金融市场与机的构Madura第九版题库ch12

金融市场与机构考试试题一、选择题（每题 2 分，共 40 分）1、以下哪个不是金融市场的主要功能？（）A 资金融通B 风险分配C 价格发现D 商品交易2、货币市场的主要特点不包括（）A 期限短B 流动性强C 风险大D 交易额大3、资本市场中，以下哪个不属于股票市场的分类？（）A 主板市场B 创业板市场C 外汇市场D 科创板市场4、金融机构的核心业务通常是（）A 存款业务B 贷款业务C 中间业务D 表外业务5、商业银行的主要资金来源是（）A 自有资本B 发行债券C 吸收存款D 同业拆借6、以下哪种金融机构主要从事保险业务？（）A 证券公司B 信托公司C 保险公司D 财务公司7、投资银行在证券发行中的主要作用是（）A 承销证券B 提供咨询C 进行交易D 风险管理8、以下哪个不是金融市场的参与者？（）A 个人B 企业C 政府D 外星人9、中央银行的货币政策工具不包括（）A 法定存款准备金率B 再贴现率C 公开市场操作D 税收政策10、金融衍生工具的基本特征不包括（）A 跨期性B 杠杆性C 高风险性D 低收益性11、期货合约与远期合约的主要区别在于（）A 标准化程度B 交易场所C 违约风险D 以上都是12、期权合约的买方（）A 只有权利没有义务B 只有义务没有权利C 既有权利又有义务D 既无权利又无义务13、互换合约的主要类型不包括（）A 利率互换B 货币互换C 商品互换D 信用互换14、以下哪个不是金融机构的风险管理策略？（）A 风险规避B 风险降低C 风险转移D 风险忽略15、巴塞尔协议中规定的银行资本充足率最低要求是（）A 4%B 8%C 10%D 12%16、金融监管的目标不包括（）A 保护投资者利益B 维护金融体系稳定C 促进金融机构盈利D 提高金融市场效率17、以下哪种金融机构受到的监管最为严格？（）A 商业银行B 证券公司C 保险公司D 私募基金18、金融创新的主要动力不包括（）A 规避监管B 降低成本C 提高收益D 增加风险19、以下哪个不是互联网金融的主要模式？（）A 第三方支付B P2P 网贷C 众筹D 传统银行柜台业务20、金融市场全球化的主要影响不包括（）A 提高资源配置效率B 增加金融风险C 减少国际资本流动D 促进金融创新二、判断题（每题 2 分，共 20 分）1、金融市场是资金供求双方通过金融工具进行交易的场所。

金融市场期末试题答案一、选择题（每题3分，共30分）1. 以下哪个金融市场工具的期限最长？A. 国债B. 企业债券C. 短期融资券D. 银行承兑汇票答案：A2. 以下哪个金融市场不属于货币市场？A. 票据市场B. 债券市场C. 货币市场基金D. 同业拆借市场答案：B3. 以下哪个金融市场是金融市场中最大的市场？A. 股票市场B. 债券市场C. 外汇市场D. 衍生品市场答案：C4. 以下哪个金融市场具有最高的风险和收益？A. 股票市场B. 债券市场C. 外汇市场D. 衍生品市场答案：D5. 以下哪个金融工具的收益率最低？A. 国债B. 企业债券C. 股票D. 银行存款答案：D6. 以下哪个金融监管机构负责我国的金融市场监管？A. 中国人民银行B. 中国证监会C. 中国银保监会D. 中国国家发展和改革委员会答案：B7. 以下哪个金融市场工具的信用风险最低？A. 国债B. 企业债券C. 短期融资券D. 银行承兑汇票答案：A8. 以下哪个金融市场工具的流动性最好？A. 股票B. 债券C. 短期融资券D. 银行存款答案：A9. 以下哪个金融工具的利率风险最高？A. 固定利率债券B. 浮动利率债券C. 零息债券D. 票据答案：B10. 以下哪个金融市场工具的杠杆率最高？A. 股票B. 债券C. 期货D. 期权答案：C二、简答题（每题10分，共40分）1. 简述金融市场的功能。

