Reference no: EM133989774
Questions
1. Suppose that a financial institution has a negative $25 million difference between its assets and liabilities. Is the institution exposed to refinancing risk or reinvestment risk and what will happen to net income if there is a rise in interest rates?
2. Suppose a financial institution has a positive $25 million difference between its assets and liabilities. Is the institution exposed to refinancing risk or reinvestment risk and what will happen to net income if there is a drop in interest rates?
3. The total in rate sensitive assets for a financial institution is $120 million and the total in rate sensitive liabilities is $95 million. What is the cumulative pricing gap (CGAP) and what is the interest rate sensitivity gap ratio if total assets equal $195 million?
4. Using the information from problem number 3, what would the projected change to net income be if interest rates rose by 2% on both assets and liabilities? What would the projected change to net income be if interest rates declined by 2% on both assets and liabilities?
5. Using the information from number 3, what would the projected change to net income be if interest rates rose by 1.8% on assets and 1.5% on liabilities? What would the projected change to net income be if interest rates declined by 1.8% on assets and 1.5% on liabilities?
6. Pick a peer-to-peer payment company from chapter 18 PowerPoint (from the image on the slide counts) and the business-to-business company Square and use both the textbook and outside sources to explain how they make money.
7. Why is credit risk management important and what are the features of a loan or debt instrument it determines? What is the difference between a spot loan and revolving loan? What is a loan commitment? What are the different rates that have replaced LIBOR and in what countries/economic blocs are they used in? What are the borrower and market specific factors that impact the return on a loan for a financial institution? Are higher interest rates a restrictive or stimulative form of monetary policy and explain your answer?
8. Suppose management is unwilling to permit losses exceeding 18% of a financial institution's capital to a particular sector? What is the concentration limit if management estimates that the amount lost per dollar of defaulted loans in this sector is 30 cents? What would the concentration limit be if the loss rates on bad loans was 55 cents? What is it was 12 cents?
9. Suppose management is unwilling to permit losses exceeding 22% of a financial institution's capital to a particular sector? What is the concentration limit if management estimates that the amount lost per dollar of defaulted loans in this sector is 45 cents? What if the permitted losses could not exceed 25%? What if it was 16%
10. What is sovereign risk and what is the difference between rescheduling and repudiation? What is the total debt service ratio and how is it calculated? See if you can find a more recent number than your textbook for the total debt service ratio of a country. See if you can also find an example of a country, or countries, that Western banks currently have exposure to
11. What is the difference between book value accounting and market value accounting? What is duration and how is it useful when it comes to figuring out interest rate sensitivity? What are zero-coupon bonds and what do they allow securities firms and investors to do? What are the characteristics of console bonds when it comes to duration and maturity?
12. A six-year Eurobond has a 6% coupon and 6% yield. What is the modified duration if duration equals 5.20 years? What is the dollar duration for this bond if its par value is $1,000?
13. Determine the duration of a Eurobond with that matures in five years, has an annual coupon of 6%, and a face value of $1,000. What would the duration be if the annual coupon is 6% and the current yield is 10%?
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