金融机构管理课件2.04.第17章 习题

《金融机构管理Ⅱ》1、“经理国库、充当最后贷款人”表示中心银行在行使( B )本能机能。

A．调剂本能机能B．办事本能机能C．治理本能机能D．操纵本能机能2、我国公平易近经济核算新体系由( C )构成。

A．资产负债表和资金流量表B．国际进出均衡表和投入产出表C．社会再临盆核算表和经济轮回帐户D．资产负债表和投入产出表3、鄙人列泉币政策对象中，属于一样性泉币政策对象的有( B )。

A．道义劝说B．公布市场营业C．利率最高限额D．流淌性比率4、中心银行治理外债是指对( D )的治理。

A．借的方面B．用的方面C．还的方面D．借、用、还三方面5、具有最强烈和精确的宣示效应的泉币政策对象是( A )。

A．预备金政策B．再贴现政策C．公布市场营业D．中心银行贷款6、流淌性最强的资产是( C )A．固定资产B．无形资产C．现金资产D．递延资产7、下列构成投资银行永久性本钱的是( C )A．按期优先股B．经久信用C．通俗股D．从属债券8、我国规定，基金收益分派应当采取现金情势，每年一次，基金收益分派比例不得低于基金净收益的( D )A．50%B．60%C．80%D．90%9、保险公司的全然本能机能是( A )A．经济补偿B．资金应用C．防灾D．减损10、依照我国现行规定，在直辖市设立信任机构，事实上收本金最低限额为( B ) A．5000万元B．1000万元C．500万元D．100万元11、我国实施的金融体系市（A）A.复合银行体系B.单一银行体系C.没有中心银行的金融体系12、下列特点中不属于金融机构营业的全然特点的是（C）A.无形性B.非鄙视性C.差别性D.专业性13、下列营业中属于银行的资家当务的是（C）A.按期存款B.期货交易C.购买国库券D.发行经久债券14、下列构成银行核心本钱的是（B）A.通俗预备金B.公布贮备C.未公布贮备D.次级经久债券15、投资银行财务治理的目标是使（B）A.公司利润最大年夜化B.股东财宝最大年夜化C.每股收益最大年夜化16、资产治理理论重要有__ CDE __。

Chapter TwoThe Financial Services Industry: Depository InstitutionsChapter OutlineIntroductionCommercial Banks∙Size, Structure, and Composition of the Industry∙Balance Sheet and Recent Trends∙Other Fee-Generating Activities∙Regulation∙Industry PerformanceSavings Institutions∙Savings Associations (SAs)∙Savings Banks∙Recent Performance of Savings Associations and Savings BanksCredit Unions∙Size, Structure, and Composition of the Industry and Recent Trends∙Balance Sheets∙Regulation∙Industry PerformanceGlobal Issues: Japan, China, and GermanySummaryAppendix 2A: Financial Statement Analysis Using a Return on Equity (ROE) Framework Appendix 2B: Depository Institutions and Their RegulatorsAppendix 3B: Technology in Commercial BankingSolutions for End-of-Chapter Questions and Problems: Chapter Two1.What are the differences between community banks, regional banks, and money-centerbanks? Contrast the business activities, location, and markets of each of these bank groups. Community banks typically have assets under $1 billion and serve consumer and small business customers in local markets. In 2003, 94.5 percent of the banks in the United States were classified as community banks. However, these banks held only 14.6 percent of the assets of the banking industry. In comparison with regional and money-center banks, community banks typically hold a larger percentage of assets in consumer and real estate loans and a smaller percentage of assets in commercial and industrial loans. These banks also rely more heavily on local deposits and less heavily on borrowed and international funds.Regional banks range in size from several billion dollars to several hundred billion dollars in assets. The banks normally are headquartered in larger regional cities and often have offices and branches in locations throughout large portions of the United States. Although these banks provide lending products to large corporate customers, many of the regional banks have developed sophisticated electronic and branching services to consumer and residential customers. Regional banks utilize retail deposit bases for funding, but also develop relationships with large corporate customers and international money centers.Money center banks rely heavily on nondeposit or borrowed sources of funds. Some of these banks have no retail branch systems, and most regional banks are major participants in foreign currency markets. These banks compete with the larger regional banks for large commercial loans and with international banks for international commercial loans. Most money center banks have headquarters in New York City.e the data in Table 2-4 for the banks in the two asset size groups (a) $100 million-$1billion and (b) over $10 billion to answer the following questions.a. Why have the ratios for ROA and ROE tended to increase for both groups over the1990-2003 period? Identify and discuss the primary variables that affect ROA andROE as they relate to these two size groups.The primary reason for the improvements in ROA and ROE in the late 1990s may berelated to the continued strength of the macroeconomy that allowed banks to operate with a reduced regard for bad debts, or loan charge-off problems. In addition, the continued low interest rate environment has provided relatively low-cost sources of funds, and a shifttoward growth in fee income has provided additional sources of revenue in many product lines. Finally, a growing secondary market for loans has allowed banks to control the size of the balance sheet by securitizing many assets. You will note some variance inperformance in the last three years as the effects of a softer economy were felt in thefinancial industry.b. Why is ROA for the smaller banks generally larger than ROA for the large banks?Small banks historically have benefited from a larger spread between the cost rate of funds and the earning rate on assets, each of which is caused by the less severe competition in the localized markets. In addition, small banks have been able to control credit risk moreefficiently and to operate with less overhead expense than large banks.c. Why is the ratio for ROE consistently larger for the large bank group?ROE is defined as net income divided by total equity, or ROA times the ratio of assets to equity. Because large banks typically operate with less equity per dollar of assets, netincome per dollar of equity is larger.d. Using the information on ROE decomposition in Appendix 2A, calculate the ratio ofequity-to-total-assets for each of the two bank groups for the period 1990-2003. Whyhas there been such dramatic change in the values over this time period, and why isthere a difference in the size of the ratio for the two groups?ROE = ROA x (Total Assets/Equity)Therefore, (Equity/Total Assets) = ROA/ROE$100 million - $1 Billion Over $10 BillionYear ROE ROA TA/Equity Equity/TA ROE ROA TA/Equity Equity/TA1990 9.95% 0.78% 12.76 7.84% 6.68% 0.38% 17.58 5.69%1995 13.48% 1.25% 10.78 9.27% 15.60% 1.10% 14.18 7.05%1996 13.63% 1.29% 10.57 9.46% 14.93% 1.10% 13.57 7.37%1997 14.50% 1.39% 10.43 9.59% 15.32% 1.18% 12.98 7.70%1998 13.57% 1.31% 10.36 9.65% 13.82% 1.08% 12.80 7.81%1999 14.24% 1.34% 10.63 9.41% 15.97% 1.28% 12.48 8.02%2000 13.56% 1.28% 10.59 9.44% 14.42% 1.16% 12.43 8.04%2001 12.24% 1.20% 10.20 9.80% 13.43% 1.13% 11.88 8.41%2002 12.85% 1.26% 10.20 9.81% 15.06% 1.32% 11.41 8.76%2003 12.80% 1.27% 10.08 9.92% 16.32% 1.42% 11.49 8.70% The growth in the equity to total assets ratio has occurred primarily because of theincreased profitability of the entire banking industry and the encouragement of theregulators to increase the amount of equity financing in the banks. Increased fee income, reduced loan loss reserves, and a low, stable interest rate environment have produced the increased profitability which in turn has allowed banks to increase equity through retained earnings.Smaller banks tend to have a higher equity ratio because they have more limited assetgrowth opportunities, generally have less diverse sources of funds, and historically have had greater profitability than larger banks.3.What factors have caused the decrease in loan volume relative to other assets on thebalance sheets of commercial banks? How has each of these factors been related to the change and development of the financial services industry during the 1990s and early2000s? What strategic changes have banks implemented to deal with changes in thefinancial services environment?Corporations have utilized the commercial paper markets with increased frequency rather than borrow from banks. In addition, many banks have sold loan packages directly into the capital markets (securitization) as a method to reduce balance sheet risks and to improve liquidity. Finally, the decrease in loan volume during the early 1990s and early 2000s was due in part to the recession in the economy.As deregulation of the financial services industry continued during the 1990s, the position of banks as the primary financial services provider continued to erode. Banks of all sizes have increased the use of off-balance sheet activities in an effort to generate additional fee income. Letters of credit, futures, options, swaps and other derivative products are not reflected on the balance sheet, but do provide fee income for the banks.4.What are the major uses of funds for commercial banks in the United States? What are theprimary risks to the bank caused by each use of funds? Which of the risks is most critical to the continuing operation of the bank?Loans and investment securities continue to be the primary assets of the banking industry. Commercial loans are relatively more important for the larger banks, while consumer, small business loans, and residential mortgages are more important for small banks. Each of these types of loans creates credit, and to varying extents, liquidity risks for the banks. The security portfolio normally is a source of liquidity and interest rate risk, especially with the increased use of various types of mortgage backed securities and structured notes. In certain environments, each of these risks can create operational and performance problems for a bank.5.What are the major sources of funds for commercial banks in the United States? How isthe landscape for these funds changing and why?The primary sources of funds are deposits and borrowed funds. Small banks rely more heavily on transaction, savings, and retail time deposits, while large banks tend to utilize large, negotiable time deposits and nondeposit liabilities such as federal funds and repurchase agreements. The supply of nontransaction deposits is shrinking, because of the increased use by small savers of higher-yielding money market mutual funds,6. What are the three major segments of deposit funding? How are these segments changingover time? Why? What strategic impact do these changes have on the profitable operation of a bank?Transaction accounts include deposits that do not pay interest and NOW accounts that pay interest. Retail savings accounts include passbook savings accounts and small, nonnegotiable time deposits. Large time deposits include negotiable certificates of deposits that can be resold in the secondary market. The importance of transaction and retail accounts is shrinking due to the direct investment in money market assets by individual investors. The changes in the deposit markets coincide with the efforts to constrain the growth on the asset side of the balance sheet.7. How does the liability maturity structure of a bank’s balance sheet compare with thematurity structure of the asset portfolio? What risks are created or intensified by thesedifferences?Deposit and nondeposit liabilities tend to have shorter maturities than assets such as loans. The maturity mismatch creates varying degrees of interest rate risk and liquidity risk.8. The following balance sheet accounts have been taken from the annual report for a U.S.bank. Arrange the accounts in balance sheet order and determine the value of total assets.Based on the balance sheet structure, would you classify this bank as a community bank, regional bank, or a money center bank?Assets Liabilities and EquityCash $ 2,660 Demand deposits $ 5,939Fed funds sold $ 110 NOW accounts $12,816Investment securities $ 5,334 Savings deposits $ 3,292Net loans $29,981 Certificates of deposit $ 9,853Intangible assets $ 758 Other time deposits $ 2,333Other assets $ 1,633 Short-term Borrowing $ 2,080Premises $ 1,078 Other liabilities $ 778Total assets $41,554 Long-term debt $ 1,191Equity $ 3,272Total liab. and equity $41,554This bank has funded the assets primarily with transaction and savings deposits. The certificates of deposit could be either retail or corporate (negotiable). The bank has very little ( 5 percent) borrowed funds. On the asset side, about 72 percent of total assets is in the loan portfolio, but there is no information about the type of loans. The bank actually is a small regional bank with $41.5 billion in assets, but the asset structure could easily be a community bank with $41.5 million in assets.9.What types of activities normally are classified as off-balance-sheet (OBS) activities?Off-balance-sheet activities include the issuance of guarantees that may be called into play at a future time, and the commitment to lend at a future time if the borrower desires.a. How does an OBS activity move onto the balance sheet as an asset or liability?The activity becomes an asset or a liability upon the occurrence of a contingent event,which may not be in the control of the bank. In most cases the other party involved with the original agreement will call upon the bank to honor its original commitment.b.What are the benefits of OBS activities to a bank?The initial benefit is the fee that the bank charges when making the commitment. If the bank is required to honor the commitment, the normal interest rate structure will apply to the commitment as it moves onto the balance sheet. Since the initial commitment does notappear on the balance sheet, the bank avoids the need to fund the asset with either deposits or equity. Thus the bank avoids possible additional reserve requirement balances anddeposit insurance premiums while improving the earnings stream of the bank.c.What are the risks of OBS activities to a bank?The primary risk to OBS activities on the asset side of the bank involves the credit risk of the borrower. In many cases the borrower will not utilize the commitment of the bank until the borrower faces a financial problem that may alter the credit worthiness of the borrower.Moving the OBS activity to the balance sheet may have an additional impact on the interest rate and foreign exchange risk of the bank.e the data in Table 2-6 to answer the following questions.a.What was the average annual growth rate in OBS total commitments over the periodfrom 1992-2003?$78,035.6 = $10,200.3(1+g)11 g = 20.32 percentb.Which categories of contingencies have had the highest annual growth rates?Category of Contingency or Commitment Growth RateCommitments to lend 14.04%Future and forward contracts 15.13%Notional amount of credit derivatives 52.57%Standby contracts and other option contracts 56.39%Commitments to buy FX, spot, and forward 3.39%Standby LCs and foreign office guarantees 7.19%Commercial LCs -1.35%Participations in acceptances -6.11%Securities borrowed 20.74%Notional value of all outstanding swaps 31.76%Standby contracts and other option contracts have grown at the fastest rate of 56.39 percent, and they have an outstanding balance of $214,605.3 billion. The rate of growth in thecredit derivatives area has been the second strongest at 52.57 percent, the dollar volumeremains fairly low at $1,001.2 billion at year-end 2003. Interest rate swaps grew at anannual rate of 31.76 percent with a change in dollar value of $41,960.7 billion. Clearly the strongest growth involves derivative areas.c.What factors are credited for the significant growth in derivative securities activities bybanks?The primary use of derivative products has been in the areas of interest rate, credit, andforeign exchange risk management. As banks and other financial institutions have pursuedthe use of these instruments, the international financial markets have responded byextending the variations of the products available to the institutions.11. For each of the following banking organizations, identify which regulatory agencies (OCC,FRB, FDIC, or state banking commission) may have some regulatory supervisionresponsibility.(a) State-chartered, nonmember, nonholding-company bank.(b)State-chartered, nonmember holding-company bank(c) State-chartered member bank(d)Nationally chartered nonholding-company bank.(e)Nationally chartered holding-company bankBank Type OCC FRB FDIC SBCom.(a) Yes Yes(b) Yes Yes Yes(c) Yes Yes Yes(d) Yes Yes Yes(e) Yes Yes Yes12. What factors normally are given credit for the revitalization of the banking industry duringthe decade of the 1990s? How is Internet banking expected to provide benefits in thefuture?The most prominent reason was the lengthy economic expansion in both the U.S. and many global economies during the entire decade of the 1990s. This expansion was assisted in the U.S. by low and falling interest rates during the entire period.The extent of the impact of Internet banking remains unknown. However, the existence of this technology is allowing banks to open markets and develop products that did not exist prior to the Internet. Initial efforts have focused on retail customers more than corporate customers. The trend should continue with the advent of faster, more customer friendly products and services, and the continued technology education of customers.13. What factors are given credit for the strong performance of commercial banks in the early2000s?The lowest interest rates in many decades helped bank performance on both sides of the balance sheet. On the asset side, many consumers continued to refinance homes and purchase new homes, an activity that caused fee income from mortgage lending to increase and remain strong. Meanwhile, the rates banks paid on deposits shrunk to all-time lows. In addition, the development and more comfortable use of new financial instruments such as credit derivatives and mortgage backed securities helped banks ease credit risk off the balance sheets. Finally, information technology has helped banks manage their risk more efficiently.14. What are the main features of the Riegle-Neal Interstate Banking and Branching EfficiencyAct of 1994? What major impact on commercial banking activity is expected from this legislation?The main feature of the Riegle-Neal Act of 1994 was the removal of barriers to inter-state banking. In September 1995 bank holding companies were allowed to acquire banks in other states. In 1997, banks were allowed to convert out-of-state subsidiaries into branches of a single interstate bank. As a result, consolidations and acquisitions have allowed for the emergence of very large banks with branches across the country.15. What happened in 1979 to cause the failure of many savings associations during the early1980s? What was the effect of this change on the operating statements of savingsassociations?The Federal Reserve changed its reserve management policy to combat the effects of inflation, a change which caused the interest rates on short-term deposits to increase dramatically more than the rates on long-term mortgages. As a result, the marginal cost of funds exceeded the average yield on assets that caused a negative interest spread for the savings associations. Further, because savings associations were constrained by Regulation Q on the amount of interest which could be paid on deposits, they suffered disintermediation, or deposit withdrawals, which led to severe liquidity pressures on the balance sheets.16. How did the two pieces of regulatory legislation, the DIDMCA in 1980 and the DIA in1982, change the operating profitability of savings associations in the early 1980s? What impact did these pieces of legislation ultimately have on the risk posture of the savingsassociation industry? How did the FSLIC react to this change in operating performance and risk?The two pieces of legislation allowed savings associations to offer new deposit accounts, such as NOW accounts and money market deposit accounts, in an effort to reduce the net withdrawal flow of deposits from the institutions. In effect this action was an attempt to reduce the liquidity problem. In addition, the savings associations were allowed to offer adjustable-rate mortgages and a limited amount of commercial and consumer loans in an attempt to improve the profitability performance of the industry. Although many savings associations were safer, more diversified, and more profitable, the FSLIC did not foreclose many of the savings associations which were insolvent. Nor did the FSLIC change its policy of assessing higher insurance premiums on companies that remained in high risk categories. Thus many savings associations failed, which caused the FSLIC to eventually become insolvent.17. How do the asset and liability structures of a savings association compare with the assetand liability structures of a commercial bank? How do these structural differences affect the risks and operating performance of a savings association? What is the QTL test?The savings association industry relies on mortgage loans and mortgage-backed securities as the primary assets, while the commercial banking industry has a variety of loan products, including mortgage products. The large amount of longer-term fixed rate assets continues to cause interestrate risk, while the lack of asset diversity exposes the savings association to credit risk. Savings associations hold considerably less cash and U.S. Treasury securities than do commercial banks. On the liability side, small time and saving deposits remain as the predominant source of funds for savings associations, with some reliance on FHLB borrowing. The inability to nurture relationships with the capital markets also creates potential liquidity risk for the savings association industry.The acronym QTL stands for Qualified Thrift Lender. The QTL test refers to a minimum amount of mortgage-related assets that a savings association must hold. The amount currently is 65 percent of total assets.18. How do savings banks differ from savings and loan associations? Differentiate in terms ofrisk, operating performance, balance sheet structure, and regulatory responsibility.The asset structure of savings banks is similar to the asset structure of savings associations with the exception that savings banks are allowed to diversify by holding a larger proportion of corporate stocks and bonds. Savings banks rely more heavily on deposits and thus have a lower level of borrowed funds. The banks are regulated at both the state and federal level, with deposits insured by t he FDIC’s BIF.19. How did the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of1989 and the Federal Deposit Insurance Corporation Improvement Act of 1991 reversesome of the key features of earlier legislation?FIRREA rescinded some of the expanded thrift lending powers of the DIDMCA of 1980 and the Garn-St Germain Act of 1982 by instituting the qualified thrift lender (QTL) test that requires that all thrifts must hold portfolios that are comprised primarily of mortgages or mortgage products such as mortgage-backed securities. The act also required thrifts to divest their portfolios of junk bonds by 1994, and it replaced the FSLIC with a new thrift deposit insurance fund, the Savings Association Insurance Fund, which was managed by the FDIC.The FDICA of 1991 amended the DIDMCA of 1980 by introducing risk-based deposit insurance premiums in 1993 to reduce excess risk-taking. FDICA also provided for the implementation of a policy of prompt corrective actions (PCA) that allows regulators to close banks more quickly in cases where insolvency is imminent. Thus the ill-advised policy of regulatory forbearance should be curbed. Finally, the act amended the International Banking Act of 1978 by expanding the regulatory oversight powers over foreign banks.20. What is the “common bond” membership qualification under which credit unions havebeen formed and operated? How does this qualification affect the operational objective ofa credit union?The common bond policy allows any one who meets a specific membership requirement to become a member of the credit union. The requirement normally is tied to a place of employment. Because the common bond policy has been loosely interpreted, implementation has allowed credit union membership and assets to grow at a rate that exceeds similar growth inthe commercial banking industry. Since credit unions are mutual organizations where the members are owners, employees essentially use saving deposits to make loans to other employees who need funds.21. What are the operating advantages of credit unions that have caused concern bycommercial bankers? What has been the response of the Credit Union NationalAssociation to the bank criticisms?Credit unions are tax-exempt organizations that often are provided office space by employers at no cost. As a result, because non-interest operating costs are very low, credit unions can lend money at lower rates and pay higher rates on savings deposits than can commercial banks. CUNA has responded that the cost to tax payers from the tax-exempt status is replaced by the additional social good created by the benefits to the members.22. How does the asset structure of credit unions compare with the asset structure ofcommercial banks and savings and loan associations? Refer to Tables 2-5, 2-9, and 2-12 to formulate your answer.The relative proportions of credit union assets are more similar to commercial banks than savings associations, with 20 percent in investment securities and 63 percent in loans. However, nonmortgage loans of credit unions are predominantly consumer loans. On the liability side of the balance sheet, credit unions differ from banks in that they have less reliance on large time deposits, and they differ from savings associations in that they have virtually no borrowings from any source. The primary sources of funds for credit unions are transaction and small time and savings accounts.23. Compare and contrast the performance of the U.S. depository institution industry withthose of Japan, China, and Germany.The entire Japanese financial system was under increasing pressure from the early 1990s as the economy suffered from real estate and other commercial industry pressures. The Japanese government has used several financial aid packages in attempts to avert a collapse of the Japanese financial system. Most attempts have not been successful.The deterioration in the banking industry in China in the early 2000s was caused by nonperforming loans and credits. The remedies include the opportunity for more foreign bank ownership in the Chinese banking environment primarily via larger ownership positions, less restrictive capital requirements for branches, and increased geographic presence.German banks also had difficulties in the early 2000s, but the problems were not universal. The large banks suffered from credit problems, but the small banks enjoyed high credit ratings and low cast of funds because of government guarantees on their borrowing. Thus while small banks benefited from growth in small business lending, the large banks became reliant on fee and trading income.。

