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BANK3011代写-BANK3011
时间：2022-11-14
BANK3011 Workshop Week 2 – Suggested End of Chapter 1 Questions
1. Explain how economic transactions between household savers of funds and corporate
users of funds would occur in a world without financial institutions.
2. Identify and explain the two functions FIs perform that would enable the smooth flow
of funds from household savers to corporate users.
3. What are agency costs? How do FIs solve the information and related agency costs
experienced when household savers invest directly in securities issued by corporations?
4. How can individual savers use financial institutions to reduce the transaction costs of
investing in financial assets?
5. What is maturity intermediation? What are some of the ways in which the risks of
maturity intermediation are managed by financial institutions?
6. If financial markets operated perfectly and costlessly, would there be a need for
financial institutions?
BANK3011 Workshop Week 3 – End of Chapter 8 Suggested Qs
1. What is the repricing gap? In using this model to evaluate interest rate risk, what is meant by
rate sensitivity? On what financial performance variable does the repricing model focus?
Explain.
2. What is the CGAP effect? According to the CGAP effect, what is the relation between changes in
interest rates and changes in net interest income when CGAP is positive? When CGAP is
negative?
3. Which of the following is an appropriate change to make on a bank’s balance sheet when GAP is
negative, spread is expected to remain unchanged and interest rates are expected to rise?
a. Replace fixed-rate loans with rate-sensitive loans
b. Replace marketable securities with fixed-rate loans
c. Replace fixed-rate CDs with rate-sensitive CDs
d. Replace vault cash with marketable securities
4. Which of the following assets or liabilities fit the one-year rate or repricing sensitivity test?
3-month 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
5. Consider the following balance sheet for WatchoverU Savings, Inc. (in millions):
Assets Liabilities and Equity
Floating-rate mortgages 1-year time deposits
(currently 10% annually) $50 (currently 6% annually) $70
30-year fixed-rate loans 3-year time deposits
(currently 7% annually) $50 (currently 7% annually) $20
Equity $10
Total assets $100 Total liabilities & equity $100
a. What is WatchoverU’s expected net interest income at year-end?
b. What will net interest income be at year-end if interest rates rise by 2 percent?
c. Using the cumulative repricing gap model, what is the expected net interest income for a
2 percent increase in interest rates?
d. What will net interest income be at year-end if interest rates on RSAs increase by 2
percent but interest rates on RSLs increase by 1 percent? Is it reasonable for changes in
interest rates on RSAs and RSLs to differ? Why?
6. What are some of the weakness of the repricing model? How have large banks solved the
problem of choosing the optimal time period for repricing? What is runoff cash flow, and how
does this amount affect the repricing model’s analysis?
7. County Bank has the following market value balance sheet (in millions, all interest at annual
rates). All securities are selling at par equal to book value.
Assets Liabilities and Equity
Cash $20 Demand deposits $100
15-year commercial loan at 10% 5-year CDs at 6% interest,
interest, balloon payment 160 balloon payment 210
30-year mortgages at 8% interest, 20-year debentures at 7% interest, 120
balloon payment 300 balloon payment
Equity 50
Total assets $480 Total liabilities & equity $480
a. What is the maturity gap for County Bank?
b. What will be the maturity gap if the interest rates on all assets and liabilities increase by 1
percent?
c. What will happen to the market value of the equity?
8. If a bank manager is certain that interest rates were going to increase within the next six
months, how should the bank manager adjust the bank’s maturity gap to take advantage of this
anticipated increase? What if the manager believes rates will fall? Would your suggested
adjustments be difficult or easy to achieve?
BANK3011 Workshop Week 4 – Suggested End of Chapter 9 Qs + more
1. What is the difference between book value accounting and market value accounting?
How do interest rate changes affect the value of bank assets and liabilities under the two
methods? What is marking to market? (Q1 in Chapter 9)
2. Consider a five-year, 15 per cent bond annual coupon bond with a face value of $1,000.
The bond is trading at a market yield to maturity of 8 percent (just for revision)
a. What is the price of the bond? (Assume the bond is priced at the coupon date)
b. If the market yield to maturity increases 1 percent, what will be the bond’s new price?
c. Using your answers to parts (a) and (b), what is the percentage change in the bond’s
price as a result of the 1 percent increase in interest rates?
