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Question
A financial institution plans to issue a group of bonds backed by a pool of automobile loans. However, they fear that the default rate on the automobile loans will rise well above 4 percent of the portfolio the projected default rate. The financial institution wants to lower the interest payments if the loan default rate rises too high. Which type of credit derivative contract would you most recommend for this situation?
A) Credit linked note
B) Credit option
C) Credit risk option
D) Total return swap
E) Credit swap
Answer
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Related questions
Q:
One part of interest rate risk is . This part of interest rate risk reflects that as interest rates rise, prices of securities tend to fall.
Q:
When a bank has a negative duration gap a parallel decrease in the interest rates on the assets and liabilities of the bank will lead to a(n)_________________________ in the bank's net worth.
Q:
The __________________ refers to the periodic fluctuations in the scale of economic activity.
Q:
A(n)__________________________ duration gap means that for a parallel increase in all interest rates the market value of net worth will tend to increase.
Q:
The __________________________ component of interest rates is the risk premium due to the probability that the borrower will miss some payments or will not repay the loan.
Q:
__________________________ is the difference between interest-sensitive assets and interest-sensitive liabilities.
Q:
Maryellen Epplin notices that a particular T-Bill has a bankers discount rate of 9% in the Wall Street Journal. She knows that this T-Bill has 20 days to maturity and has a face value of $10,000. What is the yield to maturity on this T-Bill?
A) 9%
B) .5%
C) 4.5%
D) 9.17%
E) None of the above
Q:
The Harris State Bank has $2000 in total assets (all of which are earning assets), $500 of which will be repriced in the next 90 days. This bank also has $1600 in total liabilities, $1000 of which will be repriced in 90 days. The bank currently earns 9% on its assets and pays 4% on its liabilities. If interest rates on both assets and liabilities fall by 2% in the next 90 days, what would be this banks net interest margin?
A) 3.8%
B) 5.4%
C) 5.8%
D) 6.3%
E) 7.8%
Q:
The Harris State Bank has $2000 in total assets (all of which are earning assets), $500 of which will be repriced in the next 90 days. This bank also has $1600 in total liabilities, $1000 of which will be repriced in 90 days. The bank currently earns 9% on its assets and pays 4% on its liabilities. If interest rates on both assets and liabilities rise by 2% in the next 90 days, what should happen to this banks net interest margin?
A) It should rise
B) It should fall
C) It should stay the same
D) Cannot be determined from the information given
Q:
Which of the following would be an example of a nonrepriceable liability?
A) Money the bank has borrowed from the money market
B) Cash in the vault
C) Demand deposits that do not pay an interest rate
D) Short term securities issued by the government about to mature owned by the bank
E) All of the above are examples of repriceable assets
Q:
Havoc State Bank has a loan that it fears will not be repaid because the company is going into bankruptcy. What type of risk would this be an example of?
A) Default risk
B) Inflation risk
C) Liquidity risk
D) Call risk
E) Basis risk
Q:
U.S. banks tend to fare best when the yield curve is:
A) Flat
B) Downward-sloping
C) Vertical
D) Upward-sloping
E) Kinked
Q:
A bond has a face value of $1000 and coupon payments of $80 annually. This bond matures in three years and is selling for $1000 in the market. Market interest rates are 8%. What is this bond's duration?
A) 3 years
B) 2.78 years
C) 1.95 years
D) 4.31 years
E) None of the above
Q:
Harrison Bank has the following financial information. ROE
16% Net Income
$1000 Total Assets
$62,500 Total Equity
$6250 What is this banks asset utilization ratio?
A) 1.6%
B) 10%
C) 12.8%
D) 16%
E) None of the above
Q:
Net Profit Margin
5% Net Income
$1000 Total Assets
$62,500 Total Equity
$6250 What is this banks ROE?
A) 1.6%
B) 10 %
C) 12.8%
D) 16%
E) None of the above
Q:
Castle State Bank has the following financial information. Balance Sheet Income Statement Cash
$100
Interest Income
$400 Securities Investments
$600
Interest Expenses
($150) Net Loans
$1200
Non-Interest Income
$50 Net Premises and Equip.
