: a. Rate-sensitive assets = $100 million; Rate-sensitive liabilities = $50 million. b. Rate-sensitive assets = $50 millio
> An investment fund has $1 million in cash and $9 million invested in securities. It currently has 1 million shares outstanding. a. What is the NAV of this fund? b. Assume that some of the shareholders decide to cash in their shares of the fund. How many
> An investment fund has the following assets in its portfolio: $40 million in fixed-income securities and $40 million in stocks at current market values. In the event of a liquidity crisis, it can sell its assets at a 96 percent discount if they are dispo
> A DI has $10 million in T-bills, a $5 million line of credit to borrow in the repo market, and $5 million in excess cash reserves (above reserve requirements) with the Fed. The DI currently has borrowed $6 million in fed funds and $2 million from the Fed
> An FI holds a 15-year, $10,000,000 par value bond that is priced at 104 and yields 7 percent. The FI plans to sell the bond but for tax purposes must wait two months. The bond has a duration of 9.4 years. The FI’s market analyst is predicting that the Fe
> A DI has assets of $10 million consisting of $1 million in cash and $9 million in loans. It has core deposits of $6 million. It also has $2 million in subordinated debt and $2 million in equity. Increases in interest rates are expected to result in a net
> Consider the balance sheet for the DI listed below: The DI is expecting a $15 million net deposit drain. Show the DI’s balance sheet under these two conditions: a. The DI purchases liabilities to offset this expected drain
> Banc Two has the following balance sheet (in millions of dollars): Calculate the NSFR for BancTwo. Assets Liabilities and Equity Cash $ 20 Stable retail deposits $ 190 Less stable retail Deposits at the Fed deposits CDs maturing in 6 145 months 30
> First Bank has the following balance sheet (in millions of dollars): Calculate the NSFR for FirstBank. Assets Liabilities and Equity $ 12 Stable retail deposits $ 55 19 Less stable retail deposits Cash Deposits at the Fed 20 Unsecured wholesale Tre
> Walls Farther Bank has the following balance sheet (in millions of dollars): Cash inflows over the next 30 days from the FI’s performing assets are $5.5 million. Calculate the LCR for Walls Farther Bank. Assets Liabili
> Central Bank has the following balance sheet (in millions of dollars): Cash inflows over the next 30 days from the FI’s performing assets are $7.5 million. Calculate the LCR for Central Bank. Ássets Liabilities and Equity Cash $ 1
> The All Star Bank has the following balance sheet: Its largest customer decides to exercise a $15 million loan commitment. Show how the new balance sheet changes if All Star uses (a) stored liquidity management or (b) purchased liquidity management.
> Calculate the following ratios for Lake of Egypt Marina Inc. as of year-end 2019. Using these ratios for Lake of Egypt Marina Inc. and the industry, what can you conclude about Lake of Egypt Marina’s financial performance for 2019? (R
> Harper Outdoor Furniture Inc. has net cash flows from operating activities for the last year of $340 million. The income statement shows that net income is $315 million and depreciation expense is $46 million. During the year, the change in inventory on
> Use the balance sheet and income statement below to construct a statement of cash flows for 2019 for Clancy’s Dog Biscuit Corp. Clancy's Dog Biscuit Corporation Balance Sheet as of December 31, 2018 and 2019 (In millions of dollar
> Answer the following. a. What is the duration of a 20-year 8 percent coupon (paid semiannually) Treasury bond (deliverable against the Treasury bond futures contract) selling at par? b. What is the predicted impact on the Treasury bond price based on its
> Suppose you are a loan officer at Carbondale Local Bank. Joan Doe listed the following information on her mortgage application: Characteristic ……………&acir
> A bank has two loans of equal size outstanding, A and B, and the bank has identified the returns they would earn in two different states of nature, 1 and 2, representing default and no default, respectively. If the probability of state 1 is 0.2 and the
> An FI is planning to give a loan of $5,000,000 to a firm in the steel industry. It expects to charge an up-front fee of 0.10 percent and a service fee of 5 basis points. The loan has a maturity of 8 years. The cost of funds (and the RAROC benchmark) for
> The following is ABC Inc.’s balance sheet (in thousands): Also, sales equal $500, cost of goods sold equals $360, interest payments equal $62, taxes equal $56, and net income equals $22. The beginning retained earnings is $0, the mark
> Suppose you purchase a 10-year AAA-rated Swiss bond for par that is paying an annual coupon of 8 percent and has a face value of 1,000 Swiss francs (SF). The spot rate is US$0.66667 for SF1. At the end of the year, the bond is downgraded to AA and the yi
> Six months ago, Quality bank issued a $100 million, one year-maturity CD, denominated in British pounds (Euro CD). On the same date, $60 million was invested in a £-denominated loan and $40 million in a U.S. Treasury bill. The exchange rate on this date
