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Question:


“Bank managers should always seek the highest return possible on their assets.” Is this statement true, false, or uncertain? Explain your answer.


> An investor sends the fund a check for $50,000. If there is no front-end load, calculate the new number of shares and price per share. Assume the manager purchases 1,800 shares of stock 3, and the rest is held as cash.

> On January 1, the shares and prices for a mutual fund at 4:00 p.m. are as follows: Stock 3 announces record earnings, and the price of stock 3 jumps to $32.44 in after-market trading. If the fund (illegally) allows investors to buy at the current NAV,

> On January 3 the prices at 4:00 p.m. are as follows: Calculate the new NAV. Stock Shares owned Price 1 1,000 $1.92 2 5,000 $51.18 3 2,800 $29.08 4 9,900 $67.19 3,000 $4.51 Cash $5,353.40 n.a.

> Why did new technology make it harder to enforce limitations on bank branching?

> “The commercial banking industry in Canada is less competitive than the commercial banking industry in the United States because in Canada only a few large banks dominate the industry, while in the United States there are around 6,000 commercial banks.”

> Which regulatory agency has the primary responsibility for supervising the following categories of commercial banks? a. National banks b. Bank holding companies c. Non-Federal-Reserve-member state banks d. Federal-Reserve-member state banks

> Why was the United States one of the last of the major industrialized countries to have a central bank?

> A financial adviser has just given you the following advice: “Long-term bonds are a great investment because their interest rate is over 20%.” Is the financial adviser necessarily right?

> What will be the likely effect of the Gramm-LeachBliley Act on financial consolidation?

> If reserve requirements were eliminated in the future, as some economists advocate, what effects would this have on the size of money market mutual funds?

> If the bank at which you keep your checking account is owned by Saudi Arabians, should you worry that your deposits are less safe than if the bank were owned by Americans?

> How could the approval of international banking facilities (IBFs) by the Fed in 1981 have reduced employment in the banking industry in Europe?

> What incentives have regulatory agencies created to encourage international banking? Why have they done this?

> Why has there been such a dramatic increase in bank holding companies?

> “If inflation had not risen in the 1960s and 1970s, the banking industry might be healthier today.” Is this statement true, false, or uncertain? Explain your answer.

> Why have banks been losing cost advantages in acquiring funds in recent years?

> How did competitive forces lead to the repeal of the Glass-Steagall Act’s separation of the banking and the securities industries?

> “The invention of the computer is the major factor behind the decline of the banking industry.” Is this statement true, false, or uncertain? Explain your answer.

> Consider a coupon bond that has a $1,000 par value and a coupon rate of 10%. The bond is currently selling for $1,150 and has eight years to maturity. What is the bond’s yield to maturity?

> Why have banks been losing income advantages on their assets in recent years?

> Why does imposing bank capital requirements on banks help limit risk taking?

> Do you think that removing the impediments to a nationwide banking system will be beneficial to the economy? Explain.

> Do you think that eliminating or limiting the amount of deposit insurance would be a good idea? Explain your answer.

> What forms does bank supervision take, and how do they promote a safe and sound banking system?

> What special problem do off-balance-sheet activities present to bank regulators, and what have they done about it?

> What are the costs and benefits of a too-big-to-fail policy?

> What bank regulations are designed to reduce moral hazard problems created by deposit insurance? Will they eliminate the moral hazard problem?

> What bank regulation is designed to reduce adverse selection problems for deposit insurance? Will it always work?

> If casualty insurance companies provided fire insurance without restrictions, what kind of adverse selection and moral hazard problems might result?

> A lottery claims its grand prize is $10 million, payable over 20 years at $500,000 per year. If the first payment is made immediately, what is this grand prize really worth? Use an interest rate of 6%.

> How could market-value accounting for bank capital requirements (discussed in the first Web appendix to this chapter) benefit the economy? How difficult would it be to implement?

> How could higher deposit insurance premiums for banks with riskier assets benefit the economy?

> How do disclosure requirements help limit excessive risk taking by banks?

> Why has the trend in bank supervision moved away from a focus on capital requirements to a focus on risk management?

> What steps were taken in the FhinDICIA legislation of 1991 to improve the functioning of federal deposit insurance?

> Consider a bank with the following balance sheet: Calculate the bank’s risk-weighted assets. Assets Liabilities Required $8 million Checkable $100 million reserves deposits Excess $3 million Bank $6 million reserves capital T-bill

> Calculate the risk-weighted assets and risk-weighted capital ratio after Oldhat’s first day.