答：金融市场的功能主要包括以下几点：（1）资金筹集功能：金融市场为企业、政府和个人提供了筹集资金的渠道，有助于缓解资金短缺问题。

（2）资金配置功能：金融市场通过价格机制实现资金在各个行业、企业和个人之间的配置，提高资金使用效率。

（3）风险分散功能：金融市场提供了多种金融工具，投资者可以根据自己的风险承受能力选择合适的投资品种，实现风险分散。

（4）价格发现功能：金融市场上的交易价格反映了市场对各种金融资产的价值评估，有助于投资者做出投资决策。

Chapter 12The Mortgage MarketsMultiple Choice Questions1. Which of the following are important ways in which mortgage markets differ from the stock andbond markets?(a) The usual borrowers in the capital markets are government entities and businesses, whereas theusual borrowers in the mortgage markets are individuals.(b) Most mortgages are secured by real estate, whereas the majority of capital market borrowing isunsecured.(c) Because mortgages are made for different amounts and different maturities, developing asecondary market has been more difficult.(d) All of the above are important differences.(e) Only (a) and (b) of the above are important differences.Answer: D2. Which of the following are important ways in which mortgage markets differ from stock and bondmarkets?(a) The usual borrowers in capital markets are government entities, whereas the usual borrowers inmortgage markets are small businesses.(b) The usual borrowers in capital markets are government entities and large businesses, whereasthe usual borrowers in mortgage markets are small businesses.(c) The usual borrowers in capital markets are government entities and large businesses, whereasthe usual borrowers in mortgage markets are small businesses and individuals.(d) The usual borrowers in capital markets are businesses and government entities, whereas theusual borrowers in mortgage markets are individuals.Answer: D3. Which of the following are true of mortgages?(a) A mortgage is a long-term loan secured by real estate.(b) A borrower pays off a mortgage in a combination of principal and interest payments that resultin full payment of the debt by maturity.(c) Over 80 percent of mortgage loans finance residential home purchases.(d) All of the above are true of mortgages.(e) Only (a) and (b) of the above are true of mortgages.Answer: D4. Which of the following are true of mortgages?(a) A mortgage is a long-term loan secured by real estate.(b) Borrowers pay off mortgages over time in some combination of principal and interest paymentsthat result in full payment of the debt by maturity.(c) Less than 65 percent of mortgage loans finance residential home purchases.(d) All of the above are true of mortgages.(e) Only (a) and (b) of the above are true of mortgages.Answer: E5. Which of the following are true of mortgages?(a) Prior to the 1920s, U.S. banking legislation discouraged mortgage lending by banks.(b) In the 1920s, most mortgages were balloon loans, which required the borrower to pay the entireloan amount after three to five years.(c) Because mortgages are long-term loans secured by real estate, mortgage lenders tended to failwhen land prices declined, as was often the case during economic recessions.(d) All of the above are true.(e) Only (a) and (b) of the above are true.Answer: D6. Which of the following is true of mortgage interest rates?(a) Interest rates on mortgage loans are determined by three factors: current long-term market rates,the term of the mortgage, and the number of discount points paid.(b) Mortgage interest rates tend to track along with Treasury bond rates.(c) The interest rate on 15-year mortgages is lower than the rate on 30-year mortgages, all elsethe same.(d) All of the above are true.(e) Only (a) and (b) of the above are true.Answer: D7. Which of the following are true of mortgages?(a) More than 80 percent of mortgage loans finance residential home purchases.(b) The National Banking Act of 1863 rewarded banks that increased mortgage lending.(c) Most mortgages during the 1920s and 1930s were balloon loans.(d) All of the above are true.(e) Only (a) and (c) of the above are true.Answer: E8. Which of the following is true of mortgage interest rates?(a) Longer-term mortgages have lower interest rates than shorter-term mortgages.(b) Mortgage rates are lower than Treasury bond rates, because of the tax-deductibility of mortgageinterest rates.(c) In exchange for points, lenders reduce interest rates on mortgage loans.(d) All of the above are true.(e) Only (a) and (b) of the above are true.Answer: C9. Typically, discount points should not be paid if the borrower will pay off the loan in _________years or less.(a) 5(b) 10(c) 15(d) 20Answer: A10. Which of the following is true of mortgage interest rates?(a) Longer-term mortgages have higher interest rates than shorter-term mortgages.(b) In exchange for points, lenders reduce interest rates on mortgage loans.(c) Mortgage rates are lower than Treasury bond rates because of the tax deductibility of mortgageinterest payments.(d) All of the above are true.(e) Only (a) and (b) of the above are true.Answer: E11. Which of the following reduces moral hazard for the mortgage borrower?(a) Collateral(b) Down payments(c) Private mortgage insurance(d) Borrower qualificationsAnswer: B12. Which of the following protects the mortgage lende r’s right to sell property if the underlying loandefaults?(a) A lien(b) A down payment(c) Private mortgage insurance(d) Borrower qualification(e) AmortizationAnswer: A13. Which of the following is true of mortgage interest rates?(a) Mortgage rates are closely tied to Treasury bond rates, but mortgage rates tend to stay belowTreasury rates because mortgages are secured with collateral.(b) Longer-term mortgages have higher interest rates than shorter-term mortgages.(c) Interest rates are higher on mortgage loans on which lenders charge points.(d) All of the above are true.(e) Only (a) and (b) of the above are true.Answer: B14. During the early years of an amortizing mortgage loan, the lender applies(a) most of the monthly payment to the outstanding principal balance.(b) all of the monthly payment to the outstanding principal balance.(c) most of the monthly payment to interest on the loan.(d) all of the monthly payment to interest on the loan.(e) the monthly payment equally to interest on the loan and the outstanding principal balance.Answer: C15. During the last years of an amortizing mortgage loan, thelender applies(a) most of the monthly payment to the outstanding principal balance.(b) all of the monthly payment to the outstanding principal balance.(c) most of the monthly payment to interest on the loan.(d) all of the monthly payment to interest on the loan.(e) the monthly payment equally to interest on the loan and the outstanding principal balance.Answer: A16. During the last years of a balloon mortgage loan, the lender applies(a) most of the monthly payment to the outstanding principal balance.(b) all of the monthly payment to the outstanding principal balance.(c) most of the monthly payment to interest on the loan.(d) all of the monthly payment to interest on the loan.(e) the monthly payment equally to interest on the loan and the outstanding principal balance.Answer: D17. During the early years of a balloon mortgage loan, the lender applies(a) most of the monthly payment to the outstanding principal balance.(b) all of the monthly payment to the outstanding principal balance.(c) most of the monthly payment to interest on the loan.(d) all of the monthly payment to interest on the loan.(e) the monthly payment equally to interest on the loan and the outstanding principal balance.Answer: D18. A borrower who qualifies for an FHA or VA loan enjoys the advantage that(a) the mortgage payment is much lower.(b) only a very low or zero down payment is required.(c) the cost of private mortgage insurance is lower.(d) the government holds the lien on the property.Answer: B19. (I) Conventional mortgages are originated by private lending institutions, and FHA or VA loans areoriginated by the government. (II) Conventional mortgages are insured by private companies, and FHA or VA loans are insured by the government.(a) (I) is true, (II) is false.(b) (I) is false, (II) is true.(c) Both are true.(d) Both are false.Answer: B20. Borrowers tend to prefer _________ to _________, whereas lenders prefer _________(a) fixed-rate loans; ARMs; fixed-rate loans.(b) ARMs; fixed-rate loans; fixed-rate loans.(c) fixed-rate loans; ARMs; ARMs.(d) ARMs; fixed-rate loans; ARMs.Answer: C21. (I) ARMs offer lower initial rates and the rate may fall during the life of the loan. (II) Conventionalmortgages do not allow a borrower to take advantage of falling interest rates.(a) (I) is true, (II) is false.(b) (I) is false, (II) is true.(c) Both are true.(d) Both are false.Answer: A22. Growing-equity mortgages (GEMs)(a) help the borrower pay off the loan in a shorter time.(b) have such low payments in the first few years that the principal balance increases.(c) offer borrowers payments that are initially lower than the payments on a conventional mortgage.(d) do all of the above.(e) do only (a) and (b) of the above.Answer: A23. A borrower with a 30-year loan can create a GEM by(a) simply increasing the monthly payments beyond what is required and designating that theexcess be applied entirely to the principal.(b) converting his ARM into a conventional mortgage.(c) converting his conventional mortgage into an ARM.(d) converting his conventional mortgage into a GPM.Answer: A24. Which of the following are useful for home buyers who expect their income to rise in the future?(a) GPMs(b) RAMs(c) GEMs(d) (a) and (b)(e) (a) and (c)Answer: E25. Which of the following are useful for home buyers who expect their income to fall in the future?(a) GPMs(b) RAMs(c) GEMs(d) (a) and (b)(e) (a) and (c)Answer: B26. Retired people can live on the equity they have in their homes by using a(a) GEM.(b) GPM.(c) SAM.(d) RAM.Answer: D27. Second mortgages serve the following purposes:(a) they give borrowers a way to use the equity they have in their homes as security for another loan.(b) they allow borrowers to get a tax deduction on loans secured by their primary residence orvacation home.(c) they allow borrowers to convert their conventional mortgagesinto GEMs.(d) all of the above.(e) only (a) and (b) of the above.Answer: E28. Which of the following is a disadvantage of a second mortgage compared to credit card debt?(a) The loans are secured by the borrower’s home.(b) The borrower gives up the tax deduction on the primary mortgage.(c) The borrower must pay points to get a second mortgage loan.(d) The borrower will find it more difficult to qualify for a second mortgage loan.Answer: A29. The share of the mortgage market held by savings and loans is approximately(a) 50 percent.(b) 40 percent.(c) 20 percent.(d) 10 percent.Answer: D30. The share of the mortgage market held by commercial banks is approximately(a) 50 percent.(b) 25 percent.(c) 15 percent.(d) 5 percent.Answer: B31. Which of the following has not been a reason for the development and growth of on-line mortgagelending?(a) Mortgage lending is an information-based service and no products have to be inventoried orshipped.(b) The product (a mortgage loan) is homogeneous.(c) It has led to simplification of loan alternatives and made comparison shopping easier.(d) On-line lenders have lower overhead and can offer loans at lower costs.Answer: C32. A loan-servicing agent will(a) package the loan for an investor.(b) hold the loan in their investment portfolio.(c) collect payments from the borrower.(d) (a) and (c).(e) (b) and (c).Answer: C33. Distinct elements of a mortgage loan include(a) origination.(b) investment.(c) servicing.(d) all of the above.(e) only (b) and (c).Answer: D34. The Federal National Mortgage Association (Fannie Mae)(a) was set up to buy mortgages from thrifts so that these institutions could make more loans.(b) funds purchases of mortgages by selling bonds to the public.(c) provides insurance for certain mortgage contracts.(d) all of the above.(e) only (a) and (b) of the above.Answer: E35. The Federal Housing Administration (FHA)(a) was set up to buy mortgages from thrifts so that these institutions could make more loans.(b) funds purchases of mortgages by selling bonds to the public.(c) provides insurance for certain mortgage contracts.(d) all of the above.(e) only (a) and (b) of the above.Answer: C36. _________ issues participation certificates, and _________ provides federal insurance forparticipation certificates.(a) Freddie Mac; Freddie Mac(b) Freddie Mac; Ginnie Mae(c) Ginnie Mae; Freddie Mac(d) Ginnie Mae; Ginnie Mae(e) Freddie Mac; no oneAnswer: E37. REMICs are most like(a) Freddie Mae pass-through securities.(b) Ginnie Mae pass-through securities.(c) participation certificates.(d) collateralized mortgage obligations.Answer: D38. Ginnie Mae(a) insures qualifying mortgages.(b) insures pass-through certificates.(c) insures collateralized mortgage obligations.(d) (a) and (b).(e) (b) and (c).Answer: B39. All of the following add to concerns about the safety and soundness of Fannie Mae and Freddie Macexcept their(a) large publicly issued debt relative to that of the federal government.(b) political influence.(c) high capital-asset ratio that gives rise to conflicts of interest.(d) multiple goals of profit maximization and working to further the public interest.Answer: C40. Mortgage-backed securities(a) have been growing in popularity in recent years asinstitutional investors look for attractiveinvestment opportunities.(b) are securities collateralized by a pool of mortgages.(c) are securities collateralized by both insured and uninsured mortgages.(d) all of the above.(e) only (a) and (b) of the above.Answer: D41. The most common type of mortgage-backed security is(a) the mortgage pass-through, a security that has the borrower’s mortgage payments pass throughthe trustee before being disbursed to the investors.(b) collateralized mortgage obligations, a security which reduces prepayment risk.(c) the participation certificate, a security which passes the borrower’s mortgage payments equallyamong all the owners of the certificates.(d) the securitized mortgage, a security which increases the liquidity of otherwise illiquid mortgages.Answer: ATrue/False1. Down payments are designed to reduce the likelihood of default on mortgage loans.Answer: TRUE2. Discount points (or simply points) are interest payments made at the beginning of a loan.Answer: TRUE3. A point on a mortgage loan refers to one monthly payment of principal and interest.Answer: FALSE4. Closing for a mortgage loan refers to the moment the loan is paid off.Answer: FALSE5. Private mortgage insurance is a policy that guarantees to make up any discrepancy between thevalue of the property and the loan amount, should a default occur.Answer: TRUE6. During the early years of the loan, the lender applies most of the payment to the principal onthe loan.Answer: FALSE7. One important advantage to a borrower who qualifies for an FHA or VA loan is the very low interestrate on the mortgage.Answer: FALSE8. Adjustable-rate mortgages generally have lower initial interest rates than do fixed-rate mortgages.Answer: TRUE9. Mortgage interest rates loosely track interest rates on three-month Treasury bills.Answer: FALSE10. An advantage of a graduated-payment mortgage is that borrowers will qualify for a larger loan thanif they requested a conventional mortgage.Answer: TRUE11. Nearly half the funds for mortgage lending come from mortgage pools and trusts.Answer: TRUE12. Many institutions that make mortgage loans do not want to hold large portfolios of long-termsecurities, because it would subject them to unacceptably high interest-rate risk.Answer: TRUE13. A problem that initially hindered the marketability of mortgages in a secondary market was that theywere not standardized.Answer: TRUE154 Mishkin/Eakins ?Financial Markets and Institutions, Fifth Edition14. Mortgage-backed securities have declined in popularity in recent years as institutional investorshave sought higher returns in other markets.Answer: FALSE15. Mortgage-backed securities are marketable securities collateralized by a pool of mortgages.Answer: TRUE16. Fannie Mae and Freddie Mac together either own or insure the risk on nearly one-fourth ofAmerica’s residential mortgages.Answer: FALSEChapter 12 The Mortgage Markets 155Essay1. How has the modern mortgage market changed over recent years?2. Explain the features of mortgage loans that are designed to reduce the likelihood of default.3. What are points? What is their purpose?4. How does an amortizing mortgage loan differ from a balloon mortgage loan?5. Evaluate the advantages and disadvantages, from both the lender’s and the borrower’s perspe ctives,of fixed-rate and adjustable-rate mortgages.6. Why has the on-line lending market developed in recent years and what are the advantages anddisadvantages of this development?7. Why may Fannie Mae and Freddie Mac pose a threat to the health of the financial system?8. What are mortgage-backed securities, why were they developed, what types of mortgage-backedsecurities are there, and how do they work?。

