Tenta frågor

Question 1

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)

Answer 1

Decrease

Question 2

When investors buy or sell a futures contract, they must deposit a(n) _________ when they first enter into the contract. (5P)

Answer 2

Initial margin

Question 3

_________ assets, including loans, are those which are past due by 90 days or more. (5P)

Answer 3

Non-performing assets

Question 4

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)

Answer 4

False

Question 5

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)

Answer 5

True

Question 6

What are the Tier 1 capital? Give an example

Answer 6

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.

Question 7

What are the Tier 2 capital? Give an example

Answer 7

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

Question 8

1.4 Explain what are the first primary reserve in a bank’s balance sheet? (10P)

Answer 8

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

Question 9

1.4 Explain what are the second primary reserve in a bank’s balance sheet? (10P)

Answer 9

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

Question 10

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.

Answer 10

B. shorten asset maturities.

Question 11

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.

Answer 11

E. All of the options are correct.

Question 12

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.

Answer 12

A. net interest margin.

Question 13

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

Answer 13

A. Earning assets

Question 14

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

Answer 14

B) Liquidity risk

Question 14

What are the three variables affect the duration of a multiple payment asset? (3P)

Answer 14

1. Time to Maturity
   2.Interest rate
2. Coupon rate

Question 15

Explain how does the duration change with respect to the changes in these three variables. (9P)

Answer 15

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

Question 16

_________________________ 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)

Answer 16

Leverage multiplier (Debt-to equity ratio)

Question 17

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)

Answer 17

Credit risk

Question 18

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

Answer 18

A. Net charge-offs of loans/Total loans and leases

Question 19

(1 a) Provide one measure of credit risk (5P) and one measure of liquidity risk (5P)

Answer 19

Credit risk = Net charge-offs of loans/Total loans and leases is a measure

Liquidity risk = Short term securities/deposits

Question 20

(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)

Answer 20

Tier 1

Question 21

(2 f) _____________ is the spread between the cash price and futures price of an underlying asset. (5P)

Answer 21

Basis

Question 22

(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)

Answer 22

Futures contract

Question 23

(a) Explain why having deposit insurances in place may cause the moral hazard issue in general. (6P)

Answer 23

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.

Question 24

What is the diamond theory?

Answer 24

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,