> Bank regulators force Oldhat to sell its mortgages to recognize the fair market value. What is the accounting transaction? How does this affect its capital position?

> The next day, terrible news hits the mortgage markets, and mortgage rates jump to 13%. What is the market value of Oldhat’s mortgages? What is Oldhat’s “market value” capital ratio?

> Oldhat Financial started its first day of operations with $9 million in capital. $130 million in checkable deposits are received. The bank issues a $25 million commercial loan and another $50 million in mortgages, with the following terms: • Mortgages:

> Calculate the present value of a $1,000 zero-coupon bond with five years to maturity if the yield to maturity is 6%.

> Consider a bank with the following balance sheet: The bank commits to a loan agreement for $10 million to a commercial customer. Calculate the bank’s capital ratio before and after the agreement. Calculate the bank’s

> Consider a failing bank. A deposit of $150,000 is worth how much if the FDIC uses the payoff method? The purchase-and-assumption method? Which is more costly to taxpayers?

> Oldhat borrows $5.5 million in the overnight federal funds market to meet its resources requirement. What is the new balance sheet for Oldhat? How well- capitalized is the bank?

> The bad news about the mortgages is featured in the local newspaper, causing a minor bank run. $6 million in deposits is withdrawn. Examine the bank’s condition after this occurs.

> Oldhat decides to invest the $77 million in excess reserves in commercial loans. What will be the impact on its capital ratio? Its risk-weighted capital ratio?

> Congress allowed Oldhat to amortize the loss over the remaining life of the mortgage. If this technique had been used in the sale, how would the transaction have been recorded? What would be the annual adjustment? What does Oldhat’s balance sheet look li

> Why has noninterest income been growing as a source of bank operating income?

> “Banking has become a more dynamic industry because of more active liability management.” Is this statement true, false, or uncertain? Explain your answer.

> If you are a banker and expect interest rates to rise in the future, would you want to make short-term or long-term loans?

> The duration of a $100 million portfolio is 10 years. $40 million in new securities are added to the portfolio, increasing the duration of the portfolio to 12.5 years. What is the duration of the $40 million in new securities?

> Is everybody worse off when interest rates rise?

> Rank the following bank assets from most to least liquid: a. Commercial loans b. Securities c. Reserves d. Physical capital

> What are the benefits and costs for a bank when it decides to increase the amount of its bank capital?

> If a bank doubles the amount of its capital and ROA stays constant, what will happen to ROE?

> What does the net interest margin measure, and why is it important to bank managers?

> Which components of operating expenses experience the greatest fluctuations? Why?

> Why has the development of overnight loan markets made it more likely that banks will hold fewer excess reserves?

> If the bank you own has no excess reserves and a sound customer comes in asking for a loan, should you automatically turn the customer down, explaining that you don’t have any excess reserves to loan out? Why or why not? What options are available for yo

> If the president of a bank told you that the bank was so well run that it has never had to call in loans, sell securities, or borrow as a result of a deposit outflow, would you be willing to buy stock in that bank? Why or why not?

> If a bank is falling short of meeting its capital requirements by $1 million, what three things can it do to rectify the situation?

> If a bank finds that its ROE is too low because it has too much bank capital, what can it do to raise its ROE?

> You have paid $980.30 for an 8% coupon bond with a face value of $1,000 that matures in five years. You plan on holding the bond for one year. If you want to earn a 9% rate of return on this investment, what price must you sell the bond for? Is this real

> Why do equity holders care more about ROE than about ROA?

> The balance sheet of TriBank starts with an allowance for loan losses of $1.33 million. During the year, TriBank charges off worthless loans of $0.84 million, recovers $0.22 million on loans previously charged off, and charges current income for a $1.48

> For the upcoming week, Nobel National Bank plans to issue $25 million in mortgages and purchase $100 million in 31-day T-bills. New deposits of $35 million are expected, and other sources will generate $15 million in cash. What is Nobel’s estimate of fun

> X-Bank reported an ROE of 15% and an ROA of 1%. How well capitalized is this bank?

> NewBank also pays off its fed funds borrowed. How much cash is owed? How is this recorded?

> The end of the month finally arrives for NewBank, and it receives all the required payments from its mortgages, commercial loans, and T-bills. How much cash was received? How are these transactions recorded?

