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What is the process of asset transformation performed by a financial institution?




1. What is the process of asset transformation performed by a financial institution?;Why does this process often lead to the creation of interest rate risk? What is;interest rate risk?;2. What is refinancing risk? How is refinancing risk part of interest rate risk? If an;FI funds long-term assets with short-term liabilities, what will be the impact on;earnings of an increase in the rate of interest? A decrease in the rate of interest?;3. What is reinvestment risk? How is reinvestment risk part of interest rate risk?;If an FI funds short-term assets with long-term liabilities, what will be the;impact on earnings of a decrease in the rate of interest? An increase in the rate;of interest?;4. The sales literature of a mutual fund claims that the fund has no risk exposure;since it invests exclusively in federal government securities which are free of;default risk. Is this claim true? Explain why or why not.;5. How can interest rate risk adversely affect the economic or market value of;an FI?;Chapter # 8;11. What is the gap to total assets ratio? What is the value of this ratio to interest;rate risk managers and regulators?;12. 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;13. What is the spread effect?;14. A bank manager is quite certain that interest rates are going to fall within the;next six months. How should the bank manager adjust the bank?s six-month;repricing gap and spread to take advantage of this anticipated rise? What if;the manager believes rates will rise in the next six months?;29. Scandia Bank has issued a one-year, $1 million CD paying 5.75 percent to fund;a one-year loan paying an interest rate of 6 percent. The principal of the loan;will be paid in two installments: $500,000 in six months and the balance at the;end of the year.;a. What is the maturity gap of Scandia Bank? According to the maturity;model, what does this maturity gap imply about the interest rate risk expo-;sure faced by Scandia Bank?;b. Assuming no change in interest rates over the year, what is the expected;net interest income at the end of the year?;c. What would be the effect on annual net interest income of a 2 percent inter-;est rate increase that occurred immediately after the loan was made? What;would be the effect of a 2 percent decrease in rates?;d. What do these results indicate about the ability of the maturity model to;immunize portfolios against intere


Paper#29734 | Written in 18-Jul-2015

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