Chapter FourThe Financial Services Industry: Securities Firms and Investment BanksChapter OutlineIntroductionSize, Structure, and Composition of the IndustryBalance Sheet and Recent Trends∙Recent Trends∙Balance SheetRegulationGlobal IssuesSummarySolutions for End-of-Chapter Questions and Problems: Chapter Four1.Explain how securities firms differ from investment banks. In what ways are they financialintermediaries?Securities firms specialize primarily in the purchase, sale, and brokerage of securities, while investment banks primarily engage in originating, underwriting, and distributing issues of securities. In more recent years, investment banks have undertaken increased corporate finance activities such as advising on mergers, acquisitions, and corporate restructuring. In both cases, these firms act as financial intermediaries in that they bring together economic units who need money with those units who wish to invest money.2. In what ways have changes in the investment banking industry mirrored changes in thecommercial banking industry?First, both industries have seen a concentration of business among the larger firms. This concentration has occurred primarily through the merger and acquisition activities of several of the largest firms. Second, firms in both industries tend to be divided along product line services provided to customers. Some national full-line firms provide service to both retail customers, in the form of brokerage services, and corporate customers, in the form of new issue underwriting. Other national full-line firms specialize in corporate finance and security trading activities. Third, the remaining firms specialize in more limited activities such as discount brokerage, regional full service retail activities, etc. This business line division is not dissimilar to that of the banking industry with money center banks, regional banks, and community banks. Clearly product line overlap occurs between the different firm divisions in each industry.3. What are the different types of firms in the securities industry, and how does each typediffer from the others?The firms in the security industry vary by size and specialization. They include:a) National, full-line firms servicing both retail and corporate clients, such as MerrillLynch.b) National firms specializing in corporate finance and trading, such as Goldman Sachs,Salomon Brothers and Morgan Stanley.c) Securities firms providing investment banking services that are subsidiaries ofcommercial banks. These subsidiaries continue to make inroads into the markets heldby traditional investment banks as the restrictions imposed by the Glass-Steagall Act,which separates commercial banking from investment banking, are slowly removed.d) Specialized discount brokers providing trading services such as the purchase and sale ofstocks, without offering any investment tips, advice or financial counseling.e) Regional securities firms that offer most of the services mentioned above but restricttheir activities to specific geographical locations.4. What are the key activity areas for securities firms? How does each activity area assist inthe generation of profits, and what are the major risks for each area?The seven major activity areas of security firms are:a) Investing: Securities firms act as agents for individuals with funds to invest byestablishing and managing mutual funds and by managing pension funds. The securities firms generate fees that affect directly the revenue stream of the co mpanies.b) Investment Banking: Investment banks specialize in underwriting and distributing bothdebt and equity issues in the corporate market. New issues can be placed eitherprivately or publicly and can represent either a first issued (IPO) or a secondary issue.Secondary issues of seasoned firms typically will generate lower fees than an IPO. In aprivate offering the investment bank receives a fee for acting as the agent in thetransaction. In best-efforts public offerings, the firm acts as the agent and receives a fee based on the success of the offering. The firm serves as a principal by actually takesownership of the securities in a firm commitment underwriting. Thus the risk of loss ishigher. Finally, the firm may perform similar functions in the government markets andthe asset-backed derivative markets. In all cases, the investment bank receives feesrelated to the difficulty and risk in placing the issue.c) Market Making: Security firms assist in the market-making function by acting asbrokers to assist customers in the purchase or sale of an asset. In this capacity the firmsare providing agency transactions for a fee. Security firms also take inventory positions in assets in an effort to profit on the price movements of the securities. These principalpositions can be profitable if prices increase, but they can also create downside risk involatile markets.d) Trading: Trading activities can be conducted on behalf of a customer or the firm. Theactivities usually involve position trading, pure arbitrage, risk arbitrage, and programtrading. Position trading involves the purchase of large blocks of stock to facilitate thesmooth functioning of the market. Pure arbitrage involves the purchase andsimultaneous sale of an asset in different markets because of different prices in the twomarkets. Risk arbitrage involves establishing positions prior to some anticipatedinformation release or event. Program trading involves positioning with the aid ofcomputers and futures contracts to benefit from small market movements. In each case, the potential risk involves the movements of the asset prices, and the benefits are aidedby the lack of most transaction costs and the immediate information that is available toinvestment banks.e) Cash Management: Cash management accounts are checking accounts that earn interestand may be covered by FDIC insurance. The accounts have been beneficial inproviding full-service financial products to customers, especially at the retail level.f) Mergers and Acquisitions: Most investment banks provide advice to corporate clientswho are involved in mergers and acquisitions. This activity has been extremelybeneficial from a fee standpoint during the 1990s.g) Back-Office Service Functions: Security firms offer clearing and settlement services,research and information services, and other brokerage services on a fee basis.5. What is the difference between an IPO and a secondary issue?An IPO is the first time issue of a company’s securities, whereas a secondary offering is a new issue of a security that is already offered.6. What is the difference between a private-placement and a public offering?A public offering represents the sale of a security to the public at large. A private placement involves the sale of securities to one or several large investors such as an insurance company or a pension fund.7. What are the risk implications to the investment banker from underwriting on a best-effortsbasis versus a firm commitment basis? If you operated a company issuing stock for the first time, which type of underwriting would you prefer? Why? What factors may cause you to choose the alternative?In a best efforts underwriting, the investment banker acts as an agent of the company issuing the security and receives a fee based on the number of securities sold. With a firm commitment underwriting, the investment banker purchases the securities from the company at a negotiated price and sells them to the investing public at what it hopes will be a higher price. Thus the investment banker has greater risk with the firm commitment underwriting, since the investment banker will absorb any adverse price movements in the security before the entire issue is sold. Factors causing preference to the issuing firm include general volatility in the market, stability and maturity of the financial health of the issuing firm, and the perceived appetite for new issues in the market place. The investment bank will also consider these factors when negotiating the fees and/or pricing spread in making its decision regarding the offering process.8. How do agency transactions differ from principal transactions for market makers?Agency transactions are done on behalf of a customer. Thus the investment banker is acting as a stockbroker, and the company earns a fee or commission. In a principal transaction, the investment bank is trading on its own account. In this case the profit is made from the difference in the price that the company pays for the security and the price at which it is sold. In the first case the company bears no risk, but in the second case the company is risking its own capital. 9. An investment banker agrees to underwrite a $500,000,000, ten-year, 8 percent semiannualbond issue for KDO Corporation on a firm commitment basis. The investment banker pays KDO on Thursday and plans to begin a public sale on Friday. What type of interest rate movement does the investment bank fear while holding these securities? If interest rates rise 0.05 percent, or 5 basis points, overnight, what will be the impact on the profits of the investment banker? What if the market interest rate falls 5 basis points?An increase in interest rates will cause the value of the bonds to fall. If rates increase 5 basis points over night, the bonds will lose $1,695,036.32 in value. The investment banker will absorb the decrease in market value, since the issuing firm already has received its payment for the bonds. If market rates decrease by 5 basis points, the investment banker will benefit by the $1,702,557.67 increase in market value of the bonds. These two changes in price can be found with the following two equations respectively:000,000,500$000,000,500$000,000,20$32.036,695,1$20%,025.420%,025.4-+=-====n i n i PV PVA000,000,500$000,000,500$000,000,20$67.557,702,1$20%,975.320%,975.3-+=====n i n i PV PVA10. An investment banker pays $23.50 per share for 4,000,000 shares of JCN Company. Itthen sells these shares to the public for $25 per share. How much money does JCN receive? What is the profit to the investment banker? What is the stock price of JCN?JCN receives $23.50 x 4,000,000 shares = $94,000,000. The profit to the investment bank is ($25.00 - $23.50) x 4,000,000 shares = $6,000,000. The stock price of JCN is $25.00 since that is what the public must pay. From the perspective of JCN, the $6,000,000 represents the commission that it must pay to issue the stock.11. XYZ, Inc. has issued 10,000,000 new shares. An investment banker agrees to underwritethese shares on a best-efforts basis. The investment banker is able to sell 8,400,000 shares for $27 per share, and it charges XYZ $0.675 per share sold. How much money does XYZ receive? What is the profit to the investment banker? What is the stock price of XYZ?XYZ receives $226,800,000, the investment banker’s profit is $5,670,000, and the stock price is $27 per share since that is what the public pays. The net proceeds after commission to XYZ is $221,130,000.12. One of the major activity areas of securities firms is trading.a. What is the difference between pure arbitrage and risk arbitrage?Pure arbitrage involves the buying and selling of similar assets trading at different prices.Pure arbitrage has a lock or assurance of the profits that are available in the market. This profit position usually occurs with no equity investment, the use of only very short-term borrowed funds, and reduced transaction costs for securities firms.Risk arbitrage also is based on the principle of buying low and selling high a similar asset(or an asset with the same payoff). The difference between risk arbitrage and pure arbitrage is that the prices are not locked in, leaving open a certain speculative component that could result in real economic losses.b. What is the difference between position trading and program trading?Position trading involves the purchase of large blocks of stock for the purpose of providing consistency and continuity to the secondary markets. In most cases, these trades are held in inventory for a period of time, either after or prior to the trade. Program trading involves the ability to buy or sell entire portfolios of stocks quickly and often times simultaneously in an effort to capture differences between the actual futures price of a stock index and the theoretically correct price. The program trading process is useful when conducting index arbitrage. If the futures price were too high, an arbitrager would short the futures contract and buy the stocks in the underlying index. The program trading process in effect is acoordinated trading program that allows for this arbitrage process to be accomplished. 13. If an investor observes that the price of a stock trading in one exchange is different fromthe price in another exchange, what form of arbitrage is applicable, and how can theinvestor participate in that arbitrage?The investor should short sell the more expensive asset and use the proceeds to purchase the cheaper stock to lock in a given spread. This transaction would be an example of a pure arbitrage rather than risk arbitrage. The actual spread realized would be affected by theamount of transaction costs involved in executing the transactions.14. An investor notices that an ounce of gold is priced at $318 in London and $325 in NewYork.a. What action could the investor take to try to profit from the price discrepancy?An investor would try to buy gold in London at $318 and sell it in New York for $325yielding a riskless profit of $7 per ounce.b. Under which of the four trading activities would this action be classified?This transaction is an example of pure arbitrage.c. If the investor is correct in identifying the discrepancy, what pattern should the twoprices take in the short-term future?The prices of gold in the two separate markets should converge or move toward each other.In all likelihood the prices will not become exactly the same. It does not matter whichprice moves most, since the investor should unwind both positions when the prices arenearly equal.d. What may be some impediments to the success of the transaction?The success or profitability of this arbitrage opportunity will depend on transaction costs and the speed at which the investor can execute the transactions. If the price disparity is sufficiently large, other investors will seize the opportunity to attempt to achieve the same arbitrage results, thus causing the prices to converge quickly.15. What three factors are given credit for the steady decline in brokerage commissions as apercent of total revenues over the period beginning in 1977 and ending in 1991?The reasons often offered for the decline in brokerage commissions over the last twenty years are the abolition of fixed commissions by the SEC in 1975, the resulting competition among firms, and the stock market crash of 1987. The stock market crash caused a decline in the amount of equity and debt underwriting which subsequently had a negative effect on income. Although the equity markets have rebounded during the 1990s, the continued growth of discount brokerage firms by depository institutions and the advances of electronic trade will likely affect commissions for an extended period of time.16. What factors are given credit for the resurgence of profitability in the securities industrybeginning in 1991? Are firms that trade in fixed-income securities more or less likely to have volatile profits? Why?Profits for securities firms increased beginning in 1991 because of (a) the resurgence of stock markets and trading volume, (b) increases in the profits of fixed-income trading, and (c) increased growth in the underwriting of new issues, especially corporate debt issues.However, profits from trading in fixed-income instruments are volatile, especially if interest rate changes are rather common. Hence, even though profits in fixed-income trading were up in 1993, they declined in 1994 because interest rates increased quite suddenly. Many firms with exposed interest rate instruments reported large losses.17. Using Table 4-6, which type of security accounts for most underwriting in the UnitedStates? Which is likely to be more costly to underwrite: corporate debt or equity? Why?According to Table 4-6, debt issues were greater than equity issues by a ratio of roughly four to one in the middle 1980s and a ratio of sixteen to one in the early 2000s. Debt is less risky than equity, so there is less risk of an adverse price movement with debt compared to equity. Further, debt is more likely to be bought in larger blocks by fewer investors, a transaction characteristic that makes the selling process less costly.18. How do the operating activities, and thus the balance sheet structures, of securities firmsdiffer from the operating activities of depository institutions such as commercial banks and insurance firms? How are the balance sheet structures of securities firms similar to other financial intermediaries?The short-term nature of many of the assets in the portfolios of securities firms demonstrates that an important activity is trading/brokerage. As a broker, the securities firm receives a commission for handling the trade but does not take either an asset or liability position. Thus, many of the assets appearing on the balance sheets of securities firms are cash-like money market instruments, not capital market positions. In the case of commercial banks, assets tend to be medium term from the lending position of the banks. Insurance company assets tend to be invested reserves caused by the longer-term liabilities on the balance sheet.A major similarity between securities firms and all other types of FIs is a high degree of financial leverage. That is, all of these firms use high levels of debt that is used to finance an asset portfolio consisting primarily of financial securities. A difference in the funding is that securities firms tend to use liabilities that are extremely short term (see the balance sheet in Table 4-7). Nearly 33 percent of the total liability financing is payables incurred in the transaction process. In contrast, depository institutions have fixed-term time and savings deposit liabilities and life insurance companies have long-term policy reserves.19. Based on the data in Table 4-7, what were the second largest single asset and the largestsingle liability of securities firms in 2003? Are these asset and liability categories re lated?Exactly how does a repurchase agreement work?The second largest asset category was a reverse repurchase agreement, and the largest liability was a repurchase agreement. When a financial institution needs to borrow funds, one source is to sell an asset. In the case of financial assets, the institution often finds it more beneficial to sell the asset under an agreement to repurchase the asset at a later time. In this case, the current money market rate of interest is built into the agreed upon repurchase price, and the asset literally does not leave the balance sheet of the borrowing institution. The borrowing institution receives cash and a liability representing the agreement to repurchase. The lending institution, which has excess funds, replaces cash as an asset with the reverse repurchase agreement.20. How did the National Securities Markets Improvement Act of 1996 (NSMIA) change theregulatory structure of the securities industry?The NSMIA removed most of the regulatory burden that had been imposed by individual states, effectively giving the SEC exclusive regulatory jurisdiction over securities firms.21. Identify the major regulatory organizations that are involved with the daily operations ofthe investment securities industry, and explain their role in providing smoothly operating markets.The New York Stock Exchange and the National Association of Securities Dealers monitor trading abuses and the capital solvency of securities firms. The SEC provides governance in the area of underwriting and trading activities of securities firms, and the Securities Investory Protection Corporation protects investors against losses up to $500,000 when those losses have been caused by the failure of securities firms.22. What are the three requirements of the U.S.A. Patriot Act that financial service firms mustimplement after October 1, 2003?FIs must (1) verify the identity of people opening new accounts; (2) maintain records of the information used to verify the identity; and (3) determine whether the person opening an account is on a suspected terrorist list.。

