Reference no: EM132208013

Management of Financial Assignment - Liquidity Risk

Q1. A depository institution (DI) has the following balance sheet (all amounts are in millions). It expected a deposit drain of $25 million.

a. Illustrate how the DI's balance sheet may appear if it uses purchased liquidity management to offset the expected drain.

b. Illustrate how the DI's balance sheet may appear if it uses stored liquidity management to offset the expected drain.

Q2. A DI has assets of $25 million consisting of:

Cash - $3 million, and

Loans - $22 million.

Its liabilities are:

Core deposits - $15 million,

CDs - $6 million, repurchase agreements - $1 million, and subordinated debt - $1 million.

It has equity of $2 million.

Increases in interest rates are expected to cause a net drain of $4 million in core deposits over the next year.

a. On average, deposits cost 4% and the average yield on loans is 7%. The DI decides to reduce its loan portfolio to offset the expected decline in deposits. What will be the effect on net interest income and the size of the DI after the implementation of this strategy?

b. If the interest cost of issuing new short term debt (CD's or repurchase agreements) is expected to be 5.5%, what would be the effect on net interest income and size of the DI if the expected deposit drain is offset by an increase in these interest bearing liabilities?

c. What other factors may make the DI prefer the strategy in part b to that in part a?

Q3. A financial institution has the following assets (market values):

$120 million in cash reserves,

$120 million in Treasury bills and notes,

$200 million in mortgage loans,

$40 million in corporate bonds, and

$150 million in commercial loans.

If assets are liquidated on short notice, the institution expects to receive

99% of the fair market value of the treasury debt,

90% of the fair market value of the mortgages,

95% of the fair market value of the bonds, and

$75% of the fair market value of the commercial loans.

a. What is the financial institution's liquidity index?

b. How can the financial institution use this information is managing its liquidity risk?

Q4. A depository institution that has the following assets with weights as indicated:

$750 million in commercial loans with one to three years maturity (100%);

$50 million in long term treasuries (0%);

$500 million loans secured by first mortgages (50%);

$500 million in mortgage backed securities guaranteed by government agencies (20%);

$250 million in consumer loans (100%); and

$25 million in loans that are 90 days or more past due (150%).

a. How much Common Equity Tier 1 capital must the depository institution have to be considered adequately capitalized?

b. How much Tier 1 capital must the depository institution have to be considered adequately capitalized?

c. How much total Tier 1 and Tier 2 capital must the depository institution have to be considered adequately capitalized?

d. Assume the depository has Tier 1 capital as determined in part a, what is the maximum amount of total liabilities the depository institution can have and be considered adequately capitalized according to the Tier 1 leverage ratio.

Q5. If a securities firm has net worth of $145 million, what is the maximum market value of its assets?

Q6. If a property/casualty insurance company has risk-based assets as indicated in the table below, how much equity must it have?