Download Version A Exam 2 SAMPLE Problems FINAN420

Exam 2 SAMPLE Problems
FINAN420 - Mgmt. of Financial Institutions
Fall 2016
PART I: Problem Solving (60 pts.)
1. (14 pts.) Risky Bank has the following assets and liabilities. The duration of each of these items
is also listed. Average interest rates on assets are 6%, and average interest rates on liabilities are
3%. Calculate and carry your answers to three decimal places:
a.
(3 pts.) the weighted-average duration of the bank's assets __________
b. (3 pts.) the weighted-average duration of the bank's liabilities __________
c.
(2 pts.) the weighted-average modified duration of the bank's assets __________
d.
(2 pts.) the weighted-average modified duration of the bank's liabilities __________
e.
(4 pts.) the change in equity for a one percentage point rise in all interest rates __________
(show your work below)
Assets
Cash
Bonds
Mortgage Loans
C&I Loans
Liabilities
Deposits
Jumbo CDs
Duration
0
1.4
4.1
1.2
Dollar Amount
(millions)
$150
$200
$200
$450
2.5
3.5
$700
$200
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2. (12 pts.) A bank has the following rate-sensitive assets and liabilities. Use a GAP/repricing
model to estimate its interest rate risk by filling in the 35 missing values in the table (boxes in
grey), then answer these two questions:
a) (4 pts.) Using the simple method, by how much will net interest income change during the
first year if interest rates rise by 1 percentage point?
b) (8 pts.) Using the more precise method that accounts for the timing of the repricing, by how
much will net interest income change during the first year if interest rates rise by 1
percentage point? (Show your work in the box below.)
Q1. Interest Rate Sensitivity -- Assets and Liabilities
Remaining Time before Maturity or Interest Rate
Interest Sensitive Assets
Interest Bearing Bank Balances
Securities
Fed Funds Sold
Loans and Leases
Up to 3 > 3 Mo > 6 Mo
Months <= 6 Mo. <= 1 Yr
$3,000
$0
$0
$500
$5,000
$2,500
$500
$0
$0
$6,500
$4,000
$3,000
Over
1 Yr
$0
$7,000
$0
$8,000
Total Interest Sensitive Assets
Cumulative Total Assets
Interest Sensitive Liabilities
NOW Accounts
MMDA Accounts
Savings Deposits
Time Deposits
Fed Funds Purchased
Total
-----
Up to 3 > 3 Mo > 6 Mo
Months <= 6 Mo. <= 1 Yr
$1,500
$1,500
$1,500
$3,000
$1,000
$1,000
$2,000
$2,000
$2,000
$5,000
$6,000
$3,000
$300
Over
1 Yr
$0
$0
$0
$2,500
Total
Total Interest Sensitive Liabilities
Cumulative Total Liabilities
-----
Interval Gap
Cumulative Gap
---------
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3. (12 pts.) A bank has a two-year, fixed-income portfolio with a book value of $5,000 that pays
annual interest of 4 percent. The yields on portfolios of like securities is currently 6 percent.
Carry your answers to three decimal places.
a. (4 pts.) Calculate the duration of this portfolio.
__________________
b. (4 pts.) Calculate the modified duration of this portfolio. __________________
c. (4 pts.) Using the duration methodology, calculate the estimated change in the portfolio’s
value if interest rates increase by 2 percentage points.
___________________
4. (4 pts.) A bank has an asset portfolio of $100 million with duration of 3.6. The duration of its
$90 million liability portfolio is 2.7.
a. (2 pts.) This bank is exposed to market equity losses when interest rates (Circle one)
rise
fall
b. (2 pts.) To perfectly insulate the bank from interest rate risk, the bank should target its asset
duration to equal _________________ .
5. (10 pts.) A bank expects an ROA of 9% on a loan it made to a commercial borrower. If the
bank requires 10% as a compensating balance, reserve requirements are 9%, loan fees are 0.15%,
and the base rate on the loan is 7%, what is the credit risk premium charged to the borrower?
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Part II: Multiple Choice (40 pts.) Circle your answer choice below.
1. Which of the following is indicated by high numerical value of the duration of an asset?
a. Low interest rate elasticity of an asset price
b. High coupon elasticity of a bond
c. High interest rate elasticity of an asset price
d. Cannot tell without knowing yields
2. A bank commonly uses a(n) ___________ simulation model to assess its short-term interest rate
risk, and a(n) ___________ simulation model to assess its long-term interest rate risk.
a. option pricing, yield curve
b. earnings at risk, option pricing
c. economic value of equity, earnings at risk
d. earnings at risk, economic value of equity
3. Which of the following is NOT a potential cause of liquidity risk for a financial institution?
a. A decrease in the FI’s stock price caused by market factors
b. An increase in requests to fund large amounts of previously made loan commitments
c. A decrease in the availability of short-term borrowed funds
d. An increase in requests by depositors to withdraw large amounts of deposits
e. A decrease in asset prices in securities held in the investment portfolio
4. Which of the following observations about the repricing model is correct?
a. It accounts for the problem of rate-insensitive asset and liability runoffs and prepayments
b. It identifies an FI’s profit exposure to interest rate risk
c. It accommodates cash flows from off-balance sheet activities
d. It considers market value effects of interest rate changes
5. Which of the following factors may affect the promised return an FI receives on a loan?
a. The collateral backing the loan
b. Loan fees
c. Compensating balances
d. The credit risk premium
e. all of the above
6. Under crisis conditions which of the following are least likely to withdraw funds quickly from
banks?
a. Correspondent banks
b. Small businesses
c. Individual depositors
d. Mutual funds
e. Pension funds
7. With regard to liquidity management which of the following is NOT true?
a. Stored liquidity management involves the liquidation of assets
b. Traditionally, DIs have stored cash reserves at the Federal Reserve and in their vaults to
overcome liquidity risk
c. DIs hold cash reserves in excess of the minimum required to meet liquidity drains
d. Banks prefer stored liquidity as opposed to purchased liquidity because there is no cost to
stored liquidity.
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Answer Key:
1. Problem 1
a. 1.64
b. 2.72
c. 1.55
d. 2.64
e. 8.31
2. Problem 2
a. -$48.00
b. -$25.75
3. Problem 3
a. 1.961
b. 1.850
c. -$178.20
4. Problem 4
a. Rise
b. 2.43
5. Problem 5
a. 1.031%
Multiple Choice
1. C
2. D
3. A
4. B
5. E
6. D
7. A
8. C
9. D
10. D
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