Reference no: EM13503881

1.County Bank offers one-year loans with a stated rate of 9 percent but requires a compensating balance of 10 percent. What is the true cost of this loan to the borrower? How does the cost change if the compensating balance is 15 percent? If the compensating balance is 20 percent? In each case, assume origination fees and the reserve requirement are zero.

2.Why are rates on credit card loans generally higher than rates on car loans?

3.What are the primary characteristics of residential mortgage loans? Why does the ratio of adjustable-rate mortgages to fixed-rate mortgages in the economy vary over an interest rate cycle?  When would the ratio be highest?

4.How does a spot loan differ from a loan commitment? What are the advantages and disadvantages of borrowing through a loan commitment?

5.Differentiate between a secured and an unsecured loan. Who bears most of the risk in a fixed-rate loan? Why would FI managers prefer to charge floating rates, especially for longer-maturity loans?

6.Why is credit risk analysis an important component of FI risk management? What recent activities by FIs have made the task of credit risk assessment more difficult for both FI managers and regulators?

7.What government safeguards are in place to reduce liquidity risk for DIs?

8.The following is the balance sheet of a DI (in millions):

 

         Assets                                                         Liabilities and Equity

         Cash                                         $ 2              Demand deposits                                  $50

         Loans                                        50             

         Premises and equipment             3              Equity                                                       5

         Total                                        $55              Total                                                     $55

 

The asset-liability management committee has estimated that the loans, whose average interest rate is 6 percent and whose average life is three years, will have to be discounted at 10 percent if they are to be sold in less than two days. If they can be sold in 4 days, they will have to be discounted at 8 percent. If they can be sold later than a week, the DI will receive the full market value. Loans are not amortized; that is, principal is paid at maturity.

a. What will be the price received by the DI for the loans if they have to be sold in two days. In four days?

b.In a crisis, if depositors all demand payment on the first day, what amount will they receive? What will they receive if they demand to be paid within the week? Assume no deposit insurance.

9.What is a bank run? What are some possible withdrawal shocks that could initiate a bank run? What feature of the demand deposit contract provides deposit withdrawal momentum that can result in a bank run?

10.Plainbank has $10 million in cash and equivalents, $30 million in loans, and $15 in core deposits. 

a.  Calculate the financing gap

 

b.What is the financing requirement?

c. How can the financing gap be used in the day-to-day liquidity management of the bank?