Reference no: EM133200024
Assignment:
Reading the chapters:
The Risk and Term Structure of Interest Rates
Banking and the Management of Financial Institutions
1. Risk premiums on corporate bonds are usually anticyclical; that is, they decrease during business cycle expansions and increase during recessions. Why is this so?
2. Predict what would happen to the risk premiums of municipal bonds if the federal government guarantees today that it will pay creditors if municipal governments default on their payments. Please draw a graph to illustrate your prediction. Do you think that it will then make sense for municipal bonds to be exempt from income taxes?
3. What is a yield curve? If expectations of future short-term interest rates suddenly fell, what would happen to the slope of the yield curve? Please show it using a graph.
4. What is bank capital?
5. According to the book, what items are listed as liabilities on a bank's balance sheet? What items are listed as assets on a bank's balance sheet?
6. What do you know about the special role of the Federal Reserve Bank of New York?
7. If interest rates rise by 5 percentage points for the First National Bank, say, from 10 to 15%, bank profits (measured using gap analysis) will
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Assets
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Liabilities
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Rate-sensitive
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$20 million
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$50 million
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Fixed-rate
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$80 million
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$50 million
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A) decline by $0.5 million.
B) decline by $1.5 million.
C) decline by $2.5 million.
D) increase by $1.5 million.
Please choose from the above and explain your reasoning.
8. Why do equity holder care more about ROE than ROA?
9. According to the book, what are the general principles of bank management?
10. What are the three theories that have been put forward to explain the term structure of interest rates, please brefly specify the content of the three theories.
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