Week 1 • Chapter 1: Page 27 Question 8 8

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Week 1 • Chapter 1: Page 27 Question 8 8. List and describe the different channels that banks use to deliver banking services. For each, describe the characteristics of the customers who will likely be active users of services in that channel. • Chapter 2: Page 64 Questions 8 and 11 8. Change is always good for some participants and bad for others. Which types of financial institutions appear best situated to gain from potential changes in the regulatory structure within the financial services arena? Which institutions seem most likely to lose? 11. What are the basic arguments for increasing capital requirements at large commercial banks? In what ways will depositors, stockholders, and society in general benefit? How might each group be disadvantaged? As commercial banks enter new lines of business such as brokerage, how much additional capital should be required? Should these new lines of business be insured by the FDIC? Why or why not? Give examples from today’s financial marketplace. • Chapter 7: Page 278 Questions 9 and 10 9. Assume that you manage the interest rate risk position for your bank. Your bank cur- rently has a positive cumulative GAP for all time intervals through one year. You expect that interest rates will fall sharply during the year and want to reduce your bank’s risk position. The current yield curve is inverted with long-term rates below short-term rates. a. To reduce risk, would you recommend issuing a three-month time deposit and investing the proceeds in one-year T-bills? Will you profit if rates fall during the year? b. To reduce risk, would you recommend issuing a three-month time deposit and making a twoyear commercial loan priced at prime plus 1 percent? Why? 10. Your bank has 50 percent of its loans priced off the current prime rate at prime plus 1 percent, on average. The majority of the bank’s liabilities are interest-bearing core deposits (NOWs, MMDAs, and small time deposits). a. Assume that the prime rate immediately rises from 6 percent to 6.5 percent. Will management likely increase deposit rates by 0.50 percent immediately? Explain why or why not. What will be the impact on the bank’s spread? b. Assume that the prime rate immediately falls from 6 percent to 5.5 percent. Will management likely decrease deposit rates by 0.50 percent immediately? Explain why or why not. What will be the impact on the bank’s spread? • • • • • • • • • • Week 2 • Chapter 8: Page 306 & 307 Questions 5 and 10 5. A 5-year zero coupon bond and a 15-year zero coupon bond both carry a price of $7,500 and a market rate of 8 percent. Assuming that the market rates on both bonds fall to 7 10. Suppose that your bank currently operates with a DGAP of 2.2 years. Which of the following will serve to reduce the bank’s interest rate risk? a. Issue a one-year zero coupon CD to a customer and use the proceeds to buy a three-year zero coupon Treasury bond. b. Sell $5 million in one-year bullet (single payment) loans and buy three-month Treasury bills. c. Obtain two-year funding from the Federal Home Loan Bank and lend the proceeds overnight in the federal funds market. • Chapter 10: Page 407& 408 Questions 17 and 20 17. Explain how each of the following will affect a bank’s deposit balances at the Federal Reserve: a. The bank ships excess vault cash to the Federal Reserve. b. The bank buys U.S. government securities in the open market. c. The bank realizes a surplus in its local clearinghouse processing. d. The bank sells federal funds. e. A $100,000 certificate of deposit at the bank matures and is not rolled over. f. Local businesses deposit tax payments in the Treasury’s account at the local bank. 20. What can a bank do to increase its core deposits? What are the costs and benefits of such efforts? Generally, how might management estimate the relative interest elastic- ity of various deposit liabilities of a bank? • • • • • • • • • • • • • • • • • • • • • • Week 3 • Chapter 11: Page 445 Questions 3 and 4 3. Monetary theory examines the role of excess reserves (actual reserves minus required reserves) in influencing economic activity and Federal Reserve monetary policy. Viewed in the context of a single bank, excess reserves are difficult to measure. Explain what amount of a bank’s actual reserve assets are excess reserves during any single day in the reserve maintenance period under lagged reserve accounting. 4. Which of the following activities will affect a bank’s required reserves? a. The local Girl Scout troop collects coins and currency to buy a new camping stove. The troop deposits $250 in coins and opens a small time deposit. b. You decide to move $200 from your MMDA to your NOW account. c. You sell your car to the teller at your bank for $5,000. The teller pays with a check drawn on the bank, and you deposit the check immediately into your checking account at the bank. • Chapter 13: Page 522 & 523 Questions 7 and 13 7. Discuss reasons why banks might choose to include the following covenants in a loan agreement: a. Cash dividends cannot exceed 60 percent of pretax income. b. Interim financial statements must be provided monthly. c. Inventory turnover must be greater than five times annually. d. Capital expenditures may not exceed $10 million annually. 13. Discuss whether each of the following types of loans can be easily securitized. Explain why or why not. a. Residential mortgages b. Small-business loans c. Pools of credit card loans d. Pools of home equity loans e. Loans to farmers for production • Chapter 14: Page 575 Questions 9 and 12 9. Indicate whether each of the following is a source of cash, use of cash, or has no cash impact. a. Firm issues new long-term debt. b. Firm prepays operating costs. c. Because the firm buys another firm, it amortizes goodwill. d. Firm sells outdated computer equipment. e. Firm pays a stock dividend. f. Firm sells its product on credit. g. Firm buys a new fleet of trucks. 12. Explain the importance of identifying the “primary” source of repayment. Clearly, the primary source of repayment is always “cash.” The analysis question is really one of identifying the source of the cash used to repay the loan. Explain the advan- tages and disadvantages of the following sources of cash as the primary source of repayment on a loan Selling an asset Generating more sales Issuing stock (equity) Increasing a liability Decreasing expenses Reducing cash dividends Under what circumstances would you be comfortable with the mentioned sources being the “primary” source of repayment?