Chapter Twenty FourFutures and ForwardsChapter Outline IntroductionForward and Futures Contracts•Spot Contracts•Forward Contracts•Futures ContractsForward Contracts and Hedging Interest Rate Risk Hedging Interest Rate Risk with Futures Contracts •Microhedging•Macrohedging•Routine Hedging versus Selective Hedging•Macrohedging with Futures•The Problem of Basis RiskHedging Foreign Exchange Risk•Forwards•Futures•Estimating the Hedge RatioHedging Credit Risk with Futures and Forwards •Credit Forward Contracts and Credit Risk Hedging•Futures Contracts and Catastrophe Risk•Futures and Forward Policies of Regulators SummarySolutions for End-of-Chapter Questions and Problems: Chapter Twenty Four1.What are derivative contracts? What is the value of derivative contracts to the managers ofFIs? Which type of derivative contracts had the highest volume among all U.S. banks as of September 2003?Derivatives are financial assets whose value is determined by the value of some underlying asset. As such, derivative contracts are instruments that provide the opportunity to take some action at a later date based on an agreement to do so at the current time. Although the contracts differ, the price, timing, and extent of the later actions usually are agreed upon at the time the contracts are arranged. Normally the contracts depend on the activity of some underlying asset.The contracts have value to the managers of FIs because of their aid in managing the various types of risk prevalent in the institutions. As of September 2003 the largest category of derivatives in use by commercial banks was swaps, which was followed by options, and then by futures and forwards.2.What has been the regulatory result of some of the misuses by FIs of derivative products?In many cases the accounting requirements for the use of derivative contracts have been tightened. Specifically, FASB now requires that all derivatives be marked to market and that all gains and losses immediately be identified on financial statements.3.What are some of the major differences between futures and forward contracts? How dothese contracts differ from a spot contract?A spot contract is an exchange of cash, or immediate payment, for financial assets, or any other type of assets, at the time the agreement to transact business is made, i.e., at time 0. Futures and forward contracts both are agreements between a buyer and a seller at time 0 to exchange the asset for cash (or some other type of payment) at a later time in the future. The specific grade and quantity of asset is identified, as is the specific price and time of transaction.One of the differences between futures and forward contracts is the uniqueness of forward contracts because they are negotiated between two parties. On the other hand, futures contracts are standardized because they are offered by and traded on an exchange. Futures contracts are marked to market daily by the exchange, and the exchange guarantees the performance of the contract to both parties. Thus the risk of default by the either party is minimized from the viewpoint of the other party. No such guarantee exists for a forward contract. Finally, delivery of the asset almost always occurs for forward contracts, but seldom occurs for futures contracts. Instead, an offsetting or reverse transaction occurs through the exchange prior to the maturity of the contract.4.What is a naive hedge? How does a naïve hedge protect the FI from risk?A hedge involves protecting the price of or return on an asset from adverse changes in price or return in the market. A naive hedge usually involves the use of a derivative instrument that hasthe same underlying asset as the asset being hedged. Thus if a change in the price of the cash asset results in a gain, the same change in market value will cause the derivative instrument to generate a loss that will offset the gain in the cash asset.5.An FI holds a 15-year, par value, $10,000,000 bond that is priced at 104 with a yield tomaturity of 7 percent. The bond has a duration of eight years, and the FI plans to sell it after two months. The FI’s market analyst predicts that interest rates will be 8 percent at the time of the desired sale. Because most other analysts are predicting no change in rates, two-month forward contracts for 15-year bonds are available at 104. The FI would like to hedge against the expected change in interest rates with an appropriate position in aforward contract. What will be this position? Show that if rates rise 1 percent as forecast, the hedge will protect the FI from loss.The expected change in the spot position is –8 x $10,400,000 x (1/1.07) = -$777,570. This would mean a price change from 104 to 96.2243 per $100 face value of bonds. By entering into a two-month forward contract to sell $10,000,000 of 15-year bonds at 104, the FI will have hedged its spot position. If rates rise by 1 percent, and the bond value falls by $777,570, the FI can close out its forward position by receiving 104 for bonds that are now worth 96.2243 per $100 face value. The profit on the forward position will offset the loss in the spot market.The actual transaction to close the forward contract may involve buying the bonds in the market at 96.2243 and selling the bonds to the counterparty at 104 under the terms of the forward contract. Note that if a futures contract were used, closing the hedge position would involve buying a futures contract through the exchange with the same maturity date and dollar amount as the initial opening hedge contract.6.Contrast the position of being short with that of being long in futures contracts.To be short in futures contracts means that you have agreed to sell the underlying asset at a future time, while being long means that you have agreed to buy the asset at a later time. In each case, the price and the time of the future transaction are agreed upon when the contracts are initially negotiated.7. Suppose an FI purchases a Treasury bond futures contract at 95.a. What is the FI’s obligation at the time the futures contra ct was purchased?You are obligated to take delivery of a $100,000 face value 20-year Treasury bond at aprice of $95,000 at some predetermined later date.b. If an FI purchases this contract, in what kind of hedge is it engaged?This is a long hedge undertaken to protect the FI from falling interest rates.c. Assume that the Treasury bond futures price falls to 94. What is the loss or gain?The FI will lose $1,000 since the FI must pay $95,000 for bonds that have a market value of only $94,000.d. Assume that the Treasury bond futures price rises to 97. Mark-to-market the position.In this case the FI gains $2,000 since the FI pays only $95,000 for bonds that have a market value of $97,000.8. Long Bank has assets that consist mostly of 30-year mortgages and liabilities that are short-term time and demand deposits. Will an interest rate futures contract the bank buys add to or subtract from the bank’s risk?The purchase of an interest rate futures contract will add to the risk of the bank. If rates increase in the market, the value of the bank’s assets will decrease more than the value of the liabilities. In addition, the value of the futures contract also will decrease. Thus the bank will suffer decreases in value both on and off the balance sheet. If the bank had sold the futures contract, the increase in rates would have allowed the futures position to reflect a gain that would offset (at least partially) the losses in value on the balance sheet.9.In each of the following cases, indicate whether it would be appropriate for an FI to buy orsell a forward contract to hedge the appropriate risk.a. A commercial bank plans to issue CDs in three months.The bank should sell a forward contract to protect against an increase in interest rates.b. An insurance company plans to buy bonds in two months.The insurance company should buy a forward contract to protect against a decrease ininterest rates.c. A thrift is going to sell Treasury securities next month.The thrift should sell a forward contract to protect against an increase in interest rates.d. A U.S. bank lends to a French company; the loan is payable in francs.The bank should sell francs forward to protect against a decrease in the value of the franc, or an increase in the value of the dollar.e. A finance company has assets with a duration of six years and liabilities with a durationof 13 years.The finance company should buy a forward contract to protect against decreasing interest rates that would cause the value of liabilities to increase more than the value of assets, thus causing a decrease in equity value.10. The duration of a 20-year, 8 percent coupon Treasury bond selling at par is 10.292 years.The bond’s interest is paid semiannually, and the bond qu alifies for delivery against the Treasury bond futures contract.a. What is the modified duration of this bond?The modified duration is 10.292/1.04 = 9.896 years.b. What is the impact on the Treasury bond price if market interest rates increase 50 bps?∆P = -MD(∆R)$100,000 = -9.896 x 0.005 x $100,000 = -$4,948.08.c. If you sold a Treasury bond futures contract at 95 and interest rates rose 50 basis points,what would be the change in the value of your futures position?=P-9.(0.005)9P∆∆==-MDR(-000700.70,,4$958)6$d. If you purchased the bond at par and sold the futures contract, what would be the netvalue of your hedge after the increase in interest rates?Decrease in market value of the bond purchase -$4,948.08Gain in value from the sale of futures contract $4,700.70Net gain or loss from hedge -$247.3811. What are the differences between a microhedge and a macrohedge for a FI? Why is itgenerally more efficient for FIs to employ a macrohedge than a series of microhedges?A microhedge uses a derivative contract such as a forward or futures contract to hedge the risk exposure of a specific transaction, while a macrohedge is an attempt to hedge the duration gap of the entire balance sheet. FIs that attempt to manage their risk exposure by hedging each balance sheet position will find that hedging is excessively costly, because the use of a series of microhedges ignores the FI’s internal hedges that are already on the balance sheet. That is, if a long-term fixed-rate asset position is exposed to interest rate increases, there may be a matching long-term fixed-rate liability position that also is exposed to interest rate decreases. Putting on two microhedges to reduce the risk exposures of each of these positions fails to recognize that the FI has already hedged much of its risk by taking matched balance sheet positions. The efficiency of the macrohedge is that it focuses only on those mismatched positions that are candidates for off-balance-sheet hedging activities.12. What are the reasons an FI may choose to hedge selectively its portfolio?Selective hedging involves an explicit attempt to not minimize the risk on the balance sheet. An FI may choose to hedge selectively in an attempt to improve profit performance by accepting some risk on the balance she et, or to arbitrage profits between a spot asset’s price movements and the price movements of the futures price. This latter situation often occurs because of changes in basis caused in part by cross-hedging.13. Hedge Row Bank has the following balance sheet (in millions):Assets $150 Liabilities $135Equity $15Total $150 Total $150The duration of the assets is six years, and the duration of the liabilities is four years. The bank is expecting interest rates to fall from 10 percent to 9 percent over the next year.a. What is the duration gap for Hedge Row Bank?DGAP = D A– k x D L = 6 – (0.9)(4) = 6 – 3.6 = 2.4 yearsb. What is the expected change in net worth for Hedge Row Bank if the forecast isaccurate?Expected ∆E = -DGAP[∆R/(1 + R)]A = -2.4(-0.01/1.10)$150 = $3.272.c. What will be the effect on net worth if interest rates increase 100 basis points?Expected ∆E = -DGAP[∆R/(1 + R)]A = -2.4(0.01/1.10)$150 = -$3.272.d. If the existing interest rate on the liabilities is 6 percent, what will be the effect on networth of a 1 percent increase in interest rates?Solving for the impact on the change in equity under this assumption involves finding the impact of the change in interest rates on each side of the balance sheet, and thendetermining the difference in these values. The analysis is based on the original equation:Expected ∆E = ∆A - ∆L∆A = -D A[∆R A/(1 + R A)]A = -6[0.01/1.10]$150 = -$8.1818and ∆L = -D L[∆R L/(1 + R L)]L = -4[0.01/1.06]$135 = -$5.0943Therefore, ∆E = ∆A - ∆L = -$8.1818 – (-$5.0943) = - $3.0875.14. For a given change in interest rates, why is the sensitivity of the price of a Treasury bondfutures contract greater than the sensitivity of the price of a Treasury bill futures contract?The price sensitivity of a futures contract depends on the duration of the asset underlying the contract. In the case of a T-bill contract, the duration is 0.25 years. In the case of a T-bond contract, the duration is much longer.15. What is the meaning of the Treasury bond futures price quote 101-13?A bid-ask quote of 101 - 13 = $101 13/32 per $100 face value. Since the Treasury bond futures contracts are for $100,000 face value, the quoted price is $101,406.25.16. What is meant by fully hedging the balance sheet of an FI?Fully hedging the balance sheet involves using a sufficient number of futures contracts so that any gain (or loss) of net worth on the balance sheet is just offset by the loss (or gain) from off-balance-sheet use of futures for given changes in interest rates.17. Tree Row Bank has assets of $150 million, liabilities of $135 million, and equity of $15million. The asset duration is six years, and the duration of the liabilities is four years. Market interest rates are 10 percent. Tree Row Bank wishes to hedge the balance sheet with Treasury bond futures contracts, which currently have a price quote of $95 per $100 