Part -1:
1) Interest Income. How can gross interest income rise while the net interest margin remains somewhat stable for a particular bank?
2) Bank Leverage. What does the assets/equity ratio of a bank indicate?
3) Loan Loss Provisions. Explain why loss provisions of most banks could increase in a particular period.
4) Bank Income Statement. Assume that SUNY Bank plans to liquidate Treasury security holdings and use the process for small business loans. Explain how this strategy will affect the different income statement items. Also identify any income statement items for which the effect of this strategy are more difficult to estimate.
Problem:
1) Assessing Bank Performance. Select a bank whose income statement data are available. Using recent income statement information about the commercial bank, assess its performance. How does the performance of this bank compare to the performance of other banks? What is the main reason why its ROE is different from the norm? (Is it due to its interest expense? Its noninterest income?)
2) SI Sources and Uses of Funds. Explain in general terms how savings institutions differ from commercial banks with respect to their sources of funds and uses of funds. Discuss each source of funds for Sis. Identify and discuss the main uses of funds for Sis.
3) Liquidity and Credit Risk. Describe the liquidity and credit risk of savings institutions, and discuss how each is managed.
4) ARMs. What is an adjustable-rate mortgage (ARM)? Discuss potential advantages such mortgages offer a savings institutions.
5) Use of Interest Rate Swaps. Explain how savings institutions could use interest rate swaps to reduce interest rate. Will Sis that use swaps performs better or worse than those that were unhedged during a period of declining interest rate? Explain.
6) Impact of the Credit Crisis. Explain how the Credit crisis in the 2008-2009 period affected some saving institutions. Compare the causes of the credit crisis to the causes of the SI crisis in the late 1980s.
Part -2
1. Exposure to Interest Rate Risk. Is the cost of funds obtained by finance companies very sensitive to market interest rate movements? Explain?
2. Regulation of Finance Companies. Describe the kinds of regulations that are composed on finance companies.
3. Liquidity Position. Explain how the liquidity position of finance companies differs from that of depository institutions such as commercial banks.
4. Exposure to Interest Rate Risk. Explain how the interest rate risk of finance companies differs from that of savings institutions.
5. Exposure to Credit Risk. Explain how the default risk of finance companies differs from that of other lending financial institutions.
6. Risk of Treasury bond Funds. Support or refute the following statement: Investors can avoid all types by purchasing a mutual fund that contains only Treasury bonds.
7. Exposure to Exchange Rate Movements. Explain how changing foreign currency values can affect the performance of international mutual funds.
8. REITs. Explain the difference between equity REITs and mortgage REITs. Which type would likely be a better hedge against high inflation? Why?
9. How Private Equity Funds Can Improve Business Conditions. Describe private equity funds. How can they improve business condition? Money that individual and institutional investors previously invested in stocks is now being invested in private equity funds. Explain why this should result in improved business conditions.
PROBLEM.
1. Currency Call Options. Use the following information to determine the probability distribution of net gains per unit from purchasing a call option on British pounds.
- Spot rate of the British pound is $1.45.
- Premium on the British pound option is $0.04 per unit.
- Exercise price of a British pound option is $1.46.
- Your expectation of the British pound spot rate prior to the expiration of the option is.
Possible outcome for future Probability spot rate
$1.48 30%
1.49 40
1.52 30
2. Covered Interest Arbitrage. Assume the following information.
- British pound spot rate=$1.58
- British pound one-year forward rate=$1.58
- British one-year interest rate=11%
- U.S one-year interest rate=9%
Explain how U.S. investors could use covered interest arbitrage to lock in a higher yield than 9%. What would be their yield? Explain how the spot and forward rates of the pound would change as covered interest arbitrage occurs.