3.
a. Calculate the duration of a two-year $100,000 bond that pays an annual coupon
rate of 10 per cent if today’s yield to maturity is 14 per cent.
b. What is the expected change in the price of the bond if interest rates decline by
0.5%pa (i.e. 50 basis points) using the standard bond pricing methodology?
c. Use duration to calculate the approximate price change if interest rates decline by
50 basis points.
d. Is there a difference between the value calculated in (b) and (c)? If so, why are
they different?
e. What would the duration be if today’s yield to maturity was 13.5 per cent? Is your
answer different to that in (a)? If so why? (Not from Text)
4. The following balance sheet information is available (amounts in $ thousands and
duration in years) for a financial institution (Q26 from Chapter 9)
Amount Duration
Commercial bills $90 0.50
T-notes 55 0.90
T-bonds 176 x
Loans 2,724 7.00
Deposits 2,092 1.00
Federal funds 238 0.01
Equity 715
Treasury bonds are 5-year maturities paying 6 percent semi-annually and selling at par.
a. What is the duration of the T-bond portfolio?
b. What is the average duration of all the assets?
c. What is the average duration of all the liabilities?
d. What is the leverage-adjusted duration gap? What is the interest rate risk exposure?
e. If the entire yield curve shifted upward by 50 basis points [i.e., 'R/(1+R) = 0.0050],
what would be the impact on the FI’s market value of equity?
f. If the entire yield curve shifted downward by 25 basis points [i.e., 'R/(1+R) = 0.0025],
what would be the impact on the FI’s market value of equity?
g. What variables are available to the financial institution to immunize the balance sheet?
How much would each variable need to change to get DGAP equal to 0?
BANK3011 Workshop Week 5 – Suggested End of Chapter 15 Questions
1. What is meant by daily earnings at risk (DEAR)? What are the three measurable components?
What is the price volatility component? (Question 3 in the textbook)
2. What is meant by value at risk (VaR)? How can DEAR be adjusted to account for potential losses
over multiple days (VaR)? What statistical assumption is needed for this calculation? Could this
treatment be critical? (Not from the textbook)
3. Bank Alpha has an inventory of AAA-rated, 15-year zero-coupon bonds with a face value of $400
million. The bonds currently are yielding 9.5% in the over-the-counter market. (Modified Question 9 in
the textbook)
(a) What is the modified duration of these bonds?
(b) What is the price volatility if the potential adverse move in yields is 25 basis points?
(c) What is the DEAR?
(d) If the price volatility is based on a 95 per cent confidence limit and a mean historical change in
daily yields of 0.0 per cent, what is the implied standard deviation of daily yield changes?
4. Bank of Southern Vermont has determined that its inventory of 20 million euros (€) and 25 million
British pounds (£) is subject to market risk. The spot exchange rates are $1.25/€ and $1.60/£,
respectively. The σ’s of the spot exchange rates of the € and £, based on the daily changes of spot rates
over the past six months, are 65 bp and 45 bp, respectively. Determine the bank’s 10-day VAR for both
currencies. Use adverse rate changes in the 95 th percentile. (Modified Question 13 in the textbook)
5. Bank of Alaska’s stock portfolio has a market value of $10 million. The beta of the
portfolio approximates the market portfolio, whose standard deviation (m) has been estimated at
1.5 percent. What is the five-day VAR of this portfolio using adverse rate changes in the 95th
percentile? (Modified Question 16 in the textbook)
6. Jeff Resnick, vice president of operations at Choice Bank, is estimating the aggregate daily DEAR of
the bank’s portfolio of assets consisting of loans (L), foreign currencies (FX), and common stock (EQ). The
individual DEARs are $300,700, $274,000, and $126,700 respectively. If the correlation coefficients ( ij)
between L and FX, L and EQ, and FX and EQ are 0.3, 0.7, and 0.0, respectively, what is the DEAR of the
aggregate portfolio? (Question 17 from textbook)
7. What are the advantages of using the back simulation approach to estimate market risk? Explain
how this approach would be implemented. (Question 19 from the textbook)
8. What is the primary disadvantage to the back simulation approach in measuring market risk? What
effect does the inclusion of more observation days have as a remedy for this disadvantage? What
other remedies can be used to deal with the disadvantage? (Question 22 from the textbook)
BANK3011 Workshop Week 8 – Suggested End of Chapter 11 Qs
1. What is migration analysis? How do FIs use it to measure credit risk concentration? What are its
shortcomings? (Question 2 in textbook)
2. What does loan concentration risk mean? (Question 3 in textbook)
3. A manager decides not to lend to any firm in sectors that generate losses in excess of 5
percent of capital. (Question 4 in textbook)
a) If the average historical losses in the automobile sector total 8 percent, what is the
maximum loan a manager can lend to firms in this sector as a percentage of total
capital?
b) If the average historical losses in the mining sector total 15 percent, what is the
maximum loan a manager can lend to firms in this sector as a percentage of total
capital?
