FINC

QUESTION 1

When interest rate changes, the impact on a bank’s earnings depends on the repricing of their assets or liabilities.
Loan A (7%, 1 year)  = \$100          Deposit A (2.5%, 3 months)    = \$250
Loan B (10%, 2 years) = \$200       Deposit B (5%, 1 year)        = \$ 50
Total Assets                 = \$300        Total Liabilities                  = \$300
The net interest margin or spread 1%2%3%4%5%6%7%8%9%10%

1 points
QUESTION 2

The average maturity of its assets is larger than that of its deposits, as is typical of most banks.  There is a reinvestment risk

re-finance risk  re-pricing risk default risk

1 points
QUESTION 3

The average duration of its assets is longer than that of its liabilities.   There is a                                reinvestment risk

re-finance risk

re-pricing risk

basis point risk

1 points
QUESTION 4

If the loan interest rate adjusts every quarter and the deposit interest rate adjust every six months, the risk of interest rate from the different frequencies of rate adjustments is called

Repricing risk

yield -curve risk  basis point risk  default risk

1 points
QUESTION 5

If the loan interest rate is 4 % mark-up on the 6 month treasury bill and the deposit interest rate is 1% mark-up on the 3 month treasury bill,  the risk of interest rate like this is called

Repricing risk yield -curve risk basis point risk default risk

1 points
QUESTION 6

Consider a bank that borrows \$100 million in deposits at a floating rate of T-Bill plus 2% and lends at LIBOR plus 4%. Both rates are reset semi-annually. Normally, both rates move together. Assume the 3-month LIBOR rate was 3.40% and the 3-month T-Bill rate was 3.0% when the loan was disbursed. The spread is given as follows1.4%2.4%3.4%4.4%

1 points
QUESTION 7

Assume a bank has the following balance sheet.  Determine the 2-year GAP.

AssetAmount LiabilityAmountCash\$100 90-day CDs\$1006-month Gbonds\$400 360-day CDs\$200
2-year
commercial
loans\$400 Time Deposits 2- year
\$900
5-year fixed
rate loans\$500 Stockholder’
s equity\$200
Total\$1,400 Total\$1,400     GAP = (RSA2 yr – RSL2 yr)

0-\$100-\$200-\$300-\$400

1 points
QUESTION 8

Assume a bank has the following balance sheet.  When both the deposit rate and loan rate change by 2%, determine the 1-year net impact on net interest income (ΔNII)

AssetAmount LiabilityAmountCash\$100 90-day CDs\$1006-month Gbonds\$400 360-day CDs\$200
2-year
commercial
loans\$400 Time Deposits 2- year
\$900
5-year fixed
rate loans\$500 Stockholder’
s equity\$200
Total\$1,400 Total\$1,400     ΔNII   = (RSA1-year – RSL1-year)* (.02)

\$2\$3\$4\$5\$6

1 points
QUESTION 9

Assume a bank has the following balance sheet
for the 3-year GAP=\$?    (Hint: only rate sensitive assets and rate sensitive liabilities count)
AssetPotential rate changeAmount LiabilityPotential Rate changeAmountReserves at the FedN/A\$200 90-day CDs0.85%\$200
6-month T-Bills2.00%\$400 360-day CDs1.00%\$300
3-year Consumer loans3.00%\$600 Time Deposits 2- year
1.50%\$1200
10-year mortgages2.00%\$800 Stockholder’
s equityN/A\$200
Total \$2000 Total \$2000-300-400-500-600-700800

1 points
QUESTION 10

Assume a bank has the following balance sheet
What is the net impact on net interest income (NII) for 3 YEARS. if interest rates are expected to change as specified in the Potential rate change, (compute the detailed ERA)
AssetPotential rate changeAmount LiabilityPotential Rate changeAmountReserves at the FedN/A\$200 90-day CDs0.85%\$200
6-month T-Bills2.00%\$400 360-day CDs1.00%\$300
3-year Consumer loans3.00%\$600 Time Deposits 2- year
1.50%\$1200
10-year mortgages2.00%\$800 Stockholder’
s equityN/A\$200
Total \$2000 Total \$2000\$1.1\$2.2\$3.3\$4.4

1 points
QUESTION 11

The elasticity of the change of the price of debt toward the change in interest rate is the absolute value of (and then divided by(1+r))

Convexity

b. Maturity  c. Duration  d. Immunization

1 points
QUESTION 12

(                            ) is a measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates.

ConvexityMaturity

Duration Immunization

1 points
QUESTION 13

Assume a 4-year loan with a principal of \$5,000 paying 7% interest. The current market yield on the loan is also 7%. What is the duration of the loan? 1.62 years2.62 years3.62 years4.62 years

1 points
QUESTION 14

14. Estimate the duration of Loan M
Bank Balance SheetCash = \$ 50
Loan M (7%, 6 years) = \$200Deposit N (3 years, 2%) = \$ 200
Equity = \$ 50Total Assets = \$250Total Liabilities = \$ 2503.1 years4.1 years5.1 years6.1 years

1 points
QUESTION 15

14. Estimate the duration of Deposit N
Bank Balance SheetCash = \$ 50
Loan M (7%, 6 years) = \$200Deposit N (3 years, 2%) = \$ 200
Equity = \$ 50Total Assets = \$250Total Liabilities = \$ 2501.942.943.944.94