Chapter 20Bank Performance1. A(n) ________ in interest rates could reduce a commercial bank’s expected cash flows because theinterest paid on deposits may _______________ than the interest earned on loans and investments.A) increase; increase to a greater degreeB) increase; increase to a lesser degreeC) decrease; increase to a greater degreeD) decrease; increase to a lesser degreeANSWER: A2. Even if other external forces (such as interest rates) are unchanged, a commercial bank’s e xpectedcash flows can change in response to a change in its management skills.A) TrueB) FalseANSWER: A3. The risk premium on a commercial bank is __________ related to economic growth and____________ related to management skills.A) positively; negativelyB) positively; positivelyC) negatively; negativelyD) negatively; positivelyANSWER: A4. Interest income generated from all assets is calledA) net interest margin.B) the spread.C) gross interest income.D) net interest income.ANSWER: C5. Interest paid on deposits and borrowed funds is calledA) net interest expense.B) net interest margin.C) gross interest expense.D) net spread expense.ANSWER: C6. Net interest income is the difference between gross interest income and interest expenses and is2 ❖ Bank Performancemeasured as a percentage ofA) liabilities.B) shareholder’s equity.C) assets.D) revenues.ANSWER: C7. Fees charged by a bank on various services allow the bank to generate:A) noninterest incomeB) components of net interest marginC) components of net interest incomeD) components of gross interest incomeANSWER: A8. The loan loss provision should increase during periods of high economic growth.A) TrueB) FalseANSWER: B9. Noninterest income as a percentage of assets has been consistently lowest for banks thatA)focus on providing loans.B)offer substantial insurance services.C)offer substantial securities-related services.D)offer substantial advisory services.ANSWER: A10. If a bank has short-term deposits and provides long-term fixed rate loans, and interest rates declineover time, its net interest margin should be:A)declining over time.B)rising over time.C)constant over time.D)consistently negative.ANSWER: B11. For a given level of return on assets, a bank with a higher level of capital will have a lowerA)return on equity.B)leverage measure.C)noninterest income.D)liquidity.ANSWER: A12. Net income measured as a percentage of assets isA) return on equity (ROE).Bank Performance ❖ 3B) return on liabilities (ROL).C) return on investment (ROI).D) return on assets (ROA).ANSWER: D13. The net interest margin .A) money center; highB) money center; lowC) small; lowD) A and CANSWER: B14. When only equity counts as capital, the leverage measure isA) equal to the capital ratio.B) equal to return on assets.C) the inverse of return on assets.D) assets divided by equity.ANSWER: D15. When only equity counts as capital, the higher the capital ratio, theA) lower the leverage measure.B) lower the degree of financial leverage.C) higher the leverage measure.D) A and BE) B and CANSWER: D16. Gross interest income is affected byA) market interest rates.B) the composition of assets held by banks.C) interest expenses.D) non-interest expenses.E) A and BANSWER: E17. If a bank increases its provisions for loan losses, its interest income is _______,and its noninterest income is _______.A)reduced; not affectedB)reduced; reducedC)not affected; reducedD)not affected; not affectedANSWER: D18. Return on assets (ROA) will usually reveal when a bank’s performance is not up to par, but it doesnot indicate the reason for poor performance.4 ❖ Bank PerformanceA) TrueB) FalseANSWER: A19. Gross interest expense is affected byA) market interest rates.B) the composition of assets held by the bank.C) fee services provided by the bank.D) A and BANSWER: A20. If a bank had long-term fixed-rate assets and short-term liabilities, and interest rates increased overtime, its net interest margin shouldA) decrease.B) increase.C) stay the same.D) either A or B, depending on whether the asset maturities exceed 10 yearsANSWER: A21. The sum of net interest income, non-interest income, and securities gains, minus provision for loanlosses and non-interest expenses equalsA) net interest margin.B) gross interest margin.C) net income.D) income before taxes.ANSWER: D22. Which of the following banks would likely have the highest return on equity?A) high return on assets, high capital ratioB) high return on assets, low capital ratioC) low return on assets, low capital ratioD) low return on assets, high capital ratioANSWER: B23. Banks A and B have the same net income. Bank A has a higher capital ratio and more assets thanB. Ba nk A’s return on assets is ______ than Bank B’s.Bank A’s return on equity is ______ thanBank B’s.A) higher; higherB) higher; lowerC) lower; higherD) lower; lowerANSWER: D24. Banks G and H are the same size and have similar operations. Bank G holds the minimum level ofBank Performance ❖ 5 capital and Bank H holds a higher level of capital. Bank G’s return on equity is probably ______ volatile than that of Bank H. Bank G’s beta is probably _______ than that of Bank H.A) less; lowerB) less; higherC) more; higherD) more; lowerANSWER: C25. Bank K is conservatively managed. It benefits slightly when general economic conditions are veryfavorable and is hurt slightly when general economic conditions are very unfavorable. Its beta would likely beA) less than zero.B) zero.C) between zero and 1.00.D) greater than 1.00.ANSWER: C26. _______________ results from a bank’s sale of securities.A)Noninterest incomeB)Loan loss provisionC)Securities gains and lossesD)Noninterest expensesE)none of the aboveANSWER: C27. Bank X obtains most of its funds from NCDs, while Bank Y obtains much of its funds from passbooksavings and from demand deposit accounts. Given this information, the net interest margin of Bank X would likely be ______ than that of Bank Y, and noninterest expenses would likely be ______ than that of Bank Y.A) greater; greaterB) greater; lessC) less; lessD) less; greaterANSWER: C28. A bank’s ROE ______ account for its financial leverage. A bank’s ROA ______ account for itsfinancial leverage.A) does; doesB) does; does notC) does not; does notD) does not; doesANSWER: B29. A bank’s ROA ______ account for taxes on earnings. A bank’s ROE ______ account for taxes onearnings.6 ❖ Bank PerformanceA) does; doesB) does; does notC) does not; does notD) does not; doesANSWER: A30. A bank’s ROA ______ account for loan losses.A bank’s ROE ______ account for loan losses.A) does; doesB) does; does notC) does not; does notD) does not; doesANSWER: A31. A bank’s net interest margin includesA) noninterest expenses.B) noninterest income.C) loan losses.D) none of the aboveANSWER: D32. Banks with relatively _________ ROAs often incur ____________ noninterest expenses.A) low; very lowB) low; very highC) high; very highD) none of the aboveANSWER: B33. Bank T generally obtains a high percentage of its funds from wholesale CDs. Bank V which obtainsmost of its funds from retail CDs. Bank Z obtains its funds from checking accounts. The bank that will incur the highest interest expenses is ___________.A) Bank TB) Bank VC) Bank ZD) all banks are the sameANSWER: A34. Which of the following is not a factor that affects cash flows of a commercial bank?A)changes in economic growthB)changes in the risk-free interest rateC)changes in industry conditionsD)changes in management abilitiesE)all of the above are factors that affect cash flows of a commercial bankANSWER: EBank Performance ❖ 735. The value of a commercial bank can be modeled as the present vale of its future cash flows.A) TrueB) FalseANSWER: A36. The level of competition is an industry characteristic that will favorably affect cash flows, because ahigh level of competition may increase a bank’s volume of business or increase the prices it can charge for its services.A) TrueB) FalseANSWER: B37. If the risk premium on a commercial bank rises, so will the required rate of return by investors whoinvest in the bank.A) TrueB) FalseANSWER: A38. Gross interest expenses of banks are normally higher in periods when market interest rates are higherA) TrueB) FalseANSWER: A39. As banks continue to offer new services (such as insurance or securities services), noninterest incomewill decrease over time.A) TrueB) FalseANSWER: B40. The loan loss provision should increase during periods when loan losses are more likely, such asduring a recessionary period.A) TrueB) FalseANSWER: A41. Any individual bank’s ROA depends on the bank’s policy decisions, but not on uncontrollable factors relating to the economy and government regulations.A) TrueB) FalseANSWER: B42. ROA reveals when a bank’s performance is not up to par and the reasons for its poor performance.8 ❖ Bank PerformanceA) TrueB) FalseANSWER: B43. Which of the following is not a reason for bank failures?A)fraudB) a low loan default percentageC)liquidity crisisD)increased competitionE)All of the above are reasons for bank failures.ANSWER: B44. During periods of ___________ economic growth, loan demand tends to be __________,allowing banks to provide ____________ loans.A)strong; higher; moreB)weak; higher; moreC)weak; lower; moreD)strong; lower; fewerE)none of the aboveANSWER: A45. Changes in ____________ are a factor affecting the value of a commercial bank over which the bank has some control.A)economic growthB)the risk-free interest rateC)industry conditionsD)management abilitiesE)none of the aboveANSWER: D46. If a bank is too _________ in attempting to avoid loan losses, its net interest margin will be _______.A)conservative; highB)conservative; lowC)aggressive; highD)aggressive; lowE)none of the aboveANSWER: B47. Banks offering ______________ nontraditional services will incur _______________ noninterestexpenses and _____________ noninterest income.A)fewer; higher; higherB)more; lower; higherC)more; higher; higherD)fewer; lower; higherE)none of the aboveBank Performance ❖ 9 ANSWER: C。

第12章银行业：结构与竞争一、概念题1．自动银行机（ABM）（automated banking machine，ABM）答：自动银行机是一种无银行职员、借助于电子计算机系统自动从事银行业务的机器。

西方国家的一些城市，由于地价高、租地难，以及用机器代替雇员可以降低经费而增加盈利等原因，许多银行近年来广泛运用电子计算机，开办“无人银行营业所”、“电视银行营业所”等新型银行营业机构。

这种营业所造价低，规模小，自动化程度高，能够迅速、准确地为客户提供服务，如抵押放款的收回、小额放款的偿还、公共费用的转入、现金的存入和提收、存款转账等。

由于可实行24小时营业，休息日也照常接待顾客，工作效率高，经营成本低，因而具有很强的竞争能力。

2．自动提款机（ATM）（automated teller machine，ATM）答：自动提款机是一种电子装置，利用磁性代码卡自动工作，代替银行柜面人员基本工作的自动化机器。

自动提款机可用于提取现金、查询存款余额、进行账户之间资金划拨、余额查询等工作。

持卡人可以使用或储蓄卡，根据密码办理自动取款、查询余额、转账、更改密码等业务。

3．国民银行（national banks）答：国民银行专指向美国联邦政府登记，经批准注册并领取营业执照接受政府管理的商业银行。

国民银行根据1864年制定的《国民银行法》，由货币监理署（OCC）核准资格，还必须加盟联邦储备体系（FRS）与联邦存款保险公司（FDIC），受联邦储备银行和联邦存款保险公司的监督与检查。