> Assume that a bank has assets located in Germany worth €150 million earning an average of 8 percent. It also holds €100 in liabilities and pays an average of 6 percent per year. The current spot rate is €1.50 for $1. If the exchange rate at the end of th
> If a bank invested $50 million in a two-year asset paying 10 percent interest per year and simultaneously issued a $50 million one-year liability paying 8 percent interest per year, what would be the impact on the bank’s net interest income if, at the en
> Consider the following income statement for Watch over U Savings Inc. (in millions): a. What is Watch over U’s expected net interest income at year-end? b. What will be the net interest income at year-end if interest rates rise by 2&A
> A financial institution has the following market value balance sheet structure: a. The bond has a 10-year maturity, a fixed-rate coupon of 10Â percent paid at the end of each year, and a par value of $10,000. The certificate of deposit has a
> Bank 1 can issue five-year CDs at an annual rate of 11 percent fixed or at a variable rate of LIBOR + 2 percent. Bank 2 can issue five-year CDs at an annual fixed rate of 13 percent or at a variable rate of LIBOR + 3 percent. a. Is a mutually beneficial
> Your company sponsors a 401(k) plan into which you deposit 10 percent of your $120,000 annual income. Your company matches 75 percent of the first 10 percent of your earnings. You expect the fund to yield 12 percent next year. If you are currently in the
> Using the information in Problem 7, and assuming all variables remain constant over the next 25 years, what will your 401(k) fund value be in 25 years (when you expect to retire)? Data from Problem 7: Your company sponsors a 401(k) plan into which you
> Your company sponsors a 401(k) plan into which you deposit 12 percent of your $60,000 annual income. Your company matches 50 percent of the first 5 percent of your earnings. You expect the fund to yield 10 percent next year. If you are currently in the 3
> An employer uses a final pay formula to determine retirement payouts to its employees. The annual payout is 3 percent of the average salary over the employees’ last three years of service times the total years employed. Calculate the annual benefit under
> An employee with 25 years of service at a company is considering retirement at some time in the next 10 years. The employer uses a final pay benefit formula by which the employee receives an annual benefit payment of 3.5 percent of her average salary dur
> An employer uses a career average formula to determine retirement payments to its employees. The annual retirement payout is 5 percent of an employee’s career average salary times the number of years of service. Calculate the annual benefit payment under
> An employee contributes $15,000 to a 401(k) plan each year, and the company matches 10Â percent of this annually, or $1,500. The employee can allocate the contributions among equities (earning 12Â percent annually), bonds (earning 5
> Using the information in Problem 9, and assuming all variables remain constant over the next 15 years, what will your 401(k) fund value be in 15 years (when you expect to retire)? Data from Problem 9: Your company sponsors a 401(k) plan into which you
> What is a mutual fund? In what sense is it a financial institution?
> How do credit unions differ from savings institutions?
> How has the savings institution industry performed over the last several decades?
> What regulatory agencies oversee deposit insurance services to savings institutions?
> If we examine a typical bank’s asset portion of the balance sheet, how are the assets arranged in terms of expected return and liquidity?
> Classify the following accounts into one of the following categories: a. Assets b. Liabilities c. Equity d. Revenue e. Expense f. Off-balance-sheet activities (1) Service fees charged on deposit accounts (2) Retail CDs (3) Surplus and paid-in capital (4)
> How do loan sales and securitization help an FI manage its interest rate and liquidity risk exposures?
> Your employer uses a flat benefit formula to determine retirement payments to its employees. The fund pays an annual benefit of $2,500 per year of service. Calculate your annual benefit payments for 25, 28, and 30 years of service.
> Consider Table 23–3 again. a. What happens to the price of a call when: (1) The exercise price increases? (2) The time until expiration increases? b. What happens to the price of the put when these two variables increase? Table 23&acir
> Consider Table 23–3. What are the prices paid for the following futures options: a. December U.S. Treasury-bond calls at 17400. b. December 5-year Treasury puts at 12125. c. December Eurodollar calls at 9887. Table 23–
> In each of the following cases, indicate whether it would be appropriate for an FI to buy or sell a forward contract to hedge the appropriate risk. a. A commercial bank plans to issue CDs in three months. b. An insurance company plans to buy bonds in two
> Give two reasons why credit swaps have been the fastest growing form of swaps in recent years.
