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15 Cards in this Set
- Front
- Back
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Chartering of life insurance companies can be done only at the federal level.
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F
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If a bank’s assets has shorter maturity than its liabilities, it is more subject to refinancing risk than to reinvestment risk.
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F
The assets would have to be “rolled over.” This means that the bank would be more concerned about future rates it can earn on its assets, i.e. it has more refinancing risk. |
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Capital as defined for regulatory purposes usually is based on book value accounting.
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T
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During the past year, the Federal Reserve has raised the Federal Funds target rate so that it now exceeds the discount rate that the Fed offers on direct loans to commercial banks.
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F
The Fed has increased its FF target rate. But the discount rate has also risen and is greater than the FF target rate. |
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We identified “winners” and “losers” from unexpected increases in inflation. Winners include anyone who owes a relatively large amount of fixed-rate loans. Losers include anyone who holds relatively large cash balances.
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T
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You manage a U.S.-based corporation that is owned by U.S. shareholders. You have incurred loans in Japan, denominated in Yen. You hear that the dollar weakened today against the Yen. Considering only your Japanese loans, this is good news.
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F
Your liabilities have just increased in value. This is not good news. |
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Which country (discussed in class) currently has a large amount of non-performing loans in its banking system, thus indicating a high probability of a banking crisis?
a. The U.S. b. China c. Malaysia d. Thailand e. Japan |
b. China
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Consider the OCC’s “CAMELSI” rating system. Which of the following responses misrepresents the CAMELSI acronym?
a. “C” is for Capital b. “M” is for Maturity c. “L” is for Liquidity d. “S” is for Sensitivity e. “I” is for Information Technology |
b. “M” is for Maturity
“M” is for Management. |
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Consider a one-year maturity, $100,000 face value bond that pays a 6 percent fixed coupon annually.
What is the percentage price change for the bond if its yield declines 25 basis points from its original yield of 6.00 %? Choose the response closest to your answer. a. - 0.280 percent b. - 0.200 percent c. 0.000 percent d. + 0.200 percent e. + 0.280 percent |
d. + 0.200 percent
New yield is 5.75%. PV = 106,000 / (1.0575) = 100,236. This represents a 0.236% increase. |
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Consider the economics of insurance model (expected utility model) that we discussed in class. Suppose that an individual has a 1/20th chance of having a car accident that would cause $40,000 of damage. He has 19/20ths chance of not having an accident, in which case his wealth would be $102,500. If he has no insurance policy, what is his expected utility? (Use the same utility function from class: U = W^0.5 .)
Enter your numeric response, rounded to the 3rd decimal, as in “123.456”. |
(1/20)*62,500^0.5 + (19/20)*(102,500^0.5) =
(1/20)*250 + (19/20)*(320.156) = 316.648 |
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Consider again the above question, using the same numbers. Suppose you want to find out if this person would be better off buying a zero-deductible insurance policy that requires a premium of $2,200 per period. (Note that, with this type of insurance policy, the insurance company pays the cost of the damage in the case of an accident. The premium must be paid regardless of whether an accident occurs. Remember that you must calculate the consumer’s wealth in each of two different states.) Calculate the consumer’s expected utility if he owns such a policy.
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EU = (1/20)*(102,500 - 2,200)^0.5 + (19/20)*(102,500-2,200)^0.5
= (102,500-2,200)^0.5 = 316.702 The consumer is better off. |
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Consider a one-year maturity, $100,000 face value bond that pays a 6 percent fixed coupon annually. What is the percentage price change for the bond if its yield declines 25 basis points from its original yield of 6.00 %?
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0.236
New yield is 5.75%. PV = 106,000 / (1.0575) = 100,236. This represents a 0.236% increase. |
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The total FX risk for a domestic bank that is making a one-year loan in a foreign currency is that the interest income expected on the loan is exposed to a depreciation of the foreign currency
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F
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Borrowing in local currency, as a mean to reduce foreign exchange risk, is an example of on-balance sheet hedging
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T
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A bad news effect of increased mortgage prepayments on a mortgage pool caused by decreasing market interest rates includes a reduction in the discount rate on the mortgage cash flow
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F
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