1.
a. Explain what is meant by the term intermediation and identify and explain two types of intermediation provided by financial institutions.
b. Give an example of a security issued by a financial institution and of a security invested in by the same financial institution that provide intermediation and identify the type of intermediation.
2. Briefly describe three regulations that affect some aspect of a commercial bank's business?
3. Calculate the duration of:
a. A consul with a yield to maturity of 3.25% that makes a fixed annual coupon payment of $28.25, which represents 4.50% of its par value, that never repays the principal.
b. A 12-year bond with a par value of $1000 that pays a 4.10% annual coupon and has a yield to maturity of 4.95%.
c. An18-year, zero coupon bond with a face value of $5000.
d. A 3-year car loan of $32,500 that is fully amortized with payments based on a 2.75% coupon rate, and a yield to maturity of 4.35%.
e. A 15-year bond, 5.05% coupon bond with semi-annual payments of interest, a par value of $250,000 that yields 6.65% and has 9.5 years remaining until maturity.
4. a. Explain why the manager of a commercial bank is concerned about gap management.
b. Using the data below, determine the repricing gap for each maturity range.
|
maturity range
|
time deposits
|
expected MMDA runoff
|
expected savings runoff
|
securities
|
loans and leases
|
|
3 months or less
|
2500000
|
550000
|
550000
|
35000
|
2500000
|
|
over 3 months to 1 year
|
2550000
|
2250000
|
3250000
|
125000
|
7500000
|
|
over 1 year to 3 years
|
450000
|
0
|
0
|
180000
|
2000000
|
|
over 3 years
|
100000
|
0
|
0
|
550000
|
3800000
|
c. If interest rates are expected to increase by 65 basis points over the next year, what effect will it have on the bank in the following year?
d. What actions might the manager of the bank take now to reduce the risk associated with the expected change in rates?
5. How does the income of a financial institution differ from that of a non-financial institution?
6. a. Explain how the information revealed by a bank's duration gap differs from that provided by its re-pricing gap.
b. A bank has assets with a total value of $14.380 billion; $14.250 billion of which are rate sensitive. The bank's liabilities total $14.110 billion; all are rate sensitive. If the average duration of its asset portfolio is 5.165 years and its liabilities have a 3.125-year average duration, what is the bank's duration gap?
c. What is the expected dollar change in the value of the bank's equity if the average interest rate increases from 3.30% to 3.65%?
d. cc
7.
For each of the following line items from a depository institution's balance sheet, indicate whether the line item refers to an asset and/or a liability.
a. Cash
b. Federal funds
c. Reserves
d. Commercial loan
e. Treasury bill
f. Repurchase agreement
g. Commercial paper
h. Deposits
i. Subordinated notes
j. Equity
8. a. Name two principal sources of revenue for a depository institution.
b. Name two principal expenses for a depository institution.
9. A bond portfolio has a market value of $7,225,000. Its duration is6.64. If the average yield on the bond portfolio increases from 5.75% to 6.25%, what is the estimated effect on the value of the portfolio?