Tenta frågor Flashcards
When a bank has a positive duration gap a parallel increase in the interest rates on the assets and liabilities of the bank will lead to a(n) ___________in the bank’s net worth. (5P)
Decrease
When investors buy or sell a futures contract, they must deposit a(n) _________ when they first enter into the contract. (5P)
Initial margin
_________ assets, including loans, are those which are past due by 90 days or more. (5P)
Non-performing assets
The short hedge in financial futures contracts is most likely to be used in situations where a bank would suffer losses due to falling interest rates. Is this true or false? (5P)
False
The ratio of non-performing assets to total loans and leases is a measure of credit risk in banking industry. Is this true or false? (5P)
True
What are the Tier 1 capital? Give an example
Tier 1 capital is the most important and highest quality form of capital for a financial institution (aka core capital).
An example of Tier 1 capital is common stock, which represents ownership in a company and gives the holder voting rights at shareholder meetings.
What are the Tier 2 capital? Give an example
Tier 2 capital is a less stable form of capital than Tier 1 capital, and it is used to supplement Tier 1 capital in times of financial stress.(supplementary capital)
An example of Tier 2 capital is subordinated debt, which is a type of debt that has a lower priority than other debts in the event of bankruptcy. This means that holders of subordinated debt may not receive their full payment until all other debts have been paid
1.4 Explain what are the first primary reserve in a bank’s balance sheet? (10P)
he first primary reserve is the first line of defense in case of high liquidity needs. It includes
Vault cash
Deposits from other banks
Cash items in process of collection
1.4 Explain what are the second primary reserve in a bank’s balance sheet? (10P)
The secondary reserve in the second line of defense in case of high liquidity needs. It includes items available for sale or exchangeable for cash on a short notice for example:
Government securities
Money market deposits
1.5 If a bank has a positive interest-sensitive gap, one of the possible management responses would be to: (5P)
A. wait for the interest rates to rise or be stable.
B. shorten asset maturities.
C. decrease interest-sensitive liabilities.
D. increase interest-sensitive assets.
E. extend liability maturities.
B. shorten asset maturities.
1.6 The net interest margin of a bank is influenced by: (5P)
A. changes in the level of interest rates.
B. changes in the volume of interest-bearing assets and interest-bearing liabilities.
C. changes in interest income from loans and investments.
D. changes in interest expense on deposits and other borrowed funds.
E. All of the options are correct.
E. All of the options are correct.
1.7 The principal goal of interest rate hedging strategy is to hold fixed a bank’s: (5P)
A. net interest margin.
B. net income before taxes.
C. value of loans and securities.
D. interest sensitive assets.
E. None of the options is correct.
A. net interest margin.
1.8 What do loans and security investments represent for a bank? (5P)
A. Earning assets
B. Contra-assets
C. Discretionary accounts
D. Market-valued assets
E. None of the options is correct
A. Earning assets
1.9 The risk that a financial institution may be forced to borrow emergency funds excessive cost to cover its immediate cash needs is known as: (5P)
A. Credit risk
B. Liquidity risk
C. Interestraterisk
D. Capitalrisk
E. None of the options is correct
B) Liquidity risk
What are the three variables affect the duration of a multiple payment asset? (3P)
- Time to Maturity
2.Interest rate - Coupon rate
Explain how does the duration change with respect to the changes in these three variables. (9P)
Time to maturity
When time to maturity increases, duration increases
When time to maturity decreases, duration decreases
Interest rates
When the interest rate increases, the duration decreases
When the interest rate decreases, the duration increases
Coupon rate
When the coupon rate increases, the duration decreases
When the coupon rate decreases, the duration increases
_________________________ measures the amount of debt or leverage a bank has and is one part of the evaluation of the bank’s ROE. It is generally a number larger than one. (5P)
Leverage multiplier (Debt-to equity ratio)
2.2 Fill texts in the blanks:
________________________risk is one that deals with the quality of the bank’s assets and, in particular, the bank’s loans. (5P)
Credit risk
2.3 Which of the following ratios would be a measure of credit risk? Choose from A,B,C,D,E (5P)
A. Net charge-offs of loans/Total loans and leases
B. Interest on CDs/Total CDs issued
C. Interest Sensitive Assets/Interest Sensitive Liabilities
D. Equity Capital/Total Assets
E. None of the options is correct
A. Net charge-offs of loans/Total loans and leases
(1 a) Provide one measure of credit risk (5P) and one measure of liquidity risk (5P)
Credit risk = Net charge-offs of loans/Total loans and leases is a measure
Liquidity risk = Short term securities/deposits
(2 e) Core capital such as common stock and surplus, undivided profits, qualifying noncumulative perpetual preferred stock, etc. is referred to as _____________ capital, as defined by the Basel agreement. (5P)
Tier 1
(2 f) _____________ is the spread between the cash price and futures price of an underlying asset. (5P)
Basis
(2 g) A(n) ______________ is an agreement between a buyer and a seller today which calls for the delivery of a particular security in exchange for cash at some future date for a set price (5P)
Futures contract
(a) Explain why having deposit insurances in place may cause the moral hazard issue in general. (6P)
If we have deposit insurance, it means that customers’ money is always insured, and their only incentive is to look for the bank that offers the best interest rates. They will simply ignore the bank’s risk of failure since they have deposit insurance
Deposit insurance may also encourage banks to take on more risk, as they know that their depositors’ funds are protected even if the bank experiences financial difficulties. This can lead to excessive risk-taking, as the bank may not bear the full consequences of its actions.
What is the diamond theory?
explains how banks create money and how this affects the economy.
Create
According to the Diamond theory, banks create money by making loans to households and firms.
Affect the economy:
When banks make more loans and create more deposits, this leads to an increase in the money supply and can lead to an increase in economic activity.
Inflation
However, the Diamond theory also warns that an increase in the money supply can lead to inflation if the demand for goods and services outpaces the supply.
Central bank - monetary policy
The Diamond theory also explains how the central bank can influence the money supply and the economy through its monetary policy. The central bank can increase or decrease the money supply by buying or selling government securities,