$300
Non-Interest Expenses
($100) Total Assets
$2200
Provision for Loan Losses
($60) Deposits
$1100
Pre Tax Net Operating Income
$140 Non-Deposit Borrowings *
$800
Securities Gains (Losses)
($40) Equity Capital
$300
Taxes
($45) Total Liabilities and Equity
$2200
Net Income
$55 * All Purchased Funds Use this information to calculate Castle State Banks asset utilization ratio
A) 20.45%
B) 18.33%
C) 12.22%
D) 7.33%
E) 2.5%
Q:
Castle State Bank has the following financial information. Balance Sheet Income Statement Cash
$100
Interest Income
$400 Securities Investments
$600
Interest Expenses
($150) Net Loans
$1200
Non-Interest Income
$50 Net Premises and Equip.
$300
Non-Interest Expenses
($100) Total Assets
$2200
Provision for Loan Losses
($60) Deposits
$1100
Pre Tax Net Operating Income
$140 Non-Deposit Borrowings *
$800
Securities Gains (Losses)
($40) Equity Capital
$300
Taxes
($45) Total Liabilities and Equity
$2200
Net Income
$55 * All Purchased Funds Use this information to calculate Castle State Banks net profit margin
A) 20.45%
B) 18.33%
C) 12.22%
D) 7.33%
E) 2.5%
Q:
Operational risk includes which of the following?
A) Failure of banks computer system
B) Closure of a bank for three months due to flooding from a major hurricane
C) Embezzlement of funds of a bank by a teller of the bank
D) Closure of a bank for two weeks due to a fire from a lightening strike
E) All of the above are example of operational risk
Q:
In recent years banks have been __________ profitable than (as) S&Ls and Savings Banks.
A) More
B) Less
C) As
D) Much more
E) Much less
Q:
The Smith-James Bank has an ROE of 17.5%, an asset utilization ratio of 13% and a net profit margin of 9%. What must this bank's equity multiplier be?
A) 14.96 times
B) 1.58 times
C) 1.17 times
D) 134.62 times
E) None of the above
Q:
Which of the following would be the best example of a ratio used to examine the cost of one of the bank's liabilities?
A) Demand deposits/ total assets
B) Interest on time deposits/ total time deposits
C) Interest on real estate loans/ total real estate loans
D) Interest sensitive assets/ interest sensitive liabilities
Q:
A bank that has a high asset utilization (AU) ratio most likely:
A) Is doing a poor job of controlling expenses
B) Has a small amount of financial leverage
C) Has a small amount of liquidity risk
D) Is allocating assets to the most productive investments
E) None of the above
Q:
A bank that has a low profit margin most likely:
A) Is doing a poor job of controlling expenses
B) Has a small amount of financial leverage
C) Has a small amount of liquidity risk
D) Has assets that are not very productive
E) None of the above
Q:
A ratio that can be used to measure a bank's credit risk would be:
A) Net loans/total assets
B) Interest sensitive assets/interest sensitive liabilities
C) Total assets/number of full time employees
D) Nonperforming loans/total loans
Q:
OE for a bank reflects:
A) How well the assets of the bank are managed
B) The bank's use of leverage
C) How well the bank controls expenses
D) All of the above
E) None of the above
Q:
The risk that a customer the bank has entered into a contract with will fail to pay or to perform, forcing the bank to find a replacement contract that may be less satisfactory is what form of risk listed below?
A) Counterparty risk
B) Interest-rate risk
C) Operating risk
D) Credit risk
E) Liquidity risk
Q:
Possible breakdowns in quality control, inefficiencies in producing and delivering financial services, weather damage, aging or faulty computer systems and simple errors in judgment by bank management illustrate what form of risk faced by banks?
A) Credit risk
B) Liquidity risk
C) Interest-rate risk
D) Operational risk
E) None of the above
Q:
The Internal Capital Growth Rate for a bank is a function of which of the following factors?
A) Profit margin.
B) Asset utilization.
C) Equity multiplier.
D) Earnings retention ratio.
E) All of the above.
Q:
is long-term debt capital whose claims legally follow claims of depositors.
Q:
represents funds set aside for contingencies such as legal action against the institution as well as providing a reserve for dividends expected to be paid but not yet declared and a sinking fund to retire stock or debt in the future.