4. The Bank of Tinytown has two $20,000 loans that have the following characteristics. Loan A
has an expected return of 10 percent and a standard deviation of returns of 10 percent. The
expected return and standard deviation of returns for loan B are 12 percent and 20 percent,
respectively. (Question 8 in textbook)
a) If the correlation coefficient between loans A and B is 0.15, what are the expected return
and standard deviation of this portfolio?
b) What is the standard deviation of the portfolio if the correlation is -0.15?
c) What role does the covariance, or correlation, play in the risk reduction attributes of
modern portfolio theory?
5. What is the minimum risk portfolio? Why is this portfolio usually not the portfolio chosen by
FIs to optimize the return-risk tradeoff? (Question 10 in textbook)
6. The obvious benefit to holding a diversified portfolio of loans is to spread risk exposures so
that a single event does not result in a great loss to an FI. Are there any benefits to not being
diversified? (Question 11 in textbook)
7. Suppose that an FI holds two loans with the following characteristics.
Annual
Spread between Loss to FI Expected
Loan Rate and FI’s Annual Given Default
Loan Xi Cost of Funds Fees Default Frequency
1 ? 4.0% 3.00% ?% 4.0% ρ12 = -0.10
2 ? 2.5 1.15 ? 1.5
The return on loan 1 is R1 = 6.25%, the risk on loan 2 is σ2 = 1.8233%, and the return of the
portfolio is Rp = 4.555%.
Calculate of the loss given default on loans 1 and 2, the proportions of loans 1 and 2 in the
portfolio, and the risk of the portfolio, σp, using Moody’s Analytics Portfolio Manager.
8. Information concerning the allocation of loan portfolios to different market sectors is given
below:
Allocation of Loan Portfolios in Different Sectors (%)
Sectors National Bank A Bank B
Commercial 30 50 10
Consumer 40 30 40
Real Estate 30 20 50
Bank A and Bank B would like to estimate how much their portfolios deviate from the national
average. (Question 17 in textbook)
a. Which bank is further away from the national average?
b. Is a large standard deviation necessarily bad for a FI using this model?
9. Bank of USYD has used regression analysis to examine its historical loan losses on its C&I
loans, consumer loans, and the total loan portfolio and has estimated the following models:
XC = 0.002 + 0.8XL and Xh = 0.003 + 1.8XL
where XC = loss rate in the commercial sector, Xh = loss rate in the consumer (household)
sector, XL = loss rate for its total loan portfolio. (Modified Question 19 in textbook)
a. If the bank’s total loan loss rates increase by 10 percent, what are the expected loss rate
increases in the commercial and consumer sectors?
b. In which sector should the bank limit its loans and why?
BANK3011 Workshop Week 9 – Suggested Chapters 25 & 26 Questions
1. What is the difference between loans sold with recourse and loans sold without recourse
from the perspective of both sellers and buyers? (Q1 Chap 25)
2. In addition to managing credit risk, what are some other reasons for the sale of loans by FIs?
(Q 13 in Chap 25)
3. What specific changes occur on the balance sheet at the completion of the securitization
process? What adjustments occur to the risk profile of the FI? (Q9 in Chap 26)
4. What is a collateralized mortgage obligation (CMO)? How is it similar to a pass-through
security? How does it differ? In what way can the originator of a CMO use market
segmentation to redistribute credit risk amongst investors? (Q30 Chap 26)
5. How does a FI use loan sales and securitisation to manage interest rate, credit and liquidity
risks? (Q43 Chap 26)
BANK3011 Workshop Week 10 – Suggested End of Chapter 14 Questions
1. What risks are incurred in making loans to borrowers based in foreign countries? Explain. (Q1
textbook)
2. What is the difference between debt rescheduling and debt repudiation? (Q2 textbook)
3. Identify and explain at least four reasons that rescheduling debt in the form of loans is easier
than rescheduling debt in the form of bonds. (Q3 textbook)
4. What are the benefits and costs of rescheduling to the following? (Q13 textbook)
a. A borrower.
b. A lender.