美国的大商业银行基本上都是国民银行。

这种银行最早是根据美国国会1863年2月通过并于1864年作了修订而颁布的《国民银行法》而建立的，可以用美国政府债券作保证发行同等金额的银行券。

1913年美国颁布《联邦储备法》，规定所有国民银行都必须加入联邦储备体系，成为其会员银行。

1935年联邦政府取消了国民银行发行银行券的特权，将发行权集中到联邦储备体系，国民银行专营商业银行业务。

Chapter 6Money Markets1. Securities with maturities of one year or less are classified asA) capital market instruments.B) money market instruments.C) preferred stock.D) none of the aboveANSWER: B2. Which of the following is not a money market security?A) Treasury billB) negotiable certificate of depositC) common stockD) federal fundsANSWER: C3. ________ are sold at an auction at a discount from par value.A) Treasury billsB) Repurchase agreementsC) Banker’s acceptancesD) Commercial paperANSWER: A4. Jarrod King, a private investor, purchases a Treasury bill with a $10,000 par value for $9,645. Onehundred days later, Jarrod sells the T-bill for $9,719. What is Jarrod’s expected annualized yield from this transaction?A)13.43 percentB) 2.78 percentC)10.55 percentD) 2.80 percentE)none of the aboveANSWER: D5. If an investor buys a T-bill with a 90-day maturity and $50,000 par value for $48,500 and holds it tomaturity, what is the annualized yield?A) about 13.4 percentB) about 12.5 percentC) about 11.3 percentD) about 11.6 percentE) about 10.7 percent2 ❖ Money MarketsANSWER: B6. An investor buys a T-bill with 180 days to maturity and $250,000 par value for $242,000. He plansto sell it after 60 days, and forecasts a selling price of $247,000 at that time. What is the annualized yield based on this expectation?A) about 10.1 percentB) about 12.6 percentC) about 11.4 percentD) about 13.5 percentE) about 14.3 percentANSWER: B7. Assume investors require a 5 percent annualized return on a six-month T-bill with a par value of$10,000. The price investors would be willing to pay is $________.A) 10,000B) 9,524C) 9,756D) none of the aboveANSWER: C8. A newly issued T-bill with a $10,000 par value sells for $9,750, and has a 90-day maturity. What isthe discount?A) 10.26 percentB) 0.26 percentC) $2,500D) 10.00 percentE) 11.00 percentANSWER: D9. Large corporations typically make ___________ bids for T-bills so they can purchase larger amounts.A) competitiveB) noncompetitiveC) very smallD) none of the aboveANSWER: A10. At any given time, the yield on commercial paper is ______ the yield on a T-bill with the samematurity.A) slightly less thanB) slightly higher thanC) equal toD) A and B both occur with about equal frequencyANSWER: BMoney Markets ❖ 311. T-bills and commercial paper are soldA) with a stated coupon rate.B) at a discount from par value.C) at a premium about par value.D) A and CE) none of the aboveANSWER: B12. ___________ is a short-term debt instrument issued only be well-known, creditworthy firms and isnormally issued to provide liquidity or finance a firm’s investment in inventory and accountsreceivable.A) A banker’s acceptanceB) A repurchase agreementC) Commercial paperD) A Treasury billANSWER: C13. Commercial paper has a maximum maturity of _______days.A) 45B) 270C) 360D) none of the aboveANSWER: B14. An investor buys commercial paper with a 60-day maturity for $985,000. Par value is $1,000,000,and the investor holds it to maturity. What is the annualized yield?A) 8.62 percentB) 8.78 percentC) 8.90 percentD) 9.14 percentE) 9.00 percentANSWER: D15. A firm plans to issue 30-day commercial paper for $9,900,000. Par value is $10,000,000. What isthe firm’s cost of borrowing?A) 12.12 percentB) 11.11 percentC) 13.00 percentD) 14.08 percentE) 15.25 percentANSWER: A16. When firms sell commercial paper at a ______ price than they projected, their cost of raising funds is______ than projected.4 ❖ Money MarketsA) higher; higherB) lower; lowerC) A and BD) none of the aboveANSWER: D17. Which of the following is not a money market instrument?A) banker’s acceptanceB) commercial paperC) negotiable CDsD) repurchase agreementsE) all of the above are money market instrumentsANSWER: E18. A repurchase agreement calls for an investor to buy securities for $4,925,000 and sell them back in60 days for $5,000,000. What is the yield?A) 9.43 percentB) 9.28 percentC) 9.14 percentD) 9.00 percentANSWER: C19. The federal funds market allows depository institutions to borrowA) short-term funds from each other.B) short-term funds from the Treasury.C) long-term funds from each other.D) long-term funds from the Federal Reserve.E) B and DANSWER: A20. When a bank guarantees a future payment to a firm, the financial instrument used is calledA) a repurchase agreement.B) a negotiable CD.C) a banker’s acceptance.D) commercial paper.ANSWER: C21. Which of the following instruments has a highly active secondary market?A) banker’s acceptancesB) commercial paperC) federal fundsD) repurchase agreementsANSWER: AMoney Markets ❖ 522. Which of the following is true of money market instruments?A) Their yields are highly correlated over time.B) They typically sell for par value when they are initially issued (especially T-bills and commercialpaper).C) Treasury bills have the highest yield.D) They all make periodic coupon (interest) payments.E) A and BANSWER: A23. An investor purchased an NCD a year ago in the secondary market for $980,000. He redeems it todayand receives $1,000,000. He also receives interest of $30,000. The investor’s annualized yield on this investment isA) 2.0 percent.B) 5.10 percent.C) 5.00 percent.D) 2.04 percent.ANSWER: B24. An investor initially purchased securities at a price of $9,923,418, with an agreement to sell themback at a price of $10,000,000 at the end of a 90-day period. The repo rate is ________ percent.A) 3.10B) 0.77C) 1.00D) none of the aboveANSWER: A25. The rate at which depository institutions effectively lend or borrow funds from each other is the___________.A) federal funds rateB) discount rateC) prime rateD) repo rateANSWER: A26. ______________ are the most active participants in the federal funds market.A) Savings and loan associationsB) Securities firmsC) Credit unionsD) Commercial banksANSWER: D27. Eurodollar depositsA) are U.S. dollars deposited in the U.S. by European investors.6 ❖ Money MarketsB) are subject to interest rate ceilings.C) have a relatively large spread between deposit and loan rates (compared to the spread betweendeposits and loans in the United States).D) are not subject to reserve requirements.ANSWER: D28. Which money market transaction is most likely to represent a loan from one commercial bank toanother?A) banker’s acceptanceB) negotiable CDC) federal fundsD) commercial paperANSWER: C29. The rate on Eurodollar floating rate CDs is based onA) a weighted average of European prime rates.B) the London Interbank Offer Rate.C) the U.S. prime rate.D) a weighted average of European discount rates.ANSWER: B30. Treasury billsA) have a maturity of up to five years.B) have an active secondary market.C) are commonly sold at par value.D) commonly offer coupon payments.ANSWER: B31. The yield on commercial paper is ______ the yield of Treasury bills of the same maturity. Thedifference between their yields would be especially large during a ______ period.A) greater than; recessionaryB) greater than; boom economyC) less than; boom economyD) less than; recessionaryANSWER: A32. The yield on NCDs is ______ the yield of Treasury bills of the same maturity. The differencebetween their yields would be especially large during a ______ period.A) greater than; recessionaryB) greater than; boom economyC) less than; boom economyD) less than; recessionaryANSWER: AMoney Markets ❖ 7 33. Which of the following is sometimes issued in the primary market by nonfinancial firms to borrowfunds?A) NCDsB) retail CDsC) commercial paperD) federal fundsANSWER: C34. The so-called “flight to quality” causes the risk differential between risky and risk-free securities tobeA) eliminated.B) reduced.C) increased.D) unchanged (there is no effect).ANSWER: C35. The effective yield of a foreign money market security is _____ when the foreign currencystrengthens against the dollar.A) increasedB) reducedC) always negativeD) unaffectedANSWER: A36. The effective yield of a foreign money market security is _____ when the foreign currency weakensagainst the dollar.A) increasedB) reducedC) always negativeD) unaffectedANSWER: B37. Treasury bills are sold through _____ when initially issued.A) insurance companiesB) commercial paper dealersC) auctionD) finance companiesANSWER: C38. At a given point in time, the actual price paid for a three-month Treasury bill isA) usually equal to the par value.B) more than the price paid for a six-month Treasury bill.C) equal to the price paid for a six-month Treasury bill.8 ❖ Money MarketsD) none of the aboveANSWER: B39. The minimum denomination of commercial paper isA) $25,000.B) $100,000.C) $150,000.D) $200,000.ANSWER: B40. Commercial paper isA) always directly placed with investors.B) always placed with the help of commercial paper dealers.C) placed either directly or with the help of commercial paper dealers.D) always placed by bank holding companies.ANSWER: C41. An investor, purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700. If the Treasury bill is held to maturity, the annualized yield is _______ percent.A) 6.02B) 1.54C) 1.50D) 6.20E)none of the aboveANSWER: D42. When an investor purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700, the Treasury bill discount is ______ percent.A) 5.93B) 6.12C) 6.20D) 6.02E)none of the aboveANSWER: A43. Robbins Corp. frequently invests excess funds in the Mexican money market. One year ago, Robbinsinvested in a one-year Mexican money market security that provided a yield of 25 percent. At the end of the year, when Robbins converted the Mexican pesos to dollars, the peso had depreciated from $.12 to $.11. What is the effective yield earned by Robbins?A)25.00 percentB)35.41 percentC)14.59 percentD)none of the aboveMoney Markets ❖ 9 ANSWER: C44. An aggregate purchase by investors of low-yield instruments in favor of high-yield instruments places_____________ pressure on the yields of low-yield securities and _____________ on the yields of high-yield securities.A)upward; upwardB)downward; downwardC)upward; downwardD)downward; upwardANSWER: D45. Which of the following statements is incorrect with respect to the federal funds rate?A)It is the rate charged by financial institutions on loans they extend to each other.B)It is not influenced by the supply and demand for funds in the federal funds market.C)The federal funds rate is closely monitored by all types of firms.D)Many market participants view changes in the federal funds rate to be an indicator of potentialchanges in other money market rates.E)The Federal Reserve adjusts the amount of funds in depository institutions in order to influencethe federal funds rate.ANSWER: B46. Bullock Corp. purchases certain securities for $4,921,349, with an agreement to sell them back at aprice of $4,950,000 at the end of a 30-day period. The repo rate is ________ percent.A)7.08B) 6.95C) 6.99D)7.04E)none of the aboveANSWER: C47. Commercial paper is subject to:A) interest rate risk.B) default risk.C) A and B.D) none of the above.ANSWER: C48. If economic conditions cause investors to sell stocks because they want to invest in safer securitieswith much liquidity, this should cause a ________ demand for money market securities, which placed _________ pressure on the yields of money market securities.A)weak; downwardB)weak; upwardC)strong; upwardD)none of the above10 ❖ Money MarketsANSWER: D49. In general the money markets are widely perceived to be efficient in the sense that the prices reflectall available public information.A) TrueB) FalseANSWER: A50. Money market securities are must have a maturity of three months or less.A) TrueB) FalseANSWER: B51. Money market securities are issued in the primary market through a telecommunications network bythe Treasury, corporations, and financial intermediaries that wish to obtain short-term financing.A) TrueB) FalseANSWER: A52. An international interbank market facilitates the transfer of funds from banks with excess funds tothose with deficient funds.A) TrueB) FalseANSWER: A53. The interest rate charged for a short-term loan from a bank to a corporation is referred to as theLondon interbank offer rate (LIBOR).A) TrueB) FalseANSWER: B54. Money markets are used to facilitate the transfer of short-term funds from individuals, corporations,or governments with excess funds to those with deficient funds.A) TrueB) FalseANSWER: A55. Because money market securities have a short-term maturity and typically cannot be sold easily,they provide investors with a low degree of liquidity.A) TrueB) FalseANSWER: BMoney Markets ❖ 11 56. There is no limit to the amount of T-bills that can be purchased by noncompetitive bidders in a T-billauction.A) TrueB) FalseANSWER: B57. T-bills do not offer coupon payments but are sold at a discount from par value.A) TrueB) FalseANSWER: A58. Junk commercial paper is commercial paper that is not rated or rated low.A) TrueB) FalseANSWER: A59. A line of credit provided by a commercial bank allows a company the right (but not the obligation)to borrow a specified maximum amount of funds over a specified period of time.A) TrueB) FalseANSWER: A60. T-bills must offer a premium above the negotiable certificate of deposit (NCD) to compensate for lessliquidity and safety.A) TrueB) FalseANSWER: B61. Most repo transactions use government securities.A) TrueB) FalseANSWER: A62. Exporters can hold a banker’s acceptance until the date at which pa yment is to be made, yet theyfrequently sell the acceptance before then at a discount to obtain cash immediately.A) TrueB) FalseANSWER: A63. Money market security values are less sensitive to interest rate movements than bonds.A) True12 ❖ Money MarketsB) FalseANSWER: A64. During periods of uncertainty about the economy, there is a shift from risky money market securitiesto Treasury securities.A) TrueB) FalseANSWER: A65. The price noncompetitive bidders will pay at a Treasury bill auction is theA)highest price entered by a competitive bidder.B)highest price entered by a noncompetitive bidder.C)the weighted average price paid by all competitive bidders whose bids were accepted.D)the equally weighted average price paid by all competitive bidders whose bids were accepted.E)none of the aboveANSWER: C66. Bill Yates, a private investor, purchases a six-month (182-day) T-bill with a $10,000 par value for$9,700.If Bill holds the Treasury bill to maturity, his annualized yield is _______ percent.A) 6.02B) 1.54C) 1.50D) 6.20E)none of the aboveANSWER: D67. You purchase a six-month (182-day) T-bill with a $10,000 par value for $9,700. The Treasury bill discount is ______ percent.A) 5.93B) 6.12C) 6.20D) 6.02E)none of the aboveANSWER: A68. A _____________ is not a money market security.A)Treasury billB)negotiable certificate of depositC)bondD)banker’s acceptanceE)All of the above are money market securities.ANSWER: CMoney Markets ❖ 13 69. Freeman Corp., a large corporation, plans to issue 45-day commercial paper with a par value of$3,000,000. Freeman expects to sell the commercial paper for $2,947,000. Freeman’s annualized cost of borrowing is estimated to be ________ percent.A)14.39B)14.13C)14.59D)14.33E)none of the aboveANSWER: A70. When a firm sells its commercial paper at a ___________ price than projected, their cost of raisingfunds will be __________ than what they initially anticipated.A)higher; higherB)lower; lowerC)higher; lowerD)lower; higherE)Answers c and d are correct.ANSWER: E71. Which of the following securities is most likely to be used in a repo transaction?A)commercial paperB)certificate of depositC)Treasury billD)common stockE)All of the above are equally likely to be used in a repo transaction.ANSWER: C。