> To meet any shortfall in the previous question, NewBank will borrow the cash in the federal funds market. Management decides to borrow the needed funds for the remainder of the month (now 29 days). The required yield on a discount basis is 2.9%. What doe

> On the third day of operations, deposits fall by $5 million. What does the balance sheet look like? Are there any problems?

> NewBank decides to invest $45 million in 30-day T-bills. The T-bills are currently trading at $4,986.70 (including commissions) for a $5,000 face value instrument. How many do they purchase? What does the balance sheet look like?

> NewBank started its first day of operations with $6 million in capital. $100 million in checkable deposits is received. The bank issues a $25 million commercial loan and another $25 million in mortgages, with the following terms: • Mortgages: 100 standar

> A 10-year, 7% coupon bond with a face value of $1,000 is currently selling for $871.65. Compute your rate of return if you sell the bond next year for $880.10.

> A bank estimates that demand deposits are, on average, $100 million with a standard deviation of $5 million. The bank wants to maintain a minimum of 8% of deposits in reserves at all times. What is the highest expected level of deposits during the month?

> Refer to the previous question. In 1981 Congress allowed S&Ls to sell mortgages at a loss and to amortize the loss over the remaining life of the mortgage. If this were used for the previous question, how would the transaction have been recorded? What wo

> Wiggley S&L issues a standard 30-year fixed-rate mortgage at 7.8% for $150,000. Thirty-six months later, mortgage rates jump to 13%. If the S&L sells the mortgage, how much of a loss is incurred?

> After making payments for three years, one of the mortgage borrowers defaults on the mortgage. NewBank immediately takes possession of the house and sells it at auction for $175,000. Legal fees amount to $25,000. If no loan loss reserve was established f

> If NewBank’s target ROE is 4.5%, how much net fee income must it generate to meet this target?

> If NewBank were required to establish a loan loss reserve at 0.25% of the loan value for commercial loans, how would this be recorded? Recalculate NewBank’s ROE and final balance sheet, including its tax liabilities.

> Calculate NewBank’s ROE and final balance sheet, including its tax liabilities.

> Calculate NewBank’s ROA and NIM for its first month. Assume that net interest equals earnings before taxes, and that NewBank is in the 34% tax bracket.

> What does the month-end balance sheet for NewBank look like? Calculate this before any income tax consideration.

> What is the exchange rate between dollars and Swiss francs if one dollar is convertible into 1/20 ounce of gold and one Swiss franc is convertible into 1/40 ounce of gold?

> Property taxes in DeKalb County are roughly 2.66% of the purchase price every year. If you just bought a $100,000 home, what is the PV of all the future property tax payments? Assume that the house remains worth $100,000 forever, property tax rates never

> “Balance-of-payments deficits always cause a country to lose international reserves.” Is this statement true, false, or uncertain? Explain your answer.

> Why can balance-of-payments deficits force some countries to implement a contractionary monetary policy?

> How can a large balance-of-payments surplus contribute to the country’s inflation rate?

> If a country’s par exchange rate was undervalued during the Bretton Woods fixed exchange rate regime, what kind of intervention would that country’s central bank be forced to undertake, and what effect would it have on its international reserves and the

> Under fixed exchange rates, if Britain becomes more productive relative to the United States, what foreign exchange intervention is necessary to maintain the fixed exchange rate between dollars and pounds? Which country undertakes this intervention?

> Why does a balance-of-payments deficit for the United States have a different effect on its international reserves than a balance-of-payments deficit for the Netherlands?

> For each of the following, identify in which part of the balance-of-payments account it appears (current account, capital account, or net change in international reserves) and whether it is a receipt or a payment: a. A British subject’s purchase of a sha

> If the Federal Reserve buys dollars in the foreign exchange market but does not sterilize the intervention, what will be the effect on international reserves, the money supply, and the exchange rate?

> If the Federal Reserve buys dollars in the foreign exchange market but conducts an offsetting open market operation to sterilize the intervention, what will be the effect on international reserves, the money supply, and the exchange rate?

> What steps should an international lender of last resort take to limit moral hazard?

> What is the price of a perpetuity that has a coupon of $50 per year and a yield to maturity of 2.5%? If the yield to maturity doubles, what will happen to its price?

> Has the IMF done a good job in performing the role of the international lender of last resort?

> Why might central banks in emerging-market countries find that engaging in a lender-of-last-resort operation might be counterproductive? Does this provide a rationale for having an international lender of last resort like the IMF?

> Discuss the pros and cons of controls on capital inflows.

> Are controls on capital outflows a good idea? Why or why not?

2.99

See Answer