5. Which variables typically are negotiation points in a multiyear restructuring agreement
(MYRA)? How do changes in these variables provide benefits to the borrower and to the
lender? (Q20 textbook)
BANK3011 Workshop Week 11 – Suggested End of Chapter 12 Questions
1. What are the two ways in which a deposit taking institution can offset the liquidity effects of a net
deposit drain of funds? How do the two methods differ? What are the operational benefits and costs
of each method? (Textbook Q6 Chap 12)
2. Define each of the following four measures of liquidity risk. Explain how each measure would be
implemented and utilised by a financial institution. (Textbook Q11 Chap 12)
a. Sources and uses of liquidity.
b. Peer group ratio comparisons
c. Liquidity index
d. Financing gap and financing requirement
3. Plainbank has $10 million in cash and equivalents, $30 million in loans, and $15 million in core
deposits. (Textbook Q16 Chap 12)
a. Calculate the financing gap.
b. What is the financing requirement?
c. How can the financing gap be used in the day-to-day liquidity management of the
bank?
4. What is a bank run? What are some possible withdrawal shocks that could initiate a bank run? What
feature of the demand deposit contract provides deposit withdrawal momentum that can result in a
bank run? (Textbook Q22 Chap 12)
5. What is the relationship between funding cost and funding or withdrawal risk? (Not in textbook)
BANK3011 Workshop Week 12 – Suggested End of Chapter 19 Questions
1. How does federal deposit insurance help mitigate the problem of bank runs. What other
elements of the safety net are available to DIs in the United States? (Textbook Chap 19, Q2)
2. Contrast the two views on, or reasons why, depository institution insurance funds can become
insolvent. (Textbook Chap 19, Q4)
3. What is moral hazard? How did the fixed-rate deposit insurance program of the FDIC
contribute to the moral hazard problem of the savings association industry? What other
changes in the savings association environment during the 1980s encouraged the developing
instability of the industry? (Textbook Chap 19, Q5)
4. What are some ways of imposing stockholder discipline to prevent FI managers from engaging
in excessive risk taking? (Textbook Chap 19, Q8)
5. What is capital forbearance? How does a policy of forbearance potentially increase the costs
of financial distress to the insurance fund as well as the stockholders? (Textbook Chap 19,
Q11)
1. Explain how economic transactions between household savers of funds and corporate
users of funds would occur in a world without financial institutions.
2. Identify and explain the two functions FIs perform that would enable the smooth flow
of funds from household savers to corporate users.
3. What are agency costs? How do FIs solve the information and related agency costs
experienced when household savers invest directly in securities issued by corporations?
4. How can individual savers use financial institutions to reduce the transaction costs of
investing in financial assets?
5. What is maturity intermediation? What are some of the ways in which the risks of
maturity intermediation are managed by financial institutions?
6. If financial markets operated perfectly and costlessly, would there be a need for
financial institutions?
BANK3011 Workshop Week 3 – End of Chapter 8 Suggested Qs
1. What is the repricing gap? In using this model to evaluate interest rate risk, what is meant by
rate sensitivity? On what financial performance variable does the repricing model focus?
Explain.
2. What is the CGAP effect? According to the CGAP effect, what is the relation between changes in
interest rates and changes in net interest income when CGAP is positive? When CGAP is
negative?
3. Which of the following is an appropriate change to make on a bank’s balance sheet when GAP is
negative, spread is expected to remain unchanged and interest rates are expected to rise?
a. Replace fixed-rate loans with rate-sensitive loans
b. Replace marketable securities with fixed-rate loans
c. Replace fixed-rate CDs with rate-sensitive CDs
d. Replace vault cash with marketable securities
4. Which of the following assets or liabilities fit the one-year rate or repricing sensitivity test?
3-month 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
5. Consider the following balance sheet for WatchoverU Savings, Inc. (in millions):
Assets Liabilities and Equity
Floating-rate mortgages 1-year time deposits
(currently 10% annually) $50 (currently 6% annually) $70
30-year fixed-rate loans 3-year time deposits
(currently 7% annually) $50 (currently 7% annually) $20
Equity $10
Total assets $100 Total liabilities & equity $100
a. What is WatchoverU’s expected net interest income at year-end?
b. What will net interest income be at year-end if interest rates rise by 2 percent?
c. Using the cumulative repricing gap model, what is the expected net interest income for a
2 percent increase in interest rates?
d. What will net interest income be at year-end if interest rates on RSAs increase by 2
percent but interest rates on RSLs increase by 1 percent? Is it reasonable for changes in
interest rates on RSAs and RSLs to differ? Why?