face value for the benchmark 20-year, 8 percent coupon bond underlying the contract.a. Should the bank go short or long on the futures contracts to establish the correctmacrohedge?The bank should sell futures contracts since an increase in interest rates would cause thevalue of the equity and the futures contracts to decrease. But the bank could buy back the futures contracts to realize a gain to offset the decreased value of the equity.b. How many contracts are necessary to fully hedge the bank?If the market value of the underlying 20-year, 8 percent benchmark bond is $95 per $100,the market rate is 8.525 percent (using a calculator) and the duration is 10.05 as shown on the last page of this chapter solutions. The number of contracts to hedge the bank is:contracts x m P x D A kD D N F F L A F 06.377750,954$000,000,360$000,95$05.10150)$4)9.0(6()(==-=-=c. Verify that the change in the futures position will offset the change in the cash balancesheet position for a change in market interest rates of plus 100 basis points and minus 50 basis points.For an increase in rates of 100 basis points, the change in the cash balance sheet position is:Expected ∆E = -DGAP[∆R/(1 + R)]A = -2.4(0.01/1.10)$150 = -$3,272,727.27. Thechange in bond value = -10.05(0.01/1.08525)$95,000 = -$8,797.51, and the change in 377 contracts is -$8,797.51 x 377 = -$3,316,662.06. Since the futures contracts were sold, they could be repurchased for a gain of $3,316,662.06. The difference between the two values is a net gain of $43,934.79.For a decrease in rates of 50 basis points, the change in the cash balance sheet position is: Expected ∆E = -DGAP[∆R/(1 + R)]A = -2.4(-0.005/1.10)$150 = $1,636,363.64. Thechange in each bond value = -10.05(-0.005/1.08525)$95,000 = $4,398.76 and the change in 377 contracts is $4,398.76 x 377 = $1,658,331.03. Since the futures contracts were sold, they could be repurchased for a loss of $1,658,331.03. The difference between the two values is a loss of $21,967.39.d. If the bank had hedged with Treasury bill futures contracts that had a market value of $98 per $100 of face value, how many futures contracts would have been necessary to hedge fully the balance sheet?If Treasury bill futures contracts are used, the duration of the underlying asset is 0.25 years, the face value of the contract is $1,000,000, and the number of contracts necessary to hedge the bank is: contracts x m P x D A kD D N F F L A F 39.469,1000,245$000,000,360$000,980$25.0150)$4)9.0(6()(==-=-=e. What additional issues should be considered by the bank in choosing between T-bonds or T-bills futures contracts?In cases where a large number of Treasury bonds are necessary to hedge the balance sheetwith a macrohedge, the FI may need to consider whether a sufficient number of deliverable Treasury bonds are available. Although the number of Treasury bill contracts necessary to hedge the balance sheet is greater than the number of Treasury bonds, the bill market is much deeper and the availability of sufficient deliverable securities should be less of a problem.18. Reconsider Tree Row Bank in problem 17 but assume that the cost rate on the liabilities is6 percent.a. How many contracts are necessary to fully hedge the bank?In this case, the bank faces different average interest rates on both sides of the balancesheet, and further, the yield on the bonds underlying the futures contracts is a third interest rate. Thus the hedge also has the effects of basis risk. Determining the number of futures contracts necessary to hedge this balance sheet must consider separately the effect of a change in rates on each side of the balance sheet, and then consider the combined effect on equity. Estimating the number of contracts can be determined with the modified general equation shown on the next page.b. Verify that the change in the futures position will offset the change in the cash balancesheet position for a change in market interest rates of plus 100 basis points and minus 50 basis points.For an increase in rates of 100 basis points, ∆E = 0.01[(4/1.06)$135 m – (6/1.10)$150 m] =-$3,087,478.56. The change in the bond value is –10.05(.01/1.08525)$95,000 = -$8,797.51, and the change for 351 contracts = -$3,087,926.74. Since the futures contracts were sold, they could be repurchased for a gain of $3,087,926.74. The difference between the two values is a net gain of $448.18.For a decrease in rates of 50 basis points, ∆E = -0.005[(4/1.06)$135 m – (6/1.10)$150 m] =$1,543,739.28. The change in the bond value is –10.05(-.005/1.08525)$95,000 = $4,398.75,and the change for 351 contracts = $1,543,963.01. Since the futures contracts were sold, they could be repurchased for a loss of $1,543,963.01. The difference between the two values is a net loss of $223.73.Modified Equation Model for part (a): contractsor MD P LMD A MD MD P A MD L MD N A MD L MD MD P N A MD L MD R P N D A R R D L R R D L R R D A R R D R R P N D LA F EF FF L A F F A L F A L F F F A L F F F F A A L L L L A A F F F F 35195.35021.751,879$92.855,747,308$21.751,879$26.962,433,509$18.818,181,818$08525.105.10*000,95000,000,135*06.14000,000,150*10.16******)**(*1*)**(*)1()*(**)1(**)1(*)1(**)1(*)1(*)*(==-=-=-=+-=--=-+=-∆+-∆++=⎥⎦⎤⎢⎣⎡+∆--+∆-=+∆-∆-∆=∆∆=∆c. If the bank had hedged with Treasury bill futures contracts that had a market value of $98 per $100 of face value, how many futures contracts would have been necessary to fully hedge the balance sheet?A market value of $98 per $100 of face value implies a discount rate of 8 percent on theunderlying T-bills. Therefore the equation developed above in part (a) to determine thenumber of contracts necessary to hedge the bank can be adjusted as follows for the use of T-bill contracts:contractsor MD P L MD A MD N FF L A F 361,101.361,185.851,226$92.855,747,308$85.851,226$26.962,433,509$18.818,181,818$08.125.0*000,980000,000,135*06.14000,000,150*10.16***==-=-=-=19. What is basis risk? What are the sources of basis risk?Basis risk is the lack of perfect correlation between changes in the yields of the on-balance-sheet assets and the changes in interest rates on the futures contracts. The reason for this difference is that the cash assets and the futures contracts are traded in different markets.20. How would your answers for part (b) in problem 17 change if the relationship of the pricesensitivity of futures contracts to the price sensitivity of underlying bonds were br = 0.92?The number of contracts necessary to hedge the bank would increase to 410 contracts. This can be found by dividing $360,000,000 by ($954,750 * 0.92).21. A mutual fund plans to purchase $500,000 of 30-year Treasury bonds in four months.These bonds have a duration of 12 years and are priced at 96-08\32. The mutual fund is concerned about interest rates changing over the next four months and is considering a hedge with T-bond futures contracts that mature in six months. The T-bond futurescontracts are selling for 98-24\32 and have a duration of 8.5 years.a. If interest rate changes in the spot market exactly match those in the futures market,what type of futures position should the mutual fund create?The mutual fund needs to enter into a contract to buy Treasury bonds at 98-24 in fourmonths. The fund manager fears a fall in interest rates and by buying a futures contract, the profit from a fall in rates will offset a loss in the spot market from having to pay more for the securities.b. How many contracts should be used?The number of contracts can be determined by using the following equation:contracts P D P D N F F F 88.6750,98$*5.8250,481$*12**===Rounding this up to the nearest whole number is 7.0 contracts.c. If the implied rate on the deliverable bond in the futures market moves 12 percent more than the change in the discounted spot rate, how many futures contracts should be used to hedge the portfolio? In this case the value of br = 1.12, and the number of contracts is 6.88/1.12 = 6.14 contracts. This may be adjusted downward to 6 contracts.d. What causes futures contracts to have different price sensitivity than the assets in the spot markets? One reason for the difference in price sensitivity is that the futures contracts and the cash assets are traded in different markets.22. Consider the following balance sheet (in millions) for an FI:Assets LiabilitiesDuration = 10 years $950 Duration = 2 years $860Equity $90 a. What is the FI's duration gap?The duration gap is 10 - (860/950)(2) = 8.19 years. b. What is the FI's interest rate risk exposure?The FI is exposed to interest rate increases. The market value of equity will decrease ifinterest rates increase.c. How can the FI use futures and forward contracts to put on a macrohedge? The FI can hedge its interest rate risk by selling future or forward contracts.d. What is the impact on the FI's equity value if the relative change in interest rates is an increase of 1 percent? That is, ∆R/(1+R) = 0.01. ∆E . - 8.19(950,000)(.01) . -$77,805e. Suppose that the FI in part (c) macrohedges using Treasury bond futures that are currently priced at 96. What is the impact on the FI's futures position if the relative change in all interest rates is an increase of 1 percent? That is, ∆R/(1+R) = 0.01. Assume that the deliverable Treasury bond has a duration of nine years.∆E . - 9(96,000)(.01) . -$8,640 per futures contract. Since the macrohedge is a short hedge, this will be a profit of $8,640 per contract.f. If the FI wanted a perfect macrohedge, how many Treasury bond futures contracts does it need?To perfectly hedge, the Treasury bond futures position should yield a profit equal to the loss in equity value (for any given increase in interest rates). Thus, the number of futures contracts must be sufficient to offset the $77,805 loss in equity value. This will necessitate the sale of $77,805/8,640 = 9.005 contracts. Rounding down, to construct a perfect macrohedge requires the FI to sell 9 Treasury bond futures contracts.23. Refer again to problem 22. How does consideration of basis risk change your answers toproblem 22?In problem 22, we assumed that basis risk did not exist. That allowed us to assert that the percentage change in interest rates (∆R/(1+R)) would be the same for both the futures and underlying cash positions. If there is basis risk, then (∆R/(1+R)) is not necessarily equal to(∆R f /(1+R f )). If the FI wants to fully hedge its interest rate risk exposure in an environment with basis risk, the required number of futures contracts must reflect the disparity in volatilities between the futures and cash markets. a. Compute the number of futures contracts required to construct a perfect macrohedge if [∆R f /(1+R f ) ÷ ∆R/(1+R)] = br = 0.90If br = 0.9, then: contracts 10 = )(.90)(9)(96,00000)8.19(950,0= b P D A )D k - D ( = N FF L A f b. Explain what is meant by br = 0.90. br = 0.90 means that the implied rate on the deliverable bond in the futures market movesby 0.9 percent for every 1 percent change in discounted spot rates (∆R/(1+R)). c. If br = 0.90, what information does this provide on the number of futures contractsneeded to construct a perfect macrohedge?If br = 0.9 then the percentage change in cash market rates exceeds the percentage changein futures market rates. Since futures prices are less sensitive to interest rate shocks than cash prices, the FI must use more futures contracts to generate sufficient cash flows to offset the cash flows on its balance sheet position.24. An FI is planning to hedge its $100 million bond instruments with a cross hedge usingEuromark interest rate futures. How would the FI estimatebr = [∆R f /(1+R f ) ÷ ∆R/(1+R)]to determine the exact number of Euromark futures contracts to hedge?One way of estimating br (or the ratio of changes in yields of futures to the underlying rates) involves regressing the changes in bond yields against Euromark futures. The estimated slope of the line br provides the exact number of contracts to hedge. Note that historical estimation of the basis is not a guarantee that it will remain the same in the future.25. Village Bank has $240 million of assets with a duration of 14 years and liabilities worth$210 million with a duration of 4 years. In the interest of hedging interest rate risk, Village Bank is contemplating a macrohedge with interest rate futures contracts now selling for 102-21\32. If the spot and futures interest rates move together, how many futures contracts must Village Bank sell to fully hedge the balance sheet?contracts or x m P x D A kD D N F F L A F 27375.272656,102$9240)$4)875..0(14()(=-=-=26. Assume an FI has assets of $250 million and liabilities of $200 million. The duration of theassets is six years, and the duration of the liabilities is three years. The price of the futures contract is $115,000, and its duration is 5.5 years. a. What number of futures contracts is needed to construct a perfect hedge if br = 1.10?contracts b) P D ()A D k - D (= N f f L A f 57.293,1750,695$000,000,900$10.1*000,115$*5.5000,000,250)]$8.0*3(6[==-= b. If ∆R f /(1+R f ) = 0.0990, what is the expected ∆R/(1+R)?∆R/(1 + R) = (∆R f /(1+R f ))/br = 0.0990/1.10 = 0.0927. Suppose an FI purchases a $1 million 91-day Eurodollar futures contract trading at 98.50. a. If the contract is reversed two days later by purchasing the contract at 98.60, what is thenet profit?Profit = 0.9860 - 0.9850 x 91/360 x 1,000,000 = $252.78 b. What is the loss or gain if the price at reversal is 98.40? Loss = 0.9840 - 0.9850 x 91/360 x 1,000,000 = -$252.7828. What factors may make the use of swaps or forward contracts preferable to the use offutures contracts for the purpose of hedging long-term foreign exchange positions?A primary factor is that futures contracts may not be available on the day the hedge is desired, or the desired maturity may not be available. If the maturity of the available contract is less than the desired hedge maturity, the FI will incur additional transaction costs from rolling the futures。

