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##### What is the difference between firm-specific credit risk and systematic credit risk?

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Question 1;What is the difference between firm-specific credit risk and systematic credit risk? How can an FI alleviate firm-specific credit risk?;[20 Marks];Question 2;Use the following information about a hypothetical government security dealer named M.P. Jorgan. Market yields are in parenthesis, and amounts are in millions.;Assets Liabilities and Equity;Cash $10 Overnight repos $170;1-month T-bills (7.05%) $75 Subordinated debt;3-month T-bills (7.25%) $75 7-year fixed rate (8.55%) $150;2-year T-notes (7.50%) $50;8-year T-notes (8.96%) $100;5-year munis (floating rate);(8.20% reset every 6 months) $25 Equity $15;Total assets $335 Total liabilities & equity $335;a) What is the reprising gap if the planning period is 30 days? 3 months? 2 years?;[5 Marks];b) What is the impact over the next 30 days on net interest income if interest rates increase 50 basis points? Decrease 75 basis points?;[5 Marks];c) The following one-year runoffs are expected: $10 million for two-year T-notes and $20 million for eight-year T-notes. What is the one-year reprising gap?;[5 Marks];d) If runoffs are considered, what is the effect on net interest income at year-end if interest rates increase 50 basis points? Decrease 75 basis points?;[5 Marks];e) If you use only duration to immunize your portfolio, what three factors affect changes in the net worth of a financial institution when interest rates change?;[10 Marks];[30 ? Total Marks];Question 3;The balance sheet for Gotbucks Bank, Inc. (GBI), is presented below ($ millions);Assets Liabilities and Equity;Cash $30 Core deposits $20;Federal funds 20 Federal funds 50;Loans (floating) 105 Euro CDs 130;Loans (fixed) 65 Equity 20;Total assets $220 Total liabilities $220;equity;Notes to the balance sheet: The fed funds rate is 8.5%, the floating loan rate is LIBOR + 4%, and currently LIBOR is 11%. Fixed rate loans have five-year maturities, are priced at par, and pay 12% annual interest. The principal is repaid at maturity. Core deposits are fixed rate for two years at 8% paid annually. The principal is repaid at maturity. Euros currently yield 9%.;a) What is the duration of the fixed-rate loan portfolio of Gotbucks Bank?;[10 Marks];b) If the duration of the floating-rate loans and fed funds is 0.36 year, what is the duration of GBI?s assets?;[5 Marks];c) What is the duration of the core deposits if they are priced at par?;[6 Marks];d) If the duration of the Euro CDs and fed funds liabilities is 0.401 year, what is the duration of GBI?s liabilities?;[4 Marks];e) What is GBI?s duration gap? What is its interest rate risk exposure?;[4 Marks];f) What is the impact on the market value of equity if the relative change in all interest rates is an increase of 1 percent (100 basis points)? Note that the relative change in interest rates is?R/(1+R) = 0.01.;[6 Marks];g) What is the impact on the market value of equity if the relative change in all interest rates is a decrease of 0.5 percent (-50 basis points)?;[7 Marks];h) What variables are available to GBI to immunize the bank? How much would each variable need to change to get DGAP equal to zero?;[8 Marks];[50 ? Total Marks]

Paper#25410 | Written in 18-Jul-2015

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