第3章利率的含义及其在定价中的作用课后题（定量）1．计算5年期，到期收益率为6%的1000美元零息债券的现值。

2．一种彩票头奖每年偿付50万，共付20年，贴现率为6%，这份头奖的实际价值是多少？3．年息票利率为7%，面值1000美元，到期期限3年，到期收益率5%，计算当期价格。

4．票面价值为1000美元，息票利率为10%，当期售价1150美元，到期期限为8年，债券的到期收益率为多少？5．一种永续债券年支付1250美元，当前价格15625美元。

求年支付1250美元，20年期普通年金的当前价格。

6．一种永续债券年支付50美元，到期收益率为2.5%，求当前价格。

如果到期收益率翻倍，当前价格为多少。

7．10万美元的房产，财产税为每年2.66%，求财产税的现值。

（假设房产价值不变，财产税率不变，贴现率为9%）8．实际利率2%，下一年预期通货膨胀率6%，名义利率是多少？以名义利率存款1000美元，一年后能否购买1050美元的音响。

9．10年期息票债券，面值1000美元，息票利率7%，当前售价871.65美元，如果第二年以880.1美元出售，计算回报率。

10．5年期债券，息票利率8%，面值1000美元，当前以980.30美元购买，若在1年后售出，回报率为9%，求售出价。

11．期限3年，面值1000美元，息票利率6%的息票债券久期。

（到期收益率7%）12．第11题中，如果利率跌至6.75%，计算预期价格变动。

两种方法13．一种价值为1亿美元的资产组合久期为10年，4000万证券加入该组合后久期变为12.5年，求4000万证券的久期？14．银行有两种3年期贷款。

第一种价值为3000万美元，到期一次性还款3780万美元。

第二种价值为4000万美元，要求每年偿还360美元利息，本金到期后归还。

（1）银行贷款资产组合的久期。

（2）如果利率从8%提高为8.5%该资产组合的价值变化情况。

15．一种债券的现金流支付如下：年 1 2 3 4现金流160 170 180 230将其持有2.5年，然后售出。

Chapter 13Financial Futures Markets1. A(n) ______ is a standardized agreement to deliver or receive a specified amount of a specifiedfinancial instrument at a specified price and date.A) option contractB) brokerage contractC) financial futures contractD) margin callANSWER: C2. Interest rate futures are not available onA) Treasury bonds.B) Treasury notes.C) Eurodollar CDs.D) the S&P 500 index.ANSWER: D3. _________ take positions in futures to reduce their exposure to future movements in interest rates orstock prices.A) HedgersB) Day tradersC) Position tradersD) none of the aboveANSWER: A4. ______ trade futures contracts for their own account.A) Commission brokersB) Floor brokersC) Commission tradersD) Floor tradersANSWER: D5. The initial margin of a futures contract is typically between ___________ percent of a futurescontract’s full value.A) 0 and 2B) 5 and 18C) 25 and 40D) 45 and 60ANSWER: B2 ❖ Financial Futures Markets6. Futures exchanges facilitate the trading process and take buy or sell positions on futures contracts.A) TrueB) FalseANSWER: B7. If the prices of Treasury bonds ______, the value of an existing Treasury bond futures contractshould ______.A) increase; be unaffectedB) decrease; be unaffectedC) A and BD) decrease; decreaseE) decrease; increaseANSWER: D8. Assume that a T-bill futures contract with a face value of $1 million is purchased at a price of $95.00per $100 face value. At settlement, the price of T-bills is $95.50. What is the difference between the selling and purchase price of the futures contract?A) $.50B) $50C) $500D) $5,000E) none of the aboveANSWER: D9. If speculators believe interest rates will _______, they would consider ______ a T-bill futurescontract today.A) increase; sellingB) increase; buyingC) decrease, sellingD) decrease; purchasing a call option onANSWER: A10. Financial futures contracts on U.S. securities are __________ by non-U.S. financial institutions.A) not allowed to be tradedB) are rarely desiredC) are commonly tradedD) A and BANSWER: C11. Assume that speculators had purchased a futures contract at the beginning of the year. If the price ofa security represented by a futures contract ______ over the year, then these speculators would likelyhave purchased the futures contract for ________ than they can sell it for.A) increased; moreB) decreased; lessFinancial Futures Markets ❖ 3C) remains the same; moreD) increased; lessANSWER: D12. Assume that a futures contract on Treasury bonds with a face value of $100,000 is purchased at93-00. If the same contract is later sold at 94-18, what is the gain, ignoring transactions costs?A) $1,180,000B) $118C) $11,800D) $15,625E) $1,562.50ANSWER: E13. The use of financial leverageA) magnifies the positive returns of futures contracts.B) magnifies losses of futures contracts.C) both A and BD) none of the aboveANSWER: C14. According to the text, when a financial institution sells futures contracts on securities in order tohedge against a change in interest rates, this is referred to asA) a long hedge.B) a short hedge.C) a closed out position.D) basis trading.ANSWER: B15. A financial institution that maintains some Treasury bond holdings sells Treasury bond futures con-tracts. If interest rates increase, the market value of the bond holdings will ______ and the position in futures contracts will result in a _______.A) increase; gainB) increase; lossC) decrease; gainD) decrease; lossANSWER: C16. The basis is theA) difference between the price of a security and the price of a futures contract on the security.B) gain or loss from hedging with futures contracts.C) difference between a futures contract price and the initial deposit required.D) price paid for a futures contract after accounting for transactions costs.E) price paid for an option contract.4 ❖ Financial Futures MarketsANSWER: A17. The profits of a financial institution with interest-rate sensitive liabilities and interest rate-insensitiveassets are ______ with hedging than without hedging if interest rates decrease.A) higherB) the sameC) lowerD) higher or the sameANSWER: C18. Assume that a bank obtains most of its funds from large CDs with a one-year maturity. Its assets arein the form of loans with rates that adjust every six months. The bank would be ______ affected if interest rates increase. To partially hedge its position, it could _______ futures contracts.A) adversely; purchaseB) favorably; sellC) favorably; purchaseD) adversely; sellANSWER: C19. According to the text, a futures contract on one financial instrument to protect a position in adifferent financial instrument is known asA) cross-hedging.B) ratio hedging.C) basis hedging.D) liquid hedging.ANSWER: A20. The effectiveness of a cross-hedge depends on the degree of correlation between the market values ofthe two financial instruments.A) TrueB) FalseANSWER: A21. If a futures contract is more volatile than the portfolio value, the amount of principal represented bythe futures contracts to hedge the portfolio is _______ the market value of the securities to be hedged.A) smaller thanB) greater thanC) equal toD) B and C are both possibleANSWER: A22. In cross-hedging, if the futures contract value is ______ volatile than the portfolio value, hedging willrequire a ________ amount of principal represented by the futures contracts.A) less; greaterFinancial Futures Markets ❖ 5B) more; greaterC) more; smallerD) none of the aboveANSWER: B23. Municipal Bond Index (MBI) futuresA) involve a physical exchange of bonds.B) are based on a Treasury bond index.C) are based on actively traded corporate bonds.D) are settled in cash.ANSWER: D24. Systemic risk reflects the risk that a particular event couldA) cause losses at a firm due to inadequate management control.B) spread adverse effects among several firms or among financial markets.C) cause a loss in value due to market conditions.D) have a larger effect on the futures position than on the position being hedged.ANSWER: B25. A savings and loan association has long-term fixed-rate mortgages financed by short-term funds. Ithedges by selling Treasury bond futures. If interest rates decline, and many mortgages are prepaidA) the gain on the futures contracts offsets the loss on the mortgages.B) the gain on the mortgages offsets the loss on the futures contracts.C) the gain on the futures contracts more than offsets any unfavorable effects on mortgages.D) a loss on the futures contracts more than offsets the favorable effect on the mortgage portfolio.ANSWER: D26. If a financial institution expects that the market value of its municipal bonds will decline because ofeconomic conditions, it could hedge its position by __________ futures contracts on __________.A) purchasing; Treasury bondsB) purchasing; the S&P 500 IndexC) purchasing; a Municipal Bond IndexD) selling; a Municipal Bond IndexANSWER: D27. The net gain or loss on a futures contract for a stock index that is not closed out is based on thedifference between the futures price when the initial position was created and the futures price atA) the settlement date.B) the date at which the futures price reaches its maximum.C) the date at which the futures price reaches its minimum.D) the date three months beyond the date when the initial position was taken.ANSWER: A6 ❖ Financial Futures Markets28. The value of an S&P 500 futures contract is $500 times the index. Assume the futures price on theS&P 500 index is 1612 at the time of purchase. If the index price is $1619 when the position is closed out, the gain isA) $700.B) $7,000.C) $3,190.D) $3,120.E) $3,500.ANSWER: E29. Assume that a stock mutual fund uses stock index futures as it conducts dynamic asset allocation.This means that the mutual fundA) liquidates its stocks whenever it expects a market downturn.B) maintains a constant buy position in stock index futures.C) maintains a constant sell position in stock index futures.D) none of the aboveANSWER: D30. Companies with international trade can hedge _______ by ______ currency futures.A) payables; sellingB) receivables; buyingC) payables; buyingD) A and BE) B and CANSWER: C31. Assume that corporate bond portfolio managers are concerned about the possibility of many bonddefaults resulting from a future recession. A short position in Treasury bond futures ______ an effective hedge against the default risk. A short position in Treasury bill futures ______ an effective hedge against the default risk.A) would be; would beB) would be; would not beC) would not be; would not beD) would not be; would beANSWER: C32. The buying or selling of stock index futures with a simultaneous opposite position in the stockscomprising that index is known asA) program arbitrage.B) covered interest arbitrage.C) index arbitrage.D) future arbitrage.ANSWER: CFinancial Futures Markets ❖ 7 33. When securities firms capitalize on discrepancies between prices of index futures and stocks, theyare acting as so-calledA) raiders.B) greenmailers.C) buyout artists.D) arbitrageurs.ANSWER: D34. Trading restrictions imposed on specific stocks or stock indices are referred to asA) index busters.B) index options.C) circuit breakers.D) protective covenants.ANSWER: C35. Financial leverage, when used in association with a futures contract, _________ the positive returnsand _______ losses.A)magnifies; reducesB)reduces; magnifiesC)magnifies; magnifiesD)reduces; reducesANSWER: C36. Currency futures may be purchased to hedge ______ or to capitalize on the expected ______ of thatcurrency against the dollar.A) receivables; appreciationB) receivables; depreciationC) payables; depreciationD) payables; appreciationANSWER: D37. The risk that the position being hedged by a futures position is not affected in the same manner as theinstrument underlying the financial futures contract, is referred to asA) market risk.B) liquidity risk.C) default risk.D) basis risk.ANSWER: D38. Dynamic asset allocation involves the switching between risky and low-risk investments byinstitutional investors over time in response to changing expectations.A) TrueB) False8 ❖ Financial Futures MarketsANSWER: A39. The prices of stock index futuresA) are always the same as the prices of the stocks representing the index.B) are always a little above the prices of the stocks representing the index.C) are always a little below the prices of the stocks representing the index.D) none of the aboveANSWER: D40. The actions of numerous institutional investors to sell stock index futures instead of selling stocks toprepare for a market decline would likely cause the index futures price to beA) equal to the prevailing stock prices.B) below the prevailing stock prices.C) above the prevailing stock prices.D) negative.ANSWER: B41. Speculators in futures contracts that normally close out their futures positions on the same day thatthe positions were initiated are referred to asA) day traders.B) hedgers.C) closed-end traders.D) position traders.ANSWER: A42. Speculators in futures contracts that normally maintain the futures position that they initiate forextended periods of time (such as weeks or months) are referred to asA) day traders.B) hedgers.C) closed-end traders.D) position traders.ANSWER: D43. Which of the following is incorrect regarding organized exchanges trading financial futures contracts?A)Organized exchanges establish and enforce rules for the trading of financial futures contracts.B)Organized exchanges ensure that the seller of the futures contract always delivers the securitiescovered by the contract, whether the contract was settled prior to the settlement date or not.C)Organized exchanges clear, settle, and guarantee all transactions that occur on their exchanges.D)The operations of financial futures exchanges are regulated by the Commodity Futures TradingCommission (CFTC).E)All of the above are correct.ANSWER: B44. Marcia buys an S&P 500 futures contract with a September settlement date when the index is 1,750.Financial Futures Markets ❖ 9 By the settlement date, the S&P 500 index falls to 1,400. The return on Marcia’s position in the S&P 500 futures contract is ___ percent.A)-20B)-10C)25D)20E)0ANSWER: A45. Laura sells an S&P 500 futures contract with a September settlement date when the index is 1,750.By the settlement date, the S&P 500 index falls to 1,400. The return on Laura’s position in the S&P 500 futures contract is ___ percent.A)-20B)-10C)25D)20E)0ANSWER: C46. Assume a corporation is receiving a large amount of funds in the near future. The company plans touse the funds to purchase municipal bonds. Also assume that the company is concerned that interest rates decrease before the purchase date, which would make the municipal bonds more expensive. In order to hedge against this possibility, the company should ___________ MBI futures contracts. If interest rates decrease, the futures contract will generate a __________.A)sell; lossB)purchase; gainC)purchase; lossD)sell; gainE)none of the aboveANSWER: B47. If there are ________ traders with buy offers than sell offers for a particular contract, the futuresprice will _______ until this imbalance is removed.A)more; decreaseB)more; riseC)fewer; riseD)none of the aboveANSWER: B48. Which of the following statements is incorrect?A) Circuit breakers are trading restrictions imposed on specific stocks or stock indexes.B) Circuit breakers guarantee that prices will turn upward.C) Circuit breakers may be able to prevent large declines in prices that would be attributed to panicselling rather than to fundamental forces.D) Circuit breakers may allow investors to determine whether circulating rumors are true.10 ❖ Financial Futures MarketsANSWER: B49. ___________ risk is the risk of losses as a result of inadequate management or controls.A) BasisB) SystemicC) OperationalD) PrepaymentANSWER: C50. Financial futures contracts on stock indexes are referred to as interest rate futures.A) TrueB) FalseANSWER: B51. Financial futures contracts are rarely sold over the counter.A) TrueB) FalseANSWER: B52. Brokers commonly require margin deposits from their customers above those required bythe exchanges.A) TrueB) FalseANSWER: A53. Purchasers of financial futures contracts usually know who the sellers are, and vice versa.A) TrueB) FalseANSWER: B54. The futures price is mainly a function of the prevailing price of the underlying securityplus an expected adjustment in that price by the settlement date.A) TrueB) FalseANSWER: A55. A financial institution that hedges with interest rate futures is less sensitive to economic eventsthan an institution that does not hedge.A) TrueB) FalseANSWER: AFinancial Futures Markets ❖ 11 56. A bond index futures contract allows for the buying, but not the selling, of a bond index for aspecified price at a specified date.A) TrueB) FalseANSWER: B57. Market participants who expect the stock market to perform poorly before the settlement date may consider selling S&P 500 index futures.A) TrueB) FalseANSWER: A58. Stock index futures cannot be closed out before the settlement date.A) TrueB) FalseANSWER: B59. The value of a stock index futures contract has little correlation with the value of the underlying stockindex.A) TrueB) FalseANSWER: B60. Since stock index futures prices are primarily driven by movements in the corresponding stockindexes, participants in stock index futures monitor indicators that may signal changes in the stock indexes.A) TrueB) FalseANSWER: A61. The price of stock index futures may reflect investor expectations about the market more rapidly thanstock prices.A) TrueB) FalseANSWER: A62. Financial futures contracts on U.S. securities are commonly traded by non-U.S. financial institutionsthat maintain holdings of U.S. securities.A) TrueB) FalseANSWER: A12 ❖ Financial Futures Markets63. Purchasers of currency futures contracts are required to hold the contract until the settlement date andaccept delivery of the foreign currency at that time.A) TrueB) FalseANSWER: B64. Which of the following statements is incorrect regarding organized exchanges trading financialfutures contracts?A)Organized exchanges establish and enforce rules for the trading of financial futures contracts.B)Organized exchanges ensure that the seller of the futures contract always delivers the securitiescovered by the contract, whether the contract was settled prior to the settlement date or not.C)Organized exchanges clear, settle, and guarantee all transactions that occur on their exchanges.D)The operations of financial futures exchanges are regulated by the Commodity Futures TradingCommission (CFTC).E)All of the above are correct.ANSWER: B65. Stock index futures are priced ___________ than the stock index itself.A)higherB)lowerC)either higher or lowerD)none of the aboveANSWER: C66. An unexpected __________ in the consumer price index tends to create expectations of ___________interest rates and places ____________ pressure on Treasury bond futures prices.A)increase; higher; downwardB)increase; lower; downwardC)increase; higher; upwardD)decrease; higher; downwardE)none of the aboveANSWER: A67. Bill Baher, a private investor, purchased a futures contract on Treasury bonds at a price of 102-12.Two months later, Baher sells the same futures contract in order to close out the position. At that time, the futures contract specifies 103-15. What is Baher’s nominal profit? The par value of the futures contract is $100,000.A)$1,030.00; profitB)$1,030.00; lossC)$1,093.75; profitD)$1,093.75; lossE)none of the aboveANSWER: CFinancial Futures Markets ❖ 13 68. Clarke Bank plans to satisfy cash needs in nine months by selling its Treasury bond holdings for $4million. However, Clarke is concerned that interest rates might increase over the next three months.To hedge against this possibility, Clarke plans to sell Treasury bond futures. Thus, Clarke sells______ futures contract for a price of 99-12. Assuming that the actual price of the futures contract declined to 97-20, Clarke would make a ________ of $________ from closing out the futuresposition.A)40; profit; $76,800B)40; loss; $76,800C)50; profit; $70,000D)40; profit; $70,000E)none of the aboveANSWER: D69. Which of the following statements is incorrect with respect to cross-hedging?A)Even when the futures contract is highly correlated with the portfolio being hedged, the value ofthe futures contract may change by a higher or lower percentage than the portfolio’s market value.B)If the futures contract value is more volatile than the portfolio value, hedging will require agreater amount of principal represented by the futures contracts.C)The effectiveness of a cross-hedge depends on the degree of correlation between the marketvalues of the two financial instruments.D)If the price of the underlying security of the futures contract moves closely in tandem with thesecurity hedged, the futures contract can provide an effective hedge.E)All of the above are correct with respect to cross-hedging.ANSWER: B70. If index futures are priced ________ relative to the stocks representing the index, an arbitrageur may_________ index futures and simultaneously __________ stocks.A)low; purchase; sellB)low; sell; purchaseC)high; purchase; sellD)Answers b and c are correct.E)None of the above are correct.ANSWER: A71. __________ risk is the risk that the position being hedged by a futures contract is not affected in thesame manner as the instrument underlying the futures contract.A)MarketB)LiquidityC)CreditD)BasisE)none of the aboveANSWER: D。