金融机构管理课后答案金融机构管理课后答案【篇一：金融机构管理习题答案020】txt>capital adequacychapter outlineintroductioncapital and insolvency riskcapitalthe market value of capitalthe book value of capitalthe discrepancy between the market and book values of equityarguments against market value accountingcapital adequacy in the commercial banking and thrift industryactual capital rulesthe capital-assets ratio (or leverage ratio)risk-based capital ratioscalculating risk-based capital ratioscapital requirements for other fissecurities firmslife insuranceproperty-casualty insurancesummaryappendix 20a: internal ratings based approach to measuring credit risk-adjusted assetssolutions for end-of-chapter questions and problems: chapter twenty1. identify and briefly discuss the importance of the fivefunctions of an fi’s capital?capital serves as a primary cushion against operating losses and unexpected losses in the value of assets (such as the failure of a loan). fis need to hold enough capital to provide confidence to uninsured creditors that they can withstand reasonable shocks to the value of their assets. in addition, the fdic, which guarantees deposits, is concerned that sufficient capital is held so that their funds are protected, because they are responsible for paying insured depositors in the event of a failure. this protection of the fdic funds includes the protectionof the fi owners against increases in insurance premiums. finally, capital also serves as a source of financing to purchase and invest in assets.financial institution?regulators are concerned with the levels of capital held by an fi because of its special role in society. a failure of an fi can have severe repercussions to the local or national economy unlike non-financial institutions. such externalities impose a burden on regulators to ensure that these failures do not impose major negative externalities on the economy. higher capital levels will reduce the probability of such failures.3. what are the differences between the economic definitionof capital and the book valuedefinition of capital?the book value definition of capital is the value of assets minus liabilities as found on the balance sheet. this amount often is referred to as accounting net worth. the economic definition of capital is the difference between the market value of assets and the market value of liabilities.a. how does economic value accounting recognize theadverse effects of credit andinterest rate risk?the loss in value caused by credit risk and interest rate risk is borne first by the equityholders, and then by the liability holders. in market value accounting, the adjustments to equity value are made simultaneously as the losses due to these risk elements occur. thus economic insolvency may be revealed before accounting value insolvency occurs.b. how does book value accounting recognize the adverse effects of credit and interestrate risk?because book value accounting recognizes the value of assets and liabilities at the timethey were placed on the books or incurred by the firm, losses are not recognized until the assets are sold or regulatory requirements force the firm to make balance sheet accounting adjustments. in the case of credit risk, these adjustments usually occur after all attempts tocollect or restructure the loans have occurred. in the case of interest rate risk, the change in interest rates will not affect the recognized accounting value of the assets or the liabilities.4. a financial intermediary has the following balance sheet (in millions) with all assets and liabilities in market values:6 percent semiannual 4-year 5 percent 2-year subordinated debt treasury notes (par value $12) $10(par value $25) $207 percent annual 3-yearaa-rated bonds (par=$15) $159 percent annual 5-yearbbb rated bonds (par=$15) equity capital total assets totalliabilities equitya. under fasb statement no. 115, what would be the effect on equity capital (net worth)if interest rates increase by 30 basis points? the t-notes are held for trading purposes, the rest are all classified as held to maturity.only assets that are classified for trading purposes or available-for-sale are to be reported atmarket values. those classified as held-to-maturity are reported at book values. thechange in value of the t-notes for a 30 basis points change in interest rates is:$10 = pvan=8,k=?($0.36) + pvn=8,k=?($12) ? k = 5.6465 x 2 = 11.293%if k =11.293% + 0.30% =11.593/2 = 5.7965%, the value of the notes will decline to: pvan=8,k=5.7965($0.36) +pvn=3,k=5.7965($12) = $9.8992. and the change in value is $9.8992 -$10 = -0.1008 x $1,000,000 = $100,770.396% semiannual 4-year 5% 2-year subordinatedt-notes (par value $12) $9.8992 debt (par value $25) $20.0000 7% annual 3-yearaa-rated bonds (par=$15) $15.0000 equity capital $20.0000 9% annual 5-yearbbb rated bonds (par=$15) adj. to equity total $39.8992 $39.8992b. under fasb statement no. 115, how are the changes in the market value of assetsadjusted in the income statements and balance sheets of fis?under fasb statement no. 115 assets held till maturity will bekept in book value. assetsavailable for sale and for trading purposes will always be reported in market values except by securities firms, which will have all assets and liabilities reported in market values. also, all uealized and realized income gains and losses will be reflected in both incomestatements and balance sheets for trading purposes. adjustments to assets available for sale will be reflected only through equity adjustments.5. why is the market value of equity a better measure of a banks ability to absorb losses thanbook value of equity?the market value of equity is more relevant than book value because in the event of abankruptcy, the liquidation (market) values will determine the fis ability to pay the various claimants.6. state bank has the following year-end balance sheet (in millions):cash $10 deposits $90loans equitytotal assetsthe loans primarily are fixed-rate, medium-term loans, while the deposits are either short-term or variable-rate. rising interest rates have caused the failure of a key industrialcompany, and as a result, 3 percent of the loans are considered to be uncollectable and thus have no economic value. one-third of these uncollectable loans will be charged off.further, the increase in interest rates has caused a 5 percent decrease in the market value of the remaining loans.a. what is the impact on the balance sheet after the necessaryadjustments are madeaccording to book value accounting? according to market value accounting?under book value accounting, the only adjustment is to charge off 1 percent of the loans.thus the loan portfolio will decrease by $0.90 and a corresponding adjustment will occur in the equity account.the new book value of equity will be $9.10. we assume no tax affects since the tax rate is not given.under market value accounting, the 3 percent decrease inloan value will be recognized, aswill the 5 percent decrease in market value of the remaining loans. thus equity willdecrease by 0.03 x $90 + 0.05 x $90(1 – 0.03) = $7.065. the new market value of equity will be $2.935.b. what is the new market to book value ratio if state bank has $1 million sharesoutstanding?the new market to book value ratio is $2.935/$9.10 = 0.3225.7. what are the arguments for and against the use of market value accounting for fis?market values produce a more accurate picture of the bank’s current financial position for both stockholders and regulators. stockholders can more easily see the effects of changes in interest rates on the bank’s equity, and they can evalua te more clearly the liquidation value of adistressed bank. among the arguments against market value accounting are that market values sometimes are difficult to estimate, particularly for small banks with non-traded assets. this argument is countered by the increasing use of assetsecuritization as a means to determine value of even thinly traded assets. in addition, some argue that market value accounting can produce higher volatility in the earnings of banks. a significant issue in this regard is that regulators may close a bank too quickly under the prompt corrective action requirements of fdicia.8. how is the leverage ratio for an fi defined?the leverage ratio is the ratio of book value of core capital to the book value of total assets, where core capital is book value of equity plus qualifying cumulative perpetual preferred stock plus minority interests in equity accounts of consolidated subsidiaries.9. what is the significance of prompt corrective action as specified by the fdicia legislation?the prompt corrective action provision requires regulators to appoint a receiver for the bank when the leverage ratio falls below 2 percent. thus even though the bank is technically not insolvent in terms of book value of equity, the institution can be placed into receivorship.10. identify and discuss the weaknesses of the leverage ratio as a measure of capital adequacy.first, closing a bank when the leverage ratio falls below 2 percent does not guarantee that the depositors are adequately protected. in many cases of financial distress, the actual market value of equity is significantly negative by the time the leverage ratio reaches 2 percent. second, using total assets as the denominator does not consider the different credit and interest rate risks of the individual assets. third, the ratio does not capture the contingent risk of the off-balance sheet activities of the bank.11. what is the basel agreement?the basel agreement identifies the risk-based capital ratios agreed upon by the member countries of the bank forinternational settlements. the ratios are to be implemented for all commercial banks under their jurisdiction. further, most countries in the world now have accepted the guidelines of this agreement for measuring capital adequacy.12. what is the major feature in the estimation of credit risk under the basel i capitalrequirements?the major feature of the basel agreement is that the capital of banks must be measured as an average of credit-risk-adjusted total assets both on and off the balance sheet.13. what is the total risk-based capital ratio?the total risk-based capital ratio divides total capital by the total of risk-adjusted assets. this ratio must be at least 8 percent for a bank to be considered adequately capitalized. further, at least 4 percent of the risk-based assets must be supported by core capital.【篇二：银行管理章节练习题(附答案)】以下关于金融工具的分类，错误的是（）。