6. What are some of the weakness of the repricing model? How have large banks solved the
problem of choosing the optimal time period for repricing? What is runoff cash flow, and how
does this amount affect the repricing model’s analysis?
7. County Bank has the following market value balance sheet (in millions, all interest at annual
rates). All securities are selling at par equal to book value.
Assets Liabilities and Equity
Cash $20 Demand deposits $100
15-year commercial loan at 10% 5-year CDs at 6% interest,
interest, balloon payment 160 balloon payment 210
30-year mortgages at 8% interest, 20-year debentures at 7% interest, 120
balloon payment 300 balloon payment
Equity 50
Total assets $480 Total liabilities & equity $480
a. What is the maturity gap for County Bank?
b. What will be the maturity gap if the interest rates on all assets and liabilities increase by 1
percent?
c. What will happen to the market value of the equity?
8. If a bank manager is certain that interest rates were going to increase within the next six
months, how should the bank manager adjust the bank’s maturity gap to take advantage of this
anticipated increase? What if the manager believes rates will fall? Would your suggested
adjustments be difficult or easy to achieve?
BANK3011 Workshop Week 4 – Suggested End of Chapter 9 Qs + more
1. What is the difference between book value accounting and market value accounting?
How do interest rate changes affect the value of bank assets and liabilities under the two
methods? What is marking to market? (Q1 in Chapter 9)
2. Consider a five-year, 15 per cent bond annual coupon bond with a face value of $1,000.
The bond is trading at a market yield to maturity of 8 percent (just for revision)
a. What is the price of the bond? (Assume the bond is priced at the coupon date)
b. If the market yield to maturity increases 1 percent, what will be the bond’s new price?
c. Using your answers to parts (a) and (b), what is the percentage change in the bond’s
price as a result of the 1 percent increase in interest rates?
3.
a. Calculate the duration of a two-year $100,000 bond that pays an annual coupon
rate of 10 per cent if today’s yield to maturity is 14 per cent.
b. What is the expected change in the price of the bond if interest rates decline by
0.5%pa (i.e. 50 basis points) using the standard bond pricing methodology?
c. Use duration to calculate the approximate price change if interest rates decline by
50 basis points.
d. Is there a difference between the value calculated in (b) and (c)? If so, why are
they different?
e. What would the duration be if today’s yield to maturity was 13.5 per cent? Is your
answer different to that in (a)? If so why? (Not from Text)
4. The following balance sheet information is available (amounts in $ thousands and
duration in years) for a financial institution (Q26 from Chapter 9)
Amount Duration
Commercial bills $90 0.50
T-notes 55 0.90
T-bonds 176 x
Loans 2,724 7.00
Deposits 2,092 1.00
Federal funds 238 0.01
Equity 715
Treasury bonds are 5-year maturities paying 6 percent semi-annually and selling at par.
a. What is the duration of the T-bond portfolio?
b. What is the average duration of all the assets?
c. What is the average duration of all the liabilities?
d. What is the leverage-adjusted duration gap? What is the interest rate risk exposure?
e. If the entire yield curve shifted upward by 50 basis points [i.e., 'R/(1+R) = 0.0050],
what would be the impact on the FI’s market value of equity?
f. If the entire yield curve shifted downward by 25 basis points [i.e., 'R/(1+R) = 0.0025],
what would be the impact on the FI’s market value of equity?
g. What variables are available to the financial institution to immunize the balance sheet?
How much would each variable need to change to get DGAP equal to 0?
BANK3011 Workshop Week 5 – Suggested End of Chapter 15 Questions
1. What is meant by daily earnings at risk (DEAR)? What are the three measurable components?
What is the price volatility component? (Question 3 in the textbook)
2. What is meant by value at risk (VaR)? How can DEAR be adjusted to account for potential losses
over multiple days (VaR)? What statistical assumption is needed for this calculation? Could this
treatment be critical? (Not from the textbook)
3. Bank Alpha has an inventory of AAA-rated, 15-year zero-coupon bonds with a face value of $400
million. The bonds currently are yielding 9.5% in the over-the-counter market. (Modified Question 9 in
the textbook)
(a) What is the modified duration of these bonds?
(b) What is the price volatility if the potential adverse move in yields is 25 basis points?