Chapter 19Bank Management OutlineBank ManagementBoard of DirectorsOverview of Bank ManagementOperationsofManagementManaging LiquidityUse of Securitization to Boost LiquidityProblemsLiquidityManaging Interest Rate RiskMethods Used to Assess Interest Rate RiskWhether to Hedge Interest Rate RiskMethods Used to Reduce Interest Rate RiskInternationalRateRiskInterestManaging Credit RiskMeasuring Credit RiskTradeoff between Credit Risk and Expected Return Reducing Credit RiskManaging Market RiskMeasuring Market RiskMethods Used to Reduce Market RiskIntegrated Bank ManagementApplicationManaging Risk of International Operations Exchange Rate RiskRiskSettlementParticipation in Financial Markets2 Chapter 19: Bank ManagementKey Concepts1.Create a simple example of how banks that attempt to maximize returns can be exposed to a highdegree of liquidity risk, interest rate risk, and default risk.2. Describe liquidity risk, and explain how banks manage it.3. Describe interest rate risk, and explain how banks manage it.4. Describe credit risk, and explain how banks manage it.POINT/COUNTER-POINT:Can Bank Failures be Avoided?POINT: No. Banks are in the business of providing credit. When economic conditions deteriorate, there will be loan defaults and some banks will not be able to survive.COUNTER-POINT: Yes. If banks focus on providing loans to creditworthy borrowers, most loans will not default even during recessionary periods.WHO IS CORRECT? Use the Internet to learn more about this issue. Offer your own opinion on this issue.ANSWER: Many arguments are possible. A bank may be able to avoid a large amount of loan defaults by providing loans to only the highest rated firms. However, many banks would not be able to lend all the funds that they have if they only lend to the highest rated firms. Therefore, they provide some loans to weaker firms, and are susceptible to loan defaults when economic conditions are weak. There are many banks competing to give loans and it causes some banks to provide loans that are questionable. The competition is good for the industry because it ensures that deserving customers can receive funding at a competitive rate, but it leads to some bank failures.Questions1. Integrating Asset and Liability Management. What is accomplished when a bank integrates itsliability management with its asset management?ANSWER: Integrating asset and liability decisions can improve performance. For example, thedecision to focus on short-term CDs as a source of funds may result in a decision to concentrate on rate-sensitive assets, such as floating-rate loans. This strategy reduces interest rate risk.2. Liquidity. Given the liquidity advantage of holding Treasury bills, why do banks hold only arelatively small portion of their assets as T-bills?ANSWER: Treasury bill yields are sometimes lower than a bank’s cost of obtaining funds. Thus, banks should not concentrate their investment in Treasury bills.Chapter 19: Bank Management 3 3. Illiquidity. How do banks resolve illiquidity problems?ANSWER: Banks can resolve illiquidity by selling some assets to obtain funds, or borrowing funds in the federal funds market or from the discount window.4. Managing Interest Rate Risk. If a bank expects interest rates to decrease over time, how might italter the rate sensitivity of its assets and liabilities?ANSWER: It may increase its concentration of rate-sensitive liabilities and reduce its concentration of rate-sensitive assets.5. Rate Sensitivity. List some rate-sensitive assets and some rate-insensitive assets of banks.ANSWER: Rate-sensitive assets include floating-rate loans and short-term securities. Rate-insensitive assets include long-term fixed-rate loans and long-term securities.6. Managing Interest Rate Risk. If a bank is very uncertain about future interest rates, how might itinsulate its future performance from future interest rate movements?ANSWER: It can attempt to match the degree of rate sensitivity of assets and liabilities, through maturity matching, interest rate futures contracts, or interest rate swaps. Interest Margin. What is the formula for the net interest margin? Explain why it is closelymonitored by banks.ANSWER: The net interest margin is closely monitored by banks because it usually is the primary contributor to the bank’s return on assets.Net interest margin = Interest revenue –Interest expensesAssets8. Managing Interest Rate Risk. Assume that a bank expects to attract most of its funds through short-term CDs and would prefer to use most of its funds to provide long-term loans. How could it follow this strategy and still reduce interest rate risk?ANSWER: It could use floating-rate loans, so that its assets are rate-sensitive even with long-term maturities.9.Bank Exposure to Interest Rate Movements. According to this chapter, have banks been able toinsulate themselves against interest rate movements? Explain.ANSWER: Banks can attempt to minimize their exposure to interest rate risk because they have the flexibility to use assets whose rate sensitivity is similar to the liabilities. Yet, banks are unable to perfectly match the rate sensitivity of assets and liabilities. Research has found that bank values are typically inversely related to interest rates.4 Chapter 19: Bank Management10.Gap Management. What is a bank’s gap, and what does it attempt to determine? Interpret a negativegap. What are some limitations of measuring a bank’s gap?ANSWER: A bank gap is measured to determine its exposure to interest rate risk. A negative gap implies that a bank would be adversely affected by rising interest rates, since the value of rate-sensitive liabilities exceeds the value of rate-sensitive assets.of ValueofValueGap = rate-sensitive – rate-sensitiveassets liabilitiesIt is difficult to classify some assets or liabilities as rate sensitive or rate insensitive, since the degree of rate sensitivity may vary within a given classification.11.Duration. How do banks use duration analysis?ANSWER: Banks measure duration of assets and liabilities so that they can determine whether their assets are more or less rate-sensitive than their liabilities.12. Measuring Interest Rate Risk. Why do loans that can be prepaid on a moment’s notice complicatethe bank’s assessment of interest rate risk?ANSWER: A fixed-rate loan may be perceived as rate insensitive. Yet, if it is prepaid, the funds are loaned out to someone else at the prevailing rate. Therefore, this type of loan can be sensitive to interest rates.13. Bank Management Dilemma. Can a bank simultaneously maximize return and minimize defaultrisk? If not, what can it do instead?ANSWER: Banks cannot maximize return unless they incur some default risk, so they must balance the risk and return objectives, based on their degree of risk aversion.14. Bank Exposure to Economic Conditions. As economic conditions change, how do banks adjusttheir asset portfolio?ANSWER: Expectations of a stronger economy may encourage banks to provide more risky loans, since the probability of default may decrease, and the potential return is higher. Expectations of a weaker economy may encourage banks to use a more conservative approach. Expectations of higher (lower) interest rates encourage banks to have more rate sensitive assets (liabilities).15. Bank Loan Diversification. In what two ways should a bank diversify its loans? Why? Isinternational diversification of loans a viable solution to credit risk? Defend your answer.ANSWER: Banks should diversify across geographic regions and industries, to reduce exposure to specific events.Not necessarily. If the countries receiving loans tend to experience similar business cycles,international diversification of loans has only limited effectiveness. International diversification of loans to creditworthy borrowers has some merit, but the creditworthiness criterion should not beChapter 19: Bank Management 5 ignored just to achieve international diversification.mercial Borrowing. Do all commercial borrowers receive the same interest rate on loans?ANSWER: Interest rates on loans at a given point in time are dependent on the degree of risk of the borrower.17. Bank Dividend Policy. Why might a bank retain some excess earnings rather than distribute them asdividends?ANSWER: Banks retain earnings as a source of capital.18.Managing Interest Rate Risk. If a bank has more rate-sensitive liabilities than rate-sensitive assets,what will happen to its net interest margin during a period of rising interest rates? During a period of declining interest rates?ANSWER: During a period of rising interest rates, the bank’s net interest margin will decline. Duringa period of declining interest rates, the bank’s net interest margin will increase.19. Floating-Rate Loans. Does the use of floating-rate loans eliminate interest rate risk? Explain.ANSWER: The use of floating-rate loans may reduce interest rate risk, but not eliminate it, because the rate sensitivity on assets will still not match up perfectly with the rate sensitivity on liabilities. 20. Managing Exchange Rate Risk. Explain how banks become exposed to exchange rate risk.ANSWER: When banks accept deposits in one currency and provide loans in a different currency, they are exposed to exchange rate risk. Banks whose currency composition of assets differ from the currency composition of liabilities are exposed to exchange rate risk. Banks may also becomeexposed if they offer forward contracts that are not offset by opposite commitments.Advanced Questions21.Bank Exposure to Interest Rate Risk. Oregon Bank has branches overseas that concentrate in short-term deposits in dollars and floating-rate loans in British pounds. Because it maintains rate-sensitive assets and liabilities of equal amounts, it believes it has essentially eliminated its interest rate risk. Do you agree? Explain.ANSWER: U.S. interest rates will not necessarily move in tandem with British interest rates, thus, it is possible that British interest rates will decline while U.S. interest rates remain stable or rise. In this case, the bank will be adversely affected by interest rate movements. Oregon Bank has not eliminated its interest rate risk.22. Managing Interest Rate Risk. Dakota Bank has a branch overseas with the following balance sheetcharacteristics: 50 percent of the liabilities are rate sensitive and denominated in Swiss francs; the remaining 50 percent of liabilities are rate insensitive and are denominated in dollars. With regard to assets, 50 percent are rate-sensitive and are denominated in dollars; the remaining 50 percent of assets are rate-insensitive and are denominated in Swiss francs.6 Chapter 19: Bank Managementa. Is the performance of this branch susceptible to interest rate movements? Explain.ANSWER: Dakota Bank is susceptible to interest rate movements. If Swiss interest rates rise, the bank’s cost of funds increases. If U.S. interest rates decline, the bank’s interest revenues woulddecline. The two scenarios described above could occur simultaneously, causing lower earnings for Dakota Bank.b. Assume that Dakota Bank plans to replace its short-term deposits denominated in U.S. dollarswith short-term deposits denominated in Swiss francs, because Swiss interest rates are currently lower than U.S. interest rates. The asset composition would not change. This strategy is intended to widen the spread between the rate earned on assets and the rate paid on liabilities. Offer your insight on how this strategy could backfire.ANSWER: The strategy could backfire if the Swiss franc appreciates against the dollar over time, because some of the dollars received from loan repayments etc. would have to be converted into Swiss francs to repay the deposits denominated in francs.c. One consultant has suggested to Dakota Bank that it could avoid exchange rate risk by makingloans in whatever currencies it receives as deposits. In this way, it will not have to exchange one currency for another. Offer your insight on whether there are any disadvantages to this strategy.ANSWER: One disadvantage is that the bank may not be able to satisfy some potential borrowers who desire a loan denominated in some other currency. For