1 points
QUESTION 16

Δ%(MV)  = -MD*Δr When we use this equation to evaluate a loan, this equation does not totally reflect the change in the present value of loans mainly because of the ignorance  of which of the following factors

a.              Convexity b. Maturity  c. Duration  d. Immunization

1 points
QUESTION 17

16.  In the following balance sheet, estimate the impact on the economic value of equity (EVE).
if all interest rates decrease by 3%, EVE=\$(                        )
Loan A (7.5%, 5 year) = \$500Deposit B (5%, 2 year) = \$500
Total Assets = \$500Total Liabilities = \$50036.7338.540.2241.77

1 points
QUESTION 18

In the following balance sheet, estimate the impact on the economic value of equity (EVE).
If interest rates of assets fall by 1% and deposit rates increase by 1%. EVE=\$(     )
Loan A(8%, 3 year)= \$150 Deposit A(5%, 2 years)=\$250
Loan B(11%, 4 years)= \$200 Deposit B(7%, 3 year)= \$100Total Assets = \$350 Total Liabilities = \$35016.4417.4418.4419.44

1 points
QUESTION 19

In the following balance sheet,
Loan A(8%, 3 year)= \$150 Deposit A(5%, 2 years)=\$250Loan B(11%, 4 years)= \$200 Deposit B(7%, 3 year)= \$100Total Assets = \$350 Total Liabilities = \$350The GAP 3 y

GAP three year0-200-400-350

1 points
QUESTION 20

19. In the following balance sheet,
Loan A(8%, 3 year)= \$150 Deposit A(5%, 2 years)=\$250Loan B(11%, 4 years)= \$200 Deposit B(7%, 3 year)= \$100Total Assets = \$350 Total Liabilities = \$350The GAP 3 yr=-200

if all interest rates decrease by 3%, net impact on net interest income (ΔNII) is

+\$6+\$7+\$8+\$9

1 points
QUESTION 21

20. When both deposit and loan interest rates decrease at the same speed in the market, a bank tends to  (               ) to make money.(a. reinvest

b. refinance  c. keep neutral)

1 points
QUESTION 22

When both deposit and loan interest rates increase at the same speed in the market, a bank tends to ( ) to make profit. a. reinvest b. refinance  c. keep neutral

1 points
QUESTION 23

When borrowers tend to pay back the loans to bankers earlier, the bank is facing a. Repricing risk    b. Yield curve risk    c. Basis points risk   d. Embedded options risk

1 points
QUESTION 24

24. The GAP analysis and EAR analysis

a. If GAP is positive and interest rate increases the same on both asset and liability sides, EAR increases.b. If GAP is negative and interest rate decreases the same on both asset and liability sides, EAR increases.
c. If EARs for year 1, year 2, year 3. ….up to year 30 are all positive, the bank should be profitable.
d. If GAP for year 1, year 2, year 3. ….up to year 30 are all zero, the bank’s interest rate risk should be very low.

all a,b,c,d are correct.

1 points
QUESTION 25

25. The Federal Reserve has tools at its disposal to implement monetary policy, which does NOT include

a. Reserve requirements
b. Regulate investment banks

c. Open market operations
d. Discount rate

1 points
QUESTION 26

26. (                                    ) is responsible for conducting monetary policy by influencing money supply and interest rates.

a. A Commercial Bank
b. A credit union

c. A Central Bank
d. An investment bank

1 points
QUESTION 27

The use of paper money

a. people trust paper money more than metal coins.
b.  Improves the Durability of the currency

c.  Improve the transportability of the currency

e.remedies the problem of Gresham’s Law

d. Improve the scarcity of the currency

1 points
QUESTION 28

When the Federal Reserve buys T-Bonds in the US market.

a. Money supply increases

b. Money supply decreases

c. Irrelevant to Money Supply

1 points
QUESTION 29

29.  When the Federal Reserve increase the discount rate of the Fed Fund in the US market.

a. Money supply increases
b. Money supply decreases

c. Irrelevant to Money Supply

1 points
QUESTION 30

30. By raising the reserve requirement, the central bank

a. Money supply increases

b. Money supply decreases
c. Irrelevant to Money Supply

1 points
QUESTION 31

Negative Interest rate

a. This action was meant to complement the quantitative easing
b. encourages banks to lend more instead of keeping them as excess reserves.

c. Customers will consume more and deposit less.
all are correct.

1 points
QUESTION 32

a SOFR represents the interest rate of the unsecured funds
LIBOR is a good proxy of the risk-free rate
SOFRs include triparty repo data from the Bank of New York Mellon (BNYM) and the Depository Trust & Clearing Corporation (DTCC).

LIBOR now in 2020 is still the most influential interest rate in the international market.

1 points
QUESTION 33

Deposit Insurance

a. depositor indifference generates a moral hazard problem that encourages banks to engage in risky activities
b. exists only in the USA, not in the other countries.
c. It is a privately owned insurance company.

d. successfully helped US to overcome the problems in 1980’s S&L crisis and 2008 Financial Crisis.

1 points
QUESTION 34

What are CAMELS? They are ratings assessed by bank regulators after on-site examinations.
Which one is wrong

b. A =     Assurance of Assessment
c. M =    Management

d. E =     Earnings

e. L =     Liquidity

1 points
QUESTION 35

About Insurance, which one is wrong?

a. insurance firms purchase re-insurance to reduce/alleviate/diversify the risk.
b. Deposit insurance is used in commercial banking businesses.
c. Underwriting and reinsurance risks are the major risks for insurance companies.

d. Categorized as Life insurance and non-life (property/casualty, including medical) insurance.

e. The US became a dominant insurer from modest roots planted in the 16th century.

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