(c) What is the DEAR?
(d) If the price volatility is based on a 95 per cent confidence limit and a mean historical change in
daily yields of 0.0 per cent, what is the implied standard deviation of daily yield changes?
4. Bank of Southern Vermont has determined that its inventory of 20 million euros (€) and 25 million
British pounds (£) is subject to market risk. The spot exchange rates are $1.25/€ and $1.60/£,
respectively. The σ’s of the spot exchange rates of the € and £, based on the daily changes of spot rates
over the past six months, are 65 bp and 45 bp, respectively. Determine the bank’s 10-day VAR for both
currencies. Use adverse rate changes in the 95 th percentile. (Modified Question 13 in the textbook)
5. Bank of Alaska’s stock portfolio has a market value of $10 million. The beta of the
portfolio approximates the market portfolio, whose standard deviation (m) has been estimated at
1.5 percent. What is the five-day VAR of this portfolio using adverse rate changes in the 95th
percentile? (Modified Question 16 in the textbook)
6. Jeff Resnick, vice president of operations at Choice Bank, is estimating the aggregate daily DEAR of
the bank’s portfolio of assets consisting of loans (L), foreign currencies (FX), and common stock (EQ). The
individual DEARs are $300,700, $274,000, and $126,700 respectively. If the correlation coefficients ( ij)
between L and FX, L and EQ, and FX and EQ are 0.3, 0.7, and 0.0, respectively, what is the DEAR of the
aggregate portfolio? (Question 17 from textbook)
7. What are the advantages of using the back simulation approach to estimate market risk? Explain
how this approach would be implemented. (Question 19 from the textbook)
8. What is the primary disadvantage to the back simulation approach in measuring market risk? What
effect does the inclusion of more observation days have as a remedy for this disadvantage? What
other remedies can be used to deal with the disadvantage? (Question 22 from the textbook)
BANK3011 Workshop Week 8 – Suggested End of Chapter 11 Qs
1. What is migration analysis? How do FIs use it to measure credit risk concentration? What are its
shortcomings? (Question 2 in textbook)
2. What does loan concentration risk mean? (Question 3 in textbook)
3. A manager decides not to lend to any firm in sectors that generate losses in excess of 5
percent of capital. (Question 4 in textbook)
a) If the average historical losses in the automobile sector total 8 percent, what is the
maximum loan a manager can lend to firms in this sector as a percentage of total
capital?
b) If the average historical losses in the mining sector total 15 percent, what is the
maximum loan a manager can lend to firms in this sector as a percentage of total
capital?
4. The Bank of Tinytown has two $20,000 loans that have the following characteristics. Loan A
has an expected return of 10 percent and a standard deviation of returns of 10 percent. The
expected return and standard deviation of returns for loan B are 12 percent and 20 percent,
respectively. (Question 8 in textbook)
a) If the correlation coefficient between loans A and B is 0.15, what are the expected return
and standard deviation of this portfolio?
b) What is the standard deviation of the portfolio if the correlation is -0.15?
c) What role does the covariance, or correlation, play in the risk reduction attributes of
modern portfolio theory?
5. What is the minimum risk portfolio? Why is this portfolio usually not the portfolio chosen by
FIs to optimize the return-risk tradeoff? (Question 10 in textbook)
6. The obvious benefit to holding a diversified portfolio of loans is to spread risk exposures so
that a single event does not result in a great loss to an FI. Are there any benefits to not being
diversified? (Question 11 in textbook)
7. Suppose that an FI holds two loans with the following characteristics.
Annual
Spread between Loss to FI Expected
Loan Rate and FI’s Annual Given Default
Loan Xi Cost of Funds Fees Default Frequency
1 ? 4.0% 3.00% ?% 4.0% ρ12 = -0.10
2 ? 2.5 1.15 ? 1.5
The return on loan 1 is R1 = 6.25%, the risk on loan 2 is σ2 = 1.8233%, and the return of the
portfolio is Rp = 4.555%.
Calculate of the loss given default on loans 1 and 2, the proportions of loans 1 and 2 in the
portfolio, and the risk of the portfolio, σp, using Moody’s Analytics Portfolio Manager.
8. Information concerning the allocation of loan portfolios to different market sectors is given
below:
Allocation of Loan Portfolios in Different Sectors (%)
Sectors National Bank A Bank B
Commercial 30 50 10
Consumer 40 30 40
Real Estate 30 20 50
Bank A and Bank B would like to estimate how much their portfolios deviate from the national
average. (Question 17 in textbook)
a. Which bank is further away from the national average?
b. Is a large standard deviation necessarily bad for a FI using this model?
