Home assignment 10
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Economics
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Jan 9, 2024
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Uploaded by Danielravencroft
International College of Economics and Finance
Principles of Banking and Finance
Home assignment #10
Please handle in before March,
09
th
, 2013 before start of the lecture
You should manage the size of your answers according to the number of marks awarded. Please be informed that
your work will be evaluated on the basis of logic of your explanation, its clarity and relevance to the question.
Incomprehensible handwriting will not be deciphered
, so try to make your text literate. The length of your
essay should not exceed
350
words.
Part 1.
Essay
1.
[25 points]
Describe the main sources of credit risks. How can the banks minimize negative
effects of credit risks on their value"
Part 2.
Problems
2.
[10 points]
Calculate the income gap and the impact on net interest income of a 1 percentage
point increase in interest rates for each of the following positions:
Rate-sensitive assets _ $200 million
Rate-sensitive liabilities _ $100 million
Rate-sensitive assets _ $100 million
Rate-sensitive liabilities _ $150 million
Rate-sensitive assets _ $150 million
Rate-sensitive liabilities _ $140 million
(A)
Calculate the impact on net interest income of each of the above situations, assuming
decrease in interest rates by 1 percentage point. (6 points)
(B)
What conclusion can you draw about the interest rate exposure on the basis results derived?
(4 points)
3.
[10 points]
Which of the following assets or liabilities fit the definition odf risk sensitive for
purpose on income GAP analysis? Explain.
91-day U.S. Treasury bills
1-year U.S. Treasury notes
20-year U.S. Treasury bonds
20-year floating-rate corporate bonds with annual repricing
30-year floating-rate mortgages with repricing every two years
30-year floating-rate mortgages with repricing every six months
Overnight fed funds
9-month fixed-rate CDs
1-year fixed-rate CDs
5-year floating-rate CDs with annual repricing
Common stock
4.
[15 points]
The following balance sheet information is available (amounts in $ thousands and
duration in years) for a financial institution:
Treasury bonds are five-year maturities paying 6 per cent semi-annually and selling at par.
(A)
What is the duration of the T-bond portfolio?
(2 points)
(B)
What is the average duration of all the assets?
(2 points)
(C)
What is the average duration of all the liabilities?
(2 points)
(D)
What is the leverage-adjusted duration gap?
(2 points)
What is the interest rate risk?
(7
points)
5.
[5 points]
A bank has made a loan charging a base lending rate of 10 per cent. It expects a
probability of default of 5 per cent. If the loan is defaulted, it expects to recover 50 per cent of its
money through the sale of its collateral. What is the expected return on this loan?
6.
[15 points]
AllStarBank has the following balance sheet (in millions):
AllStarBank’s largest customer decides to exercise a $15 million loan commitment.
How will the new balance sheet appear if AllStar uses the following liquidity risk strategies?
(A)
Define briefly loan commitment
(3 points)
(B)
Asset management. Compute and interpret
(2 points+4 points)
(C)
Liability management. Compute and interpret
(2 points+4 points)
7.
[10 points]
The probability of default of company A in a single year is 2.3%. Assume that it
would not be changed in nearest 5 years. The Bank granted a credit of $15mn for 5y with 3mn to
be paid each year as repayment of the principal. The rate is 5%. The bank required collateral. It
is a Blue Chips, fair value of which is $4mn, but if sold by bank transaction costs would be about
$0.25mn.
(A)
What is cumulative probability of default (CMR)?
(4 points)
(B)
What would be loss given default (LGD) immediately after loan was granted? In 3 years
condition to the company is operating?
(6 points)
8.
[10 points]
1
Please find VAR (at 95%) of 3Y bond that is trading now at 0.9. Bond has semi-
annual coupon payments of 12% and will mature in 2.5 years. The volatility of interest rate
(measured as standard deviation) is 15 basis points (
3 points).
Please find VAR (at 99%),
comment on both results
(3 points + 4 points)
1
Providing a chart would be a good idea
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