Chapter NineInterest Rate Risk IIChapter Outline IntroductionDurationA General Formula for Duration•The Duration of Interest Bearing Bonds•The Duration of a Zero-Coupon Bond•The Duration of a Consol Bond (Perpetuities)Features of Duration•Duration and Maturity•Duration and Yield•Duration and Coupon InterestThe Economic Meaning of Duration•Semiannual Coupon BondsDuration and Immunization•Duration and Immunizing Future Payments•Immunizing the Whole Balance Sheet of an FI Immunization and Regulatory ConsiderationsDifficulties in Applying the Duration Model•Duration Matching can be Costly•Immunization is a Dynamic Problem•Large Interest Rate Changes and ConvexitySummaryAppendix 9A: Incorporating Convexity into the Duration Model •The Problem of the Flat Term Structure•The Problem of Default Risk•Floating-Rate Loans and Bonds•Demand Deposits and Passbook Savings•Mortgages and Mortgage-Backed Securities•Futures, Options, Swaps, Caps, and Other Contingent ClaimsSolutions for End-of-Chapter Questions and Problems: Chapter Nine1. What are the two different general interpretations of the concept of duration, and what isthe technical definition of this term? How does duration differ from maturity?Duration measures the average life of an asset or liability in economic terms. As such, duration has economic meaning as the interest sensitivity (or interest elasticity) of an asset’s value to changes in the interest rate. Duration differs from maturity as a measure of interest ratesensitivity because duration takes into account the time of arrival and the rate of reinvestment ofall cash flows during the assets life. Technically, duration is the weighted-average time to maturity using the relative present values of the cash flows as the weights.2. Two bonds are available for purchase in the financial markets. The first bond is a 2-year,$1,000 bond that pays an annual coupon of 10 percent. The second bond is a 2-year,$1,000, zero-coupon bond.a. What is the duration of the coupon bond if the current yield-to-maturity (YTM) is 8percent? 10 percent? 12 percent? (Hint: You may wish to create a spreadsheetprogram to assist in the calculations.)Coupon BondPar value = $1,000 Coupon = 0.10 Annual payments YTM = 0.08 Maturity = 2Time Cash Flow PVIF PV of CF PV*CF*T1 $100.00 0.92593 $92.59 $92.592 $1,100.00 0.85734 $943.07 $1,886.15Price = $1,035.67Numerator = $1,978.74 Duration = 1.9106 = Numerator/Price YTM = 0.10Time Cash Flow PVIF PV of CF PV*CF*T1 $100.00 0.90909 $90.91 $90.912 $1,100.00 0.82645 $909.09 $1,818.18Price = $1,000.00Numerator = $1,909.09 Duration = 1.9091 = Numerator/Price YTM = 0.12Time Cash Flow PVIF PV of CF PV*CF*T1 $100.00 0.89286 $89.29 $89.292 $1,100.00 0.79719 $876.91 $1,753.83Price = $966.20Numerator = $1,843.11 Duration = 1.9076 = Numerator/Priceb. How does the change in the current YTM affect the duration of this coupon bond?Increasing the yield-to-maturity decreases the duration of the bond.c. Calculate the duration of the zero-coupon bond with a YTM of 8 percent, 10 percent,and 12 percent.Zero Coupon BondPar value = $1,000 Coupon = 0.00YTM = 0.08 Maturity = 2Time Cash Flow PVIF PV of CF PV*CF*T1 $0.00 0.92593 $0.00 $0.002 $1,000.00 0.85734 $857.34 $1,714.68Price = $857.34Numerator = $1,714.68 Duration = 2.0000 = Numerator/Price YTM = 0.10Time Cash Flow PVIF PV of CF PV*CF*T1 $0.00 0.90909 $0.00 $0.002 $1,000.00 0.82645 $826.45 $1,652.89Price = $826.45Numerator = $1,652.89 Duration = 2.0000 = Numerator/Price YTM = 0.12Time Cash Flow PVIF PV of CF PV*CF*T1 $0.00 0.89286 $0.00 $0.002 $1,000.00 0.79719 $797.19 $1,594.39Price = $797.19Numerator = $1,594.39 Duration = 2.0000 = Numerator/Priced. How does the change in the current YTM affect the duration of the zero-coupon bond?Changing the yield-to-maturity does not affect the duration of the zero coupon bond.e. Why does the change in the YTM affect the coupon bond differently than the zero-coupon bond?Increasing the YTM on the coupon bond allows for a higher reinvestment income that more quickly recovers the initial investment. The zero-coupon bond has no cash flow untilmaturity.3. A one-year, $100,000 loan carries a market interest rate of 12 percent. The loan requires payment of accrued interest and one-half of the principal at the end of six months. The remaining principal and accrued interest are due at the end of the year. a. What is the duration of this loan?Cash flow in 6 months = $100,000 x .12 x .5 + $50,000 = $56,000 interest and principal. Cash flow in 1 year = $50,000 x 1.06 = $53,000 interest and principal. Time Cash Flow PVIF CF*PVIF T*CF*CVIF1 $56,000 0.943396 $52,830.19 $52,830.192 $53,000 0.889996 $47,169.81 $94,339.62Price = $100,000.00 $147,169.81 = Numerator735849.02100.000,100$81.169,147$==x D yearsb. What will be the cash flows at the end of 6 months and at the end of the year? Cash flow in 6 months = $100,000 x .12 x .5 + $50,000 = $56,000 interest and principal. Cash flow in 1 year = $50,000 x 1.06 = $53,000 interest and principal.c. What is the present value of each cash flow discounted at the market rate? What is the total present value? $56,000 ÷ 1.06 = $52,830.19 = PVCF 1$53,000 ÷ (1.06)2 = $47,169.81 = PVCF 2=$100,000.00 = PV Total CFd. What proportion of the total present value of cash flows occurs at the end of 6 months? What proportion occurs at the end of the year? Proportion t=.5 = $52,830.19 ÷ $100,000 x 100 = 52.830 percent. Proportion t=1 = $47,169.81 ÷ $100,000 x 100 = 47.169 percent.e. What is the weighted-average life of the cash flows on the loan?D = 0.5283 x 0.5 years + 0.47169 x 1.0 years = 0.26415 + 0.47169 = 0.73584 years. f. How does this weighted-average life compare to the duration calculated in part (a) above? The two values are the same.4. What is the duration of a five-year, $1,000 Treasury bond with a 10 percent semiannualcoupon selling at par? Selling with a YTM of 12 percent? 14 percent? What can youconclude about the relationship between duration and yield to maturity? Plot therelationship. Why does this relationship exist?Five-year Treasury BondPar value = $1,000 Coupon = 0.10 Semiannual payments YTM = 0.10 Maturity = 5Time Cash Flow PVIF PV of CF PV*CF*T0.5 $50.00 0.95238 $47.62 $23.81 PVIF = 1/(1+YTM/2)^(Time*2)1 $50.00 0.90703 $45.35 $45.351.5 $50.00 0.86384 $43.19 $64.792 $50.00 0.8227 $41.14 $82.272.5 $50.00 0.78353 $39.18 $97.943 $50.00 0.74622 $37.31 $111.933.5$50.00 0.71068 $35.53 $124.374$50.00 0.67684 $33.84 $135.374.5 $50.00 0.64461 $32.23 $145.045 $1,050.00 0.61391 $644.61 $3,223.04Price = $1,000.00Numerator = $4,053.91 Duration = 4.0539 = Numerator/Price Five-year Treasury BondPar value = $1,000 Coupon = 0.10 Semiannual payments YTM = 0.12 Maturity = 5Time Cash Flow PVIF PV of CF PV*CF*T0.5 $50.00 0.9434 $47.17 $23.58 Duration YTM1 $50.00 0.89 $44.50 $44.50 4.0539 0.101.5 $50.00 0.83962 $41.98 $62.97 4.0113 0.122 $50.00 0.79209 $39.60 $79.21 3.9676 0.142.5 $50.00 0.74726 $37.36 $93.413 $50.00 0.70496 $35.25 $105.743.5$50.00 0.66506 $33.25 $116.384$50.00 0.62741 $31.37 $125.484.5 $50.00 0.5919 $29.59 $133.185 $1,050.00 0.55839 $586.31 $2,931.57 .Price = $926.40Numerator = $3,716.03 Duration = 4.0113 = Numerator/PriceFive-year Treasury Bond Par value = $1,000 Coupon = 0.10 Semiannual payments YTM = 0.14 Maturity = 5Time Cash Flow PVIF PV of CF PV*CF*T 0.5 $50.00 0.93458 $46.73 $23.36 1 $50.00 0.87344 $43.67 $43.67 1.5 $50.00 0.8163 $40.81 $61.22 2 $50.00 0.7629 $38.14 $76.29 2.5 $50.00 0.71299 $35.65 $89.12 3 $50.00 0.66634 $33.32 $99.95 3.5 $50.00 0.62275 $31.14 $108.98 4 $50.00 0.58201 $29.10 $116.40 4.5 $50.00 0.54393 $27.20 $122.39 5 $1,050.00 0.50835 $533.77 $2,668.83 Price = $859.53Numerator = $3,410.22 Duration = 3.9676 = Numerator/Price5. Consider three Treasury bonds each of which has a 10 percent semiannual coupon and trades at par.a. Calculate the duration for a bond that has a maturity of 4 years, 3 years, and 2 years? Please see the calculations on the next page.a. Four-year Treasury BondPar value = $1,000 Coupon = 0.10 Semiannual payments YTM = 0.10 Maturity = 4Time Cash Flow PVIF PV of CF PV*CF*T0.5 $50.00 0.952381 $47.62 $23.81 PVIF = 1/(1+YTM/2)^(Time*2)1 $50.00 0.907029 $45.35 $45.351.5 $50.00 0.863838 $43.19 $64.792 $50.00 0.822702 $41.14 $82.272.5 $50.00 0.783526 $39.18 $97.943 $50.00 0.746215 $37.31 $111.933.5$50.00 0.710681 $35.53 $124.374$1,050.00 0.676839 $710.68 $2,842.73Price = $1,000.00Numerator = $3,393.19 Duration = 3.3932 = Numerator/Price Three-year Treasury BondPar value = $1,000 Coupon = 0.10 Semiannual payments YTM = 0.10 Maturity = 3Time Cash Flow PVIF PV of CF PV*CF*T0.5 $50.00 0.952381 $47.62 $23.81 PVIF = 1/(1+YTM/2)^(Time*2)1 $50.00 0.907029 $45.35 $45.351.5 $50.00 0.863838 $43.19 $64.792 $50.00 0.822702 $41.14 $82.272.5 $50.00 0.783526 $39.18 $97.943 $1,050.00 0.746215 $783.53 $2,350.58Price = $1,000.00Numerator = $2,664.74 Duration = 2.6647 = Numerator/Price Two-year Treasury BondPar value = $1,000 Coupon = 0.10 Semiannual payments YTM = 0.10 Maturity = 2Time Cash Flow PVIF PV of CF PV*CF*T0.5 $50.00 0.952381 $47.62 $23.81 PVIF = 1/(1+YTM/2)^(Time*2)1 $50.00 0.907029 $45.35 $45.351.5 $50.00 0.863838 $43.19 $64.792 $1,050.00 0.822702 $863.84 $1,727.68Price = $1,000.00Numerator = $1,861.62 Duration = 1.8616 = Numerator/Priceb. What conclusions can you reach about the relationship of duration and the time tomaturity? Plot the relationship.As maturity decreases, duration decreases at a decreasing rate. Although the graph below does not illustrate with great precision, the change in duration is less than the change in time to maturity.6. A six-year, $10,000 CD pays 6 percent interest annually. What is the duration of the CD? What would be the duration if interest were paid semiannually? What is the relationship of duration to the relative frequency of interest payments?Six-year CDPar value = $10,000 Coupon = 0.06 Annual payments YTM = 0.06 Maturity = 6 Time Cash Flow PVIF PV of CF PV*CF*T 1 $600.00 0.94340 $566.04 $566.04 PVIF = 1/(1+YTM)^(Time) 2 $600.00 0.89000 $534.00 $1,068.00 3 $600.00 0.83962 $503.77 $1,511.31 4 $600.00 0.79209 $475.26 $1,901.02 5 $600.00 0.74726 $448.35 $2,241.77 6 $10,600 0.70496 $7,472.58 $44,835.49Price = $10,000.00Numerator = $52,123.64 Duration = 5.2124 = Numerator/PriceSix-year CDPar value = $10,000 Coupon = 0.06 Semiannual payments YTM = 0.06 Maturity = 6Time Cash Flow PVIF PV of CF PV*CF*T 0.5 $300.00 0.970874 $291.26 $145.63 PVIF = 1/(1+YTM/2)^(Time*2) 1 $300.00 0.942596 $282.78 $282.78 1.5 $300.00 0.915142 $274.54$411.812 $300.00 0.888487 $266.55 $533.092.5 $300.00 0.862609 $258.78 $646.963 $300.00 0.837484 $251.25 $753.743.5$300.00 0.813092 $243.93 $853.754$300.00 0.789409 $236.82 $947.294.5 $300.00 0.766417 $229.93 $1,034.665 $300.00 0.744094 $223.23 $1,116.145.5 $300.00 0.722421 $216.73 $1,192.006 $10,300 0.701380 $7,224.21 $43,345.28Price = $10,000.00Numerator = $51,263.12 Duration = 5.1263 = Numerator/Price Duration decreases as the frequency of payments increases. This relationship occurs because (a) cash is being received more quickly, and (b) reinvestment income will occur more quickly from the earlier cash flows.7. What is the duration of a consol bond that sells at a YTM of 8 percent? 10 percent? 12percent? What is a consol bond? Would a consol trading at a YTM of 10 percent have agreater duration than a 20-year zero-coupon bond trading at the same YTM? Why?A consol is a bond that pays a fixed coupon each year forever. A consol Consol Bond trading at a YTM of 10 percent has a duration of 11 years, while a zero- YTM D = 1 + 1/R coupon bond trading at a YTM of 10 percent, or any other YTM, has a 0.08 13.50 years duration of 20 years because no cash flows occur before the twentieth 0.10 11.00 years year. 0.12 9.33 years 8. Maximum Pension Fund is attempting to balance one of the bond portfolios under itsmanagement. The fund has identified three bonds which have five-year maturities andwhich trade at a YTM of 9 percent. The bonds differ only in that the coupons are 7 percent,9 percent, and 11 percent.a. What is the duration for each bond?Five-year BondPar value = $1,000 Coupon = 0.07 Annual payments YTM = 0.09 Maturity = 5Time Cash Flow PVIF PV of CF PV*CF*T1 $70.00 0.917431 $64.22 $64.22 PVIF = 1/(1+YTM)^(Time)2 $70.00 0.841680 $58.92 $117.843 $70.00 0.772183 $54.05 $162.164 $70.00 0.708425 $49.59 $198.365 $1,070.00 0.649931 $695.43 $3,477.13Price = $922.21Numerator = $4,019.71 Duration = 4.3588 = Numerator/PriceFive-year BondPar value = $1,000 Coupon = 0.09 Annual payments YTM = 0.09 Maturity = 5Time Cash Flow PVIF PV of CF PV*CF*T1 $90.00 0.917431 $82.57 $82.57 PVIF = 1/(1+YTM)^(Time)2 $90.00 0.841680 $75.75 $151.503 $90.00 0.772183 $69.50 $208.494 $90.00 0.708425 $63.76 $255.035 $1,090.00 0.649931 $708.43 $3,542.13Price = $1,000.00Numerator = $4,239.72 Duration = 4.2397 = Numerator/Price Five-year BondPar value = $1,000 Coupon = 0.11 Annual payments YTM = 0.09 Maturity = 5Time Cash Flow PVIF PV of CF PV*CF*T1 $110.00 0.917431 $100.92 $100.92 PVIF = 1/(1+YTM)^(Time)2 $110.00 0.841680 $92.58 $185.173 $110.00 0.772183 $84.94 $254.824 $110.00 0.708425 $77.93 $311.715 $1,110.00 0.649931 $721.42 $3,607.12Price = $1,077.79Numerator = $4,459.73 Duration = 4.1378 = Numerator/Priceb. What is the relationship between duration and the amount of coupon interest that is paid?Plot the relationship.9. An insurance company is analyzing three bonds and is using duration as the measure ofinterest rate risk. All three bonds trade at a YTM of 10 percent and have $10,000 parvalues. The bonds differ only in the amount of annual coupon interest that they pay: 8, 10, or 12 percent.a. What is the duration for each five-year bond?Five-year BondPar value = $10,000 Coupon = 0.08 Annual payments YTM = 0.10 Maturity = 5Time Cash Flow PVIF PV of CF PV*CF*T1 $800.00 0.909091 $727.27 $727.27 PVIF = 1/(1+YTM)^(Time)2 $800.00 0.826446 $661.16 $1,322.313 $800.00 0.751315 $601.05 $1,803.164 $800.00 0.683013 $546.41 $2,185.645 $10,800.00 0.620921 $6,705.95 $33,529.75Price = $9,241.84Numerator = $39,568.14 Duration = 4.2814 = Numerator/Price Five-year BondPar value = $10,000 Coupon = 0.10 Annual payments YTM = 0.10 Maturity = 5Time Cash Flow PVIF PV of CF PV*CF*T1 $1,000.00 0.909091 $909.09 $909.09 PVIF = 1/(1+YTM)^(Time)2 $1,000.00 0.826446 $826.45 $1,652.893 $1,000.00 0.751315 $751.31 $2,253.944 $1,000.00 0.683013 $683.01 $2,732.055 $11,000.00 0.620921 $6,830.13 $34,150.67Price = $10,000.00Numerator = $41,698.65 Duration = 4.1699 = Numerator/Price Five-year BondPar value = $10,000 Coupon = 0.12 Annual payments YTM = 0.10 Maturity = 5Time Cash Flow PVIF PV of CF PV*CF*T1 $1,200.00 0.909091 $1,090.91 $1,090.91 PVIF = 1/(1+YTM)^(Time)2 $1,200.00 0.826446 $991.74 $1,983.473 $1,200.00 0.751315 $901.58 $2,704.734 $1,200.00 0.683013 $819.62 $3,278.465 $11,200.00 0.620921 $6,954.32 $34,771.59Price = $10,758.16Numerator = $43,829.17 Duration = 4.0740 = Numerator/Priceb. What is the relationship between duration and the amount of coupon interest that is paid?10. You can obtain a loan for $100,000 at a rate of 10 percent for two years. You have a choiceof either paying the principal at the end of the second year or amortizing the loan, that is, paying interest and principal in equal payments each year. The loan is priced at par. a. What is the duration of the loan under both methods of payment?Two-year loan: Principal and interest at end of year two. Par value = 100,000 Coupon = 0.00 No annual payments YTM = 0.10 Maturity = 2Time Cash Flow PVIF PV of CF PV*CF*T 1 $0.00 0.90909 $0.00 $0.00 PVIF = 1/(1+YTM)^(Time) 2 $121,000 0.82645 $100,000.0 200,000.00 Price = $100,000.0 Numerator = 200,000.00 Duration = 2.0000 = Numerator/Price Two-year loan: Interest at end of year one, P & I at end of year two. Par value = 100,000 Coupon = 0.10 Annual payments YTM = 0.10 Maturity = 2 Time Cash Flow PVIF PV of CF PV*CF*T 1 $10,000 0.909091 $9,090.91 $9,090.91 PVIF = 1/(1+YTM)^(Time) 2 $110,000 0.826446 $90,909.09 181,818.18 Price = $100,000.0 Numerator = 190,909.09 Duration = 1.9091 = Numerator/Price Two-year loan: Amortized over two years. Amortized payment of $57.619.05 Par value = 100,000 Coupon = 0.10 YTM = 0.10 Maturity = 2 Time Cash Flow PVIF PV of CF PV*CF*T 1 $57,619.05 0.909091 $52,380.95 $52,380.95 PVIF = 1/(1+YTM)^(Time) 2 $57,619.05 0.826446 $47,619.05 $95,238.10 Price = $100,000.0Numerator = 147,619.05 Duration = 1.4762 = Numerator/Priceb. Explain the difference in the two results?11. How is duration related to the interest elasticity of a fixed-income security? What is therelationship between duration and the price of the fixed-income security?Taking the first derivative of a bond’s (or any fixed -income security) price (P) with respect to the yield to maturity (R) provides the following:D R dR P dP-=+)1( The economic interpretation is that D is a measure of the percentage change in price of a bond for a given percentage change in yield to maturity (interest elasticity). This equation can be rewritten to provide a practical application:P R dR D dP ⎥⎦⎤⎢⎣⎡+-=1 In other words, if duration is known, then the change in the price of a bond due to small changes in interest rates, R, can be estimated using the above formula.12. You have discovered that the price of a bond rose from $975 to $995 when the YTM fellfrom 9.75 percent to 9.25 percent. What is the duration of the bond?We know years D years R R P PD 5.45.40975.1005.97520)1(=⇒-=-=+∆∆=-13. Calculate the duration of a 2-year, $1,000 bond that pays an annual coupon of 10 percentand trades at a yield of 14 percent. What is the expected change in the price of the bond if interest rates decline by 0.50 percent (50 basis points)?Two-year Bond Par value = $1,000 Coupon = 0.10 Annual payments YTM = 0.14 Maturity = 2Time Cash Flow PVIF PV of CF PV*CF*T 1 $100.00 0.87719 $87.72 $87.72 PVIF = 1/(1+YTM)^(Time) 2 $1,100.00 0.76947 $846.41 $1,692.83 Price = $934.13Numerator = $1,780.55 Duration = 1.9061 = Numerator/PriceExpected change in price = 81.7$13.934$14.1005.9061.11=--=+∆-P R R D . This implies a newprice of $941.94. The actual price using conventional bond price discounting would be $941.99. The difference of $0.05 is due to convexity, which was not considered in this solution.14. The duration of an 11-year, $1,000 Treasury bond paying a 10 percent semiannual couponand selling at par has been estimated at 6.9 years. a. What is the modified duration of the bond (Modified Duration = D/(1 + R))? MD = 6.9/(1 + .10/2) = 6.57 years b. What will be the estimated price change of the bond if market interest rates increase0.10 percent (10 basis points)? If rates decrease 0.20 percent (20 basis points)?Estimated change in price = -MD x ∆R x P = -6.57 x 0.001 x $1,000 = -$6.57. Estimated change in price = -MD x ∆R x P = -6.57 x -0.002 x $1,000 = $13.14. c. What would be the actual price of the bond under each rate change situation in part (b)using the traditional present value bond pricing techniques? What is the amount of error in each case?Rate Price Actual Change Estimated Price Error + 0.001 $993.43 $993.45 $0.02 - 0.002 $1,013.14 $1,013.28 -$0.1415. Suppose you purchase a five-year, 13.76 percent bond that is priced to yield 10 percent. a. Show that the duration of this annual payment bond is equal to four years.Five-year Bond Par value = $1,000 Coupon = 0.1376 Annual payments YTM = 0.10 Maturity = 5Time Cash Flow PVIF PV of CF PV*CF*T1 $137.60 0.909091 $125.09 $125.09 PVIF = 1/(1+YTM)^(Time)2 $137.60 0.826446 $113.72 $227.443 $137.60 0.751315 $103.38 $310.144 $137.60 0.683013 $93.98 $375.935 $1,137.60 0.620921 $706.36 $3,531.80Price = $1,142.53Numerator = $4,570.40 Duration = 4.0002 = Numerator/Priceb. Show that, if interest rates rise to 11 percent within the next year and that if yourinvestment horizon is four years from today, you will still earn a 10 percent yield onyour investment.Value of bond at end of year four: PV = ($137.60 + $1,000) ÷ 1.11 = $1,024.86.Future value of interest payments at end of year four: $137.60*FVIF n=4, i=11% = $648.06.Future value of all cash flows at n = 4:Coupon interest payments over four years $550.40Interest on interest at 11 percent 97.66Value of bond at end of year four $1,024.86Total future value of investment $1,672.92Yield on purchase of asset at $1,142.53 = $1,672.92*PVIV n=4, i=?% ⇒ i = 10.002332%.c. Show that a 10 percent yield also will be earned if interest rates fall next year to 9percent.Value of bond at end of year four: PV = ($137.60 + $1,000) ÷ 1.09 = $1,043.67.Future value of interest payments at end of year four: $137.60*FVIF n=4, i=9% = $629.26.Future value of all cash flows at n = 4:Coupon interest payments over four years $550.40Interest on interest at 9 percent 78.86Value of bond at end of year four $1,043.67Total future value of investment $1,672.93Yield on purchase of asset at $1,142.53 = $1,672.93*PVIV n=4, i=?% ⇒ i = 10.0025 percent. 16. Consider the case where an investor holds a bond for a period of time longer than theduration of the bond, that is, longer than the original investment horizon.a. If market interest rates rise, will the return that is earned exceed or fall short of theoriginal required rate of return? Explain.In this case the actual return earned would exceed the yield expected at the time ofpurchase. The benefits from a higher reinvestment rate would exceed the price reductioneffect if the investor holds the bond for a sufficient length of time.b. What will happen to the realized return if market interest rates decrease? Explain.If market rates decrease, the realized yield on the bond will be less than the expected yield because the decrease in reinvestment earnings will be greater than the gain in bond value.c. Recalculate parts (b) and (c) of problem 15 above, assuming that the bond is held for allfive years, to verify your answers to parts (a) and (b) of this problem.The case where interest rates rise to 11 percent, n = five years:Future value of interest payments at end of year five: $137.60*FVIF n=5, i=11% = $856.95.Future value of all cash flows at n = 5:Coupon interest payments over five years $688.00Interest on interest at 11 percent 168.95Value of bond at end of year five $1,000.00Total future value of investment $1,856.95Yield on purchase of asset at $1,142.53 = $1,856.95*PVIF n=5, i=?%The case where interest rates fall to 9 percent, n = five years:Future value of interest payments at end of year five: $137.60*FVIF n=5, i=9% = $823.50.Future value of all cash flows at n = 5:Coupon interest payments over five years $688.00Interest on interest at 9 percent 135.50Value of bond at end of year five $1,000.00Total future value of investment $1,823.50Yield on purchase of asset at $1,142.53 = $1,823.50*PVIV n=5, i=?% ⇒ i = 9.8013 percent.d. If either calculation in part (c) is greater than the original required rate of return, whywould an investor ever try to match the duration of an asset with his investment horizon?The answer has to do with the ability to forecast interest rates. Forecasting interest rates isa very difficult task, one that most financial institution money managers are unwilling to do.For most managers, betting that rates would rise to 11 percent to provide a realized yield of10.20 percent over five years is not a sufficient return to offset the possibility that ratescould fall to 9 percent and thus give a yield of only 9.8 percent over five years.17. Two banks are being examined by the regulators to determine the interest rate sensitivity oftheir balance sheets. Bank A has assets composed solely of a 10-year, 12 percent, $1million loan. The loan is financed with a 10-year, 10 percent, $1 million CD. Bank B has assets composed solely of a 7-year, 12 percent zero-coupon bond with a current (market) value of $894,006.20 and a maturity (principal) value of $1,976,362.88. The bond isfinanced with a 10-year, 8.275 percent coupon, $1,000,000 face value CD with a YTM of10 percent. The loan and the CDs pay interest annually, with principal due at maturity.a. If market interest rates increase 1 percent (100 basis points), how do the market valuesof the assets and liabilities of each bank change? That is, what will be the net affect onthe market value of the equity for each bank?For Bank A, an increase of 100 basis points in interest rate will cause the market values of assets and liabilities to decrease as follows:Loan: $120*PVIVA n=10,i=13% + $1,000*PVIV n=10,i=13% = $945,737.57.CD: $100*PVIVA n=10,i=11% + $1,000*PVIV n=10,i=11% = $941,107.68.Therefore, the decrease in value of the asset was $4,629.89 less than the liability.For Bank B:Bond: $1,976,362.88*PVIV n=7,i=13% = $840,074.08.CD: $82.75*PVIVA n=10,i=11% + $1,000*PVIV n=10,i=11% = $839,518.43.The bond value decreased $53,932.12, and the CD value fell $54,487.79. Therefore,the decrease in value of the asset was $555.67 less than the liability.b. What accounts for the differences in the changes of the market value of equity betweenthe two banks?The assets and liabilities of Bank A change in value by different amounts because thedurations of the assets and liabilities are not the same, even though the face values andmaturities are the same. For Bank B, the maturities of the assets and liabilities are different, but the current market values and durations are the same. Thus the change in interest rates causes the same (approximate) change in value for both liabilities and assets.c. Verify your results above by calculating the duration for the assets and liabilities ofeach bank, and estimate the changes in value for the expected change in interest rates.Summarize your results.Ten-year CD:Bank B (Calculation in millions)Par value = $1,000 Coupon = 0.08 Annual payments YTM = 0.10 Maturity = 10Time Cash Flow PVIF PV of CF PV*CF*T1 $82.75 0.909091 $75.23 $75.23 PVIF = 1/(1+YTM)^(Time)2 $82.75 0.826446 $68.39 $136.783 $82.75 0.751315 $62.17 $186.514 $82.75 0.683013 $56.52 $226.085 $82.75 0.620921 $51.38 $256.916 $82.75 0.564474 $46.71 $280.267 $82.75 0.513158 $42.46 $297.258 $82.75 0.466507 $38.60 $308.839 $82.75 0.424098 $35.09 $315.8510 $1,082.75 0.385543 $417.45 $4,174.47Price = $894.006Numerator = $6,258.15 Duration = 7.0001 = Numerator/PriceThe duration for the CD of Bank B is calculated above to be 7.001 years. Since the bond is a zero-coupon, the duration is equal to the maturity of 7 years.Using the duration formula to estimate the change in value:Bond: ∆Value = 39.875,55$20.006,894$12.101.0.71-=-=+∆-P R R DCD:∆Value = 43.899,56$22.006,894$10.101.0001.71-=-=+∆-P R R DThe difference in the change in value of the assets and liabilities for Bank B is $1,024.04using the duration estimation model. The small difference in this estimate and the estimate found in part a above is due to the convexity of the two financial assets.The duration estimates for the loan and CD for Bank A are presented below:Ten-year Loan: Bank A (Calculation in millions)Par value = $1,000 Coupon = 0.12 Annual payments YTM = 0.12 Maturity = 10Time Cash Flow PVIF PV of CF PV*CF*T 1 $120.00 0.892857 $107.14 $107.14 PVIF = 1/(1+YTM)^(Time) 2 $120.00 0.797194 $95.66 $191.33 3 $120.00 0.711780 $85.41 $256.24 4 $120.00 0.635518 $76.26 $305.05 5 $120.00 0.567427 $68.09 $340.46 6 $120.00 0.506631 $60.80 $364.77 7 $120.00 0.452349 $54.28 $379.97 8 $120.00 0.403883 $48.47 $387.73 9 $120.00 0.360610 $43.27 $389.46 10 $1,120.00 0.321973 $360.61 $3,606.10 Price = $1,000.00Numerator = $6,328.25 Duration = 6.3282 = Numerator/PriceTen-year CD: Bank A (Calculation in millions) Par value = $1,000 Coupon = 0.10 Annual payments YTM = 0.10 Maturity = 10 Time Cash Flow PVIF PV of CF PV*CF*T 1 $100.00 0.909091 $90.91 $90.91 PVIF = 1/(1+YTM)^(Time) 2 $100.00 0.826446 $82.64 $165.29 3 $100.00 0.751315 $75.13 $225.39 4 $100.00 0.683013 $68.30 $273.21 5 $100.00 0.620921 $62.09 $310.46。