> Match these three types of cash balances with the functions that they serve: a. Vault cash b. Deposits at the Federal Reserve c. Deposits at other FIs (1) Used to meet legal reserve requirements (2) Used to purchase services (3) Used to meet customer wit
> Suppose that a pension fund manager anticipates the purchase of a 20-year, 8 percent coupon T-bond at the end of two years. Interest rates are assumed to change only once every year at year end. At that time, it is equally probable that interest rates wi
> Why can insolvency risk be classified as a consequence or outcome of any or all of the other types of risks?
> How is asset-side liquidity risk likely to be related to liability-side liquidity risk?
> Bank 1, with $130 million in assets and $20 million in costs, acquires Bank 2, which has $50 million in assets and $10 million in costs. After the acquisition, the bank has $180 million in assets and $35 million in costs. Did this acquisition produce eco
> Suppose an individual invests $10,000 in a load mutual fund for two years. The load fee entails an up-front commission charge of 4 percent of the amount invested and is deducted from the original funds invested. In addition, annual fund operating expense
> A British bank issues a $100 million, three-year Eurodollar CD at a fixed annual rate of 7 percent. The proceeds of the CD are lent to a British company for three years at a fixed rate of 9 percent. The spot exchange rate of pounds for U.S. dollars is £1
> Why would a DI be forced to sell assets at fire-sale prices?
> What has been the fastest-growing area of asset business for finance companies?
> Webb Bank has a composite CAMELS rating of 2, a total risk–based capital ratio of 10.2 percent, a Tier I risk-based capital ratio of 7.2 percent, a CET1 capital ratio of 6.4 percent, and a leverage ratio of 4.8 percent. Assuming the DIF reserve ratio is
> How does the degree of liquidity risk differ for different types of financial institutions?
> How does loan portfolio risk differ from individual loan risk?
> What does it mean when a bank has a CAMELS rating of 2? Of 4?
> What are compensating balances? What is the relationship between the amount of compensating balance requirement and the return on the loan to the FI?
> Why could a lender’s expected return be lower when the risk premium is increased on a loan?
> What components are used in the calculation of credit risk– adjusted assets?
> If a bank’s asset utilization ratio increases, what will happen to its return on equity, all else constant?
> Suppose an individual invests $20,000 in a load mutual fund for two years. The load fee entails an up-front commission charge of 2.5 percent of the amount invested and is deducted from the original funds invested. In addition, annual fund operating expen
> A money market mutual fund bought $1,000,000 of two year Treasury notes six months ago. During this time, the value of the securities has increased, but for tax reasons the mutual fund wants to postpone any sale for two more months. What type of risk doe
> Corporate bonds usually pay interest semiannually. If an FI decided to change from semiannual to annual interest payments, how would this affect the bond’s interest rate risk?
> Describe the trend in assets invested in 401(k) plans in the 1990s through 2010s.
> Describe the difference between a private pension fund and a public pension fund.
> How does a bank’s annual net income compare with its annual cash flow?
> What is the major feature in the estimation of credit risk under the Basel capital requirements?
> In what ways are securities firms and investment banks financial intermediaries?
> Which of the following assets or liabilities fit the one-year rate or re pricing sensitivity test? (LG 22-1) a. 91-day U.S. Treasury bills. b. 1-year U.S. Treasury notes. c. 20-year U.S. Treasury bonds. d. 20-year floating-rate corporate bonds with annua
> Why is the market value of equity a better measure of a bank’s ability to absorb losses than book value of equity?
> If interest rates rise and an investor holds a bond for a time longer than the duration, will the return earned exceed or fall short of the original required rate of return?
> An investor purchases a mutual fund share for $100. The fund pays dividends of $3, distributes a capital gain of $4, and charges a fee of $2 when the fund is sold one year later for $105. What is the net rate of return from this investment?