9. Bank of USYD has used regression analysis to examine its historical loan losses on its C&I
loans, consumer loans, and the total loan portfolio and has estimated the following models:
XC = 0.002 + 0.8XL and Xh = 0.003 + 1.8XL
where XC = loss rate in the commercial sector, Xh = loss rate in the consumer (household)
sector, XL = loss rate for its total loan portfolio. (Modified Question 19 in textbook)
a. If the bank’s total loan loss rates increase by 10 percent, what are the expected loss rate
increases in the commercial and consumer sectors?
b. In which sector should the bank limit its loans and why?
BANK3011 Workshop Week 9 – Suggested Chapters 25 & 26 Questions
1. What is the difference between loans sold with recourse and loans sold without recourse
from the perspective of both sellers and buyers? (Q1 Chap 25)
2. In addition to managing credit risk, what are some other reasons for the sale of loans by FIs?
(Q 13 in Chap 25)
3. What specific changes occur on the balance sheet at the completion of the securitization
process? What adjustments occur to the risk profile of the FI? (Q9 in Chap 26)
4. What is a collateralized mortgage obligation (CMO)? How is it similar to a pass-through
security? How does it differ? In what way can the originator of a CMO use market
segmentation to redistribute credit risk amongst investors? (Q30 Chap 26)
5. How does a FI use loan sales and securitisation to manage interest rate, credit and liquidity
risks? (Q43 Chap 26)
BANK3011 Workshop Week 10 – Suggested End of Chapter 14 Questions
1. What risks are incurred in making loans to borrowers based in foreign countries? Explain. (Q1
textbook)
2. What is the difference between debt rescheduling and debt repudiation? (Q2 textbook)
3. Identify and explain at least four reasons that rescheduling debt in the form of loans is easier
than rescheduling debt in the form of bonds. (Q3 textbook)
4. What are the benefits and costs of rescheduling to the following? (Q13 textbook)
a. A borrower.
b. A lender.
5. Which variables typically are negotiation points in a multiyear restructuring agreement
(MYRA)? How do changes in these variables provide benefits to the borrower and to the
lender? (Q20 textbook)
BANK3011 Workshop Week 11 – Suggested End of Chapter 12 Questions
1. What are the two ways in which a deposit taking institution can offset the liquidity effects of a net
deposit drain of funds? How do the two methods differ? What are the operational benefits and costs
of each method? (Textbook Q6 Chap 12)
2. Define each of the following four measures of liquidity risk. Explain how each measure would be
implemented and utilised by a financial institution. (Textbook Q11 Chap 12)
a. Sources and uses of liquidity.
b. Peer group ratio comparisons
c. Liquidity index
d. Financing gap and financing requirement
3. Plainbank has $10 million in cash and equivalents, $30 million in loans, and $15 million in core
deposits. (Textbook Q16 Chap 12)
a. Calculate the financing gap.
b. What is the financing requirement?
c. How can the financing gap be used in the day-to-day liquidity management of the
bank?
4. What is a bank run? What are some possible withdrawal shocks that could initiate a bank run? What
feature of the demand deposit contract provides deposit withdrawal momentum that can result in a
bank run? (Textbook Q22 Chap 12)
5. What is the relationship between funding cost and funding or withdrawal risk? (Not in textbook)
BANK3011 Workshop Week 12 – Suggested End of Chapter 19 Questions
1. How does federal deposit insurance help mitigate the problem of bank runs. What other
elements of the safety net are available to DIs in the United States? (Textbook Chap 19, Q2)
2. Contrast the two views on, or reasons why, depository institution insurance funds can become
insolvent. (Textbook Chap 19, Q4)
3. What is moral hazard? How did the fixed-rate deposit insurance program of the FDIC
contribute to the moral hazard problem of the savings association industry? What other
changes in the savings association environment during the 1980s encouraged the developing
instability of the industry? (Textbook Chap 19, Q5)
4. What are some ways of imposing stockholder discipline to prevent FI managers from engaging
in excessive risk taking? (Textbook Chap 19, Q8)
5. What is capital forbearance? How does a policy of forbearance potentially increase the costs
of financial distress to the insurance fund as well as the stockholders? (Textbook Chap 19,
Q11)
