Home assignment 10

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Baruch College, CUNY *

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MISC

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Economics

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Jan 9, 2024

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pdf

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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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