example, if the bank receives mostly dollar deposits over the next month, it could not accommodate firms that need to borrow francs.Therefore, it would forgo some business because of its desire to avoid exchange rate risk. Interpreting Financial NewsInterpret the following statements made by Wall Street analysts and portfolio managers.a. “The bank’s biggest mistake was that it did not recognize that its forecast of a strong local realestate market and declining interest rates could be wrong.”The bank apparently tried to capitalize on expectations of a strong real estate market byallocating a large amount of funds to real estate loans. It also apparently created a negative gap to benefit from an expected decline in interest rates. Since its forecast was wrong, itsperformance was poor.b. “Banks still need some degree of interest rate risk to be profitable.”If banks attempted to perfectly match the maturities of the liabilities with maturities of theirassets, the interest rate spread might not be sufficient to cover their own expenses. Thus, they can benefit from an upward-sloping yield curve by borrowing short term and lending long term,assuming that interest rates do not increase substantially. In some periods when there is a threat of rising interest rates, they may partially hedge their interest rate risk. Yet, they will not hedge all their interest rate risk because it limits the potential returns.c. “The bank used interest rate swaps so that its spread is no longer exposed to interest rateChapter 19: Bank Management 7movements. However, its loan volume and therefore its profits are still exposed to interest ratemovements.”When interest rates rise, demand for the bank’s loans decline. Therefore, the bank’s profits arereduced when the loan demand rises.Managing in Financial MarketsAs a manager of Stetson Bank, you are responsible for hedging Stetson’s interest rate risk. Stetson has forecasted its cost of funds as follows:Year Cost of Funds6%125%7%39%457%It expects to earn an average rate of 11 percent on some assets that charge a fixed interest rate over thenext five years. It considers engaging in an interest rate swap in which it would swap fixed payments of10 percent in exchange for variable-rate payments of LIBOR + 1 percent. Assume LIBOR is expected tobe consistently 1 percent above Stetson’s cost of funds.a. Determine the spread that would be earned each year if Stetson uses an interest rate swap tohedge all of its interest rate risk. Would you recommend that Stetson use an interest rate swap?Stetson’s overall spread is derived as follows:Year 1 Year 2 Year 3 Year 4 Year 5 Average rate earnedon assets 11% 11% 11% 11% 11%Fixed swap outflowpayments 10 10 10 10 10Difference 1 1 1 1 1 LIBOR 7 6 8 10 8 Variable-rate swapinflow payment 8 7 9 11 9Cost of funds 6 5 7 9 7Difference 2 2 2 2 2 spread 3 3 3 3 3 OverallStetson should not use an interest rate swap because its expected spread is more favorable inmost years if it does not hedge.b. Although Stetson has forecasted its cost of funds, it recognizes that its forecasts may beinaccurate. Offer a method that Stetson can use to assess the potential results from using aninterest rate swap while accounting for the uncertainty surrounding future interest rates.8 Chapter 19: Bank ManagementStetson could use sensitivity analysis to determine its performance based on a variety of possible interest rate scenarios. It might even develop a probability distribution of outcomes that could be derived from a probability distribution of interest rate scenarios.c. The reason for Stetson’s interest rate risk is that it uses some of its funds to make fixed-rate loans,as some borrowers prefer fixed rates. An alternative method of hedging interest rate risk is to use adjustable-rate loans. Would you recommend that Stetson use only adjustable-rate loans to hedge its interest rate risk? Explain.No. Stetson needs to accommodate the needs of its borrowers. If the borrowers prefer fixed-rate loans, Stetson should provide fixed-rate loans, and hedge the interest rate risk in some othermanner.Problems1. Net Interest Margin. Suppose a bank earns $201 million in interest revenue but pays $156 million ininterest expense. It also has $800 million in earning assets. What is its net interest margin?ANSWER:Net interest margin = Interest revenues – Interest expensesAssets$201 million – $156 million$800 million5.625%==2. Calculating Return on Assets. If a bank earns $169 million net profit after tax and has $17 billioninvested in assets, what is its return on assets?ANSWER:ROA = Net profit after taxes Total assets$169 million$17 billion== .%993. Calculating Return on Equity. If a bank earns $75 million net profits after tax and has $7.5 billioninvested in assets and $600 million equity investment, what is its return on equity?ANSWER:Chapter 19: Bank Management 9ROE =Net profit after taxEquity$75,000,000$600,000,000 12.5%==4. Managing Risk. Use the balance sheet for San Diego Bank in Exhibit A (below and next page) andthe industry norms in Exhibit B (page following Exhibit A) to answer the following questions:a. Estimate the gap and determine how San Diego Bank would be affected by an increase in interestrates over time.ANSWER:Gap = Rate-sensitive assets – Rate-sensitive liabilities= $0 – $18 billion=–$18billionThe bank would be adversely affected by rising interest rates.b. Assess San Diego Bank’s credit risk. Does it appear high or low relative to the industry? WouldSan Diego Bank perform better or worse than other banks during a recession?ANSWER: The bank has a greater proportion of commercial and consumer loans than the industry average, and therefore appears to have greater default risk.c. For any type of bank risk that appears to be higher than the industry, explain how the balancesheet could be restructured to reduce the risk.ANSWER: The bank could reduce its interest rate risk by using floating-rate loans and by trying to attract some funds through medium-term (one- to five-year) CDs. It could reduce the default risk by restructuring its asset portfolio to contain more Treasury and municipal securities, less consumer loans, and less commercial loans.Exhibit A: Balance Sheet for San Diego Bank(in Millions of Dollars)Assets Liabilities and Capital Requiredreserves$800 Demand deposits $800CommercialloansNOW accounts $2,500Floating-rate NoneFixed-rate $7,000 MMDAs $6,00010 Chapter 19: Bank ManagementTotal $7,000CDsConsumer loans $5,000 Short-term $9,000From 1 to 5 years None Mortgages Total $9,000 Floating-rate NoneFixed-rate $2,000 Federal funds $500 Total $2,000Long-term bonds $400 TreasurysecuritiesShort-term None Capital $800 Long-term $1,000Total $1,000Long-termcorporatesecuritiesHigh-rated NoneModerate-rated $2,000Total $2,000Long-termmunicipalsecuritiesHigh-rated NoneModerate-rated $1,700Total $1,700Fixed assets $500TOTAL ASSETS $20,000 TOTAL LIABILITIESAND CAPITAL $20,000Chapter 19: Bank Management 11 Exhibit B: Industry Norms in Percentage TermsAssets Liabilities and Capital Required reserves 4%Demand deposits 17% Commercial loans NOW accounts 10% Floating-rate 20%Fixed-rate 11% MMDAs 20% Total 31%CDsConsumer loans 20%Short-term 35%From 1 to 5 years 10%Mortgages Total 45% Floating-rate 7%Fixed-rate 3% Long-term bonds 2% Total 10%Capital 6% Treasury securitiesShort-term 7%Long-term 8%Total 15%Long-term corporatesecuritiesHigh-rated 3%Moderate-rated 2%Total 5%Long-term municipalsecuritiesHigh-rated 3%Moderate-rated 2%Total 5%Fixed assets 5%___TOTAL ASSETS 100%TOTAL LIABILITIESAND CAPITAL 100%12 Chapter 19: Bank Management5. Measuring Risk. Montana Bank wants to determine the sensitivity of its stock returns to interest ratemovements, based on the following information:Quarter Return on Montana Stock Return on Market Interest Rate6.0%1 2% 3%2 2 27.59.03 –1 –28.24 0 –17.35 2 18.16 –3 –47.47 1 59.18 0 18.29 –2 07.110 1 –16.411 3 35.512 6 4Use a regression model in which Montana’s stock return is dependent on the stock market return andthe interest rate. Determine the relationship between the interest rate and Montana’s stock return byassessing the regression coefficient applied to the interest rate. Is the sign of the coefficient positive ornegative? What does it suggest about the bank’s exposure to interest rate risk? Should Montana Bankbe concerned about rising or declining interest rate movements in the future?ANSWER: The coefficient for the market variable is 0.38, while the coefficient for the interest ratevariable is –1.15. The t-statistics for the coefficients suggest significance at the 0.10 level for themarket variable, and at the 0.05 level for the interest rate variable. The R-Squared statistic is about0.75, which suggests that 75 percent of the variation in Montana’s stock returns can be explained bythe market and interest rate variables.The sign of the interest rate coefficient is negative, which implies a negative relationship between theinterest rate movements and the stock returns of Montana Bank. Therefore, Montana Bank would beconcerned about a potential increase in interest rates.Some models use the change in the interest rate level rather than the interest rate level itself, but thisexample simply illustrates how the bank could assess exposure to economic variables.Flow of Funds ExerciseManaging Credit RiskRecall that Carson Company relies heavily on commercial banks for loans. When the company was first established with equity funding from its owners, Carson Company could easily obtain debt financing, asthe financing was backed by some of the firm’s assets. However, as Carson expanded, it continuallyrelied on extra debt financing, which increased its ratio of debt to equity. Some banks were unwilling toprovide more debt financing because of the risk that Carson would not be able to repay additional loans.A few banks were still willing to provide funding, but they required an extra premium to compensate forthe risk.Chapter 19: Bank Management 13 a.Explain the difference in the willingness of banks to provide loans to Carson Company. Why isthere a difference between banks when they are assessing the same information about a firm that wants to borrow funds?First, some banks may be more optimistic about economic conditions than other banks, andtherefore expect that the strong economy will generate more sales for the firm in the future.Second, even if banks assess a given firm as having the same probability of defaulting on the loan, some banks may be willing to provide the loan while others may not. This is because banks have different threshold levels depending on their management style. A bank may be willing to take more risk than others, because it is striving for higher income, and therefore higher returns for its shareholders.b.Consider the flow of funds for a publicly traded bank that is a key lender to Carson Company.This bank received equity funding from shareholders, which it uses to establish its business. It channels bank deposit funds, which are insured by the FDIC, to provide loans to CarsonCompany and other firms. The depositors have no idea how the bank uses their funds, as their deposits are insured. Yet, the FDIC is not preventing the bank from making risky loans. So who is monitoring the bank? Do you think the bank is taking more risk than its shareholders desire? How does the FDIC discourage the bank from taking too much risk? Why might the bank ignore the FDIC’s efforts to discourage excessive risk taking?The bank is monitored by its shareholders. It is probably taking the risk that is desired by its shareholders. Yet, the FDIC may need to intervene if the bank experiences financial problems.The FDIC attempts to prevent excessive risk-taking by forcing banks with riskier asset portfolios to maintain more capital, and this effectively reduces the return on the bank’s capital. However, the bank can charge higher interest rates on its risky loans, which may satisfy the bank’sshareholders. The point is that the objectives of the depositors, bank shareholders, and bank regulators all have a different perspective. Thus, the bank managers serve bank shareholders within the constraints enforced by bank regulators.。