> An insurance company’s projected loss ratio is 64.8 percent and its expense ratio is 25.6 percent. The company estimates that dividends to policyholders will be 6 percent. What must be the minimum yield on investments to achieve a positive operating rati
> Assume an FI originates a pool of short-term real estate loans worth $20 million with maturities of five years and paying interest rates of 9 percent (paid annually). a. What is the average payment received by the FI (both principal and interest) if no p
> Calculate the value of (a) the mortgage pool and (b) the GNMA pass-through security in Problem 9 if market interest rates increase 50 basis points. Assume no prepayments.
> A DI has the following assets in its portfolio: $20 million in cash reserves with the Fed, $20 million in T-bills, and $50 million in mortgage loans. If it needs to dispose of its assets at short notice, it will receive only 99 percent of the fair market
> The Acme Corporation has been acquired by the Conglomerate Corporation. To help finance the takeover, Conglomerate is going to liquidate the overfunded portion of Acme’s pension fund. The assets listed below are going to be liquidated.
> The Plainbank has $10 million in cash and equivalents, $30 million in loans, and $15 million in core deposits. Calculate (a) the financing gap and (b) the financing requirement.
> Industrial Corporation has a net income-to-sales (profit margin) ratio of 0.03, a sales-to-assets (asset utilization) ratio of 1.5, and a debt-to-asset ratio of 0.66. What is Industrial’s return on equity?
> In Problem 6, how might we determine whether these ratios reflect a well-managed, creditworthy company? Data from Problem 6: Consider the following company’s balance sheet and income statement. Income Statement Sales (all on credit)
> Consider the following company’s balance sheet and income statement. Income Statement Sales (all on credit) ………………
> Metro bank offers one-year loans with a 9 percent stated rate, charges a ¼ percent loan origination fee, imposes a 10 percent compensating balance requirement, and must pay a 6 percent reserve requirement to the Federal Reserve. What is the return to the
> Suppose today a mutual fund contains 2,000 shares of J.P. Morgan Chase, currently trading at $64.75, 1,000 shares of Walmart, currently trading at $63.10, and 2,500 shares of Pfizer, currently trading at $31.50. The mutual fund has no liabilities and 10,
> Country bank offers one-year loans with a stated rate of 10 percent but requires a compensating balance of 10 percent. What is the true cost of this loan to the borrower?
> Suppose that the financial ratios of a potential borrowing firm took the following values: X1 = Net working capital/Total assets = 0.10, X2 = Retained earnings/Total assets = 0.20, X3 = Earnings before interest and taxes/Total assets = 0.22, X4 = Market
> Jane Doe earns $30,000 per year and has applied for an $80,000, 30-year mortgage at 8 percent interest, paid monthly. Property taxes on the house are expected to be $1,200 per year. If her bank requires a gross debt service ratio of no more than 30 perce
> Your employer uses a final pay formula to determine retirement payments to its employees. You have 20 years of service at the company and are considering retirement sometime in the next 10 years. Your employer uses a final pay formula by which you receiv
> An insurance company’s projected loss ratio is 77.5 percent, and its expense ratio is 23.9 percent. It estimates that dividends to policyholders will add another 5 percent. What is the minimum yield on investments required in order to maintain a positive
> Calculate the following: a. If the loss ratio on a line of property insurance is 73 percent, the loss adjustment expense is 12.5 percent, and the ratio of commissions and other acquisitions expenses is 18 percent, is this line profitable? b. How does you
> An insurance company collected $12.75 million in premiums and disbursed $9.18 million in losses. Loss adjustment expenses amounted to 20.1 percent and dividends paid to policyholders totaled 5 percent. The total income generated from the company’s invest
> Using the Tier, I leverage-ratio requirement, what is the bank’s minimum regulatory capital requirement to keep it in the adequately capitalized zone? Data for Problem 14: A bank’s balance sheet information is shown
> Does the bank have enough capital to meet the Basel requirements, including the capital conservation buffer requirement? Data for Problem 16: A bank’s balance sheet information is shown below (in $000). On-Balance-Sheet Items
> To be adequately capitalized, what are the bank’s CET1, Tier I, and total risk–based capital requirements under Basel III? Data for Problem 13: A bank’s balance sheet information is show
> A mutual fund has 300 shares of General Electric, currently trading at $30, and 400 shares of Microsoft, Inc., currently trading at $54. The fund has 1,000 shares outstanding. a. What is the NAV of the fund? b. If investors expect the price of General El
> You have been asked to analyze First Union Bank. You have only the following information on the bank at year-end 2018: Net income is $250,000, total debt is $2.5 million, and the bank’s debt ratio is 55 percent. What is First Union Bank’s ROE for 2018?