第十七章课后习题参考答案1. 为什么国际公司的现金管理更困难？请说明什么是有效的现金管理。

国际公司的现金管理与非国际公司的现金管理有很大不同，主要体现为：第一，国际公司一般规模庞大，公司遍布世界各地，其业务特点决定了其现金数量巨大；第二，国际公司的管理要遵循国际公司总部所在国即母国的财务管理的规定，又要遵循其子公司所在国家的规定，同时还要遵从国际公司内部的管理规定，因此面临现金管理体制的多重性；第三，国际公司经营环境的复杂性决定了现金管理风险的多样性。

如汇率风险、利率风险，还有政治风险等。

有效的现金管理是指通过确定现金最佳持有量，促进现金在母公司和子公司之间合理有效流动，在保证经营活动健康运行的前提下节约现金、加速流动、降低风险和成本，提高现金的使用效率和经济效益。

2. 请比较集中式现金管理与分散式现金管理，并讨论各自的优缺点。

所谓集中管理，就是由母公司的资金管理部门统一集中各关联公司所持有的现金，并根据各关联公司对现金的需要情况予以调拨；各关联公司只保留满足交易性需要的最低限度的现金，超过部分统一上缴母公司的现金管理中心，由母公司统一管理。

而分散管理就是由各关联公司根据自己的经营情况和对现金的需要状况决定现金的持有额并分别持有。

在分散管理形式下，各关联公司考量自己的现金需要不仅要考虑到交易性需要，也要考虑到预防性需要和投机性需要。

总体上说，世界各国的大型公司制企业都采取了集中管理的模式并且以现金池的方式予以实现，采取集中管理最大的有利之处是能够保证现金的安全；能够实现现金在所属成员企业之间的合理调配，这不仅有利于整个公司的资源配置，也有利于降低资金成本；现金的集中管理使得公司总部可以通过现金的流入流出了解所属成员企业的业务活动，可以称之为对所属成员企业的知情权。

但是，实行现金的集中管理是以所属子公司和分公司对自身现金的管理权不被分割为基础的。

也就是说公司将子公司和分公司的现金集中统一到现金池中，在不同企业之间进行调配使用时始终贯穿两条基本原则：一是有偿原则，二是保证原则。