Archives: Solution Manual
978-0078034800 Chapter 9 Part 1
Chapter 09 – Interest Rate Risk II 9-1 Education. Solutions for End-of-Chapter Questions and Problems: Chapter Nine 1. What is the difference between book value accounting and market value accounting? How do interest rate changes affect the value of bank […]
978-0078034800 Chapter 8 Part 2
Chapter 08 – Interest Rate Risk I 8-15 Education. The value and average maturity of the liabilities will be: Demand deposits = $100 CDs = $12.60xPVAn=5,i=7% + $210xPVn=5,i=7% = $201.39 Debentures = $8.4xPVAn=20,i=8% + $120xPVn=20,i=8% = $108.22 ML = [0x$100 […]
978-0078034800 Chapter 8 Part 1
Chapter 08 – Interest Rate Risk I 8-1 Solutions for End-of-Chapter Questions and Problems: Chapter Eight 1. How do monetary policy actions made by the Federal Reserve impact interest rates? Through its daily open market operations, such as buying and […]
978-0078034800 Chapter 7
Chapter 07 – Risks of Financial Institutions 7-1 Solutions for End-of-Chapter Questions and Problems: Chapter Seven 1. What is the process of asset transformation performed by a financial institution? Why does this process often lead to the creation of interest […]
978-0078034800 Chapter 6
Chapter 06 – Financial Services: Insurance 6-1 Solutions for End-of-Chapter Questions and Problems: Chapter Six 1. What is the primary function of an insurance company? How does this function compare with the primary function of a depository institution? The primary […]
978-0078034800 Chapter 5
Chapter 05 – Financial Services: Mutual Funds and Hedge Funds 5-1 Education. Solutions for End-of-Chapter Questions and Problems: Chapter Five 1. What is a mutual fund? In what sense is it a financial institution? A mutual fund represents a pool […]
978-0078034800 Chapter 4
Chapter 04 – Financial Services: Securities Brokerage and Investment Banking 4-1 Education. Solutions for End-of-Chapter Questions and Problems: Chapter Four 1. Explain how securities firms differ from investment banks. In what ways are they financial intermediaries? Securities firms specialize primarily […]
978-0078034800 Chapter 3
Chapter 03 – Financial Services: Finance Companies 3-1 Education. Solutions for End-of-Chapter Questions and Problems: Chapter Three 1. What is the primary function of finance companies? How do finance companies differ from depository institutions? The primary function of finance companies […]
978-0078034800 Chapter 26 Part 2
Chapter 26 – Securitization 26–14 c. Interest rate movements over time are assumed to change a maximum of 1 percent per year. Both an increase of 1 percent and a decrease of 1 percent in interest rates are equally probable. […]
978-0078034800 Chapter 26 Part 1
Chapter 26 – Securitization 26-1 Solutions for End-of-Chapter Questions and Answers: Chapter Twenty-Six 1. What has been the effect of securitization on the asset portfolios of financial institutions? In addition to serving as another mechanism to hedge interest rate exposure […]
978-0078034800 Chapter 25
Chapter 25 – Loan Sales 25-1 Solutions for End-of-Chapter Questions and Problems: Chapter Twenty Five 1. What is the difference between loans sold with recourse and loans sold without recourse from the perspective of both sellers and buyers? Loans sold […]
978-0078034800 Chapter 24 Part 2
Chapter 24 – Swaps 24–15 d. How can the Swiss bank reduce that risk exposure? The Swiss bank can undertake a short currency hedge if it wants to protect itself against exchange rate risk exposure. e. If the US dollar […]
978-0078034800 Chapter 24 Part 1
Chapter 24 – Swaps 24-1 Solutions for End-of-Chapter Questions and Problems: Chapter Twenty-Four 1. Explain the similarity between a swap and a forward contract. A forward contract requires delivery or taking delivery of some commodity or financial security at a […]
978-0078034800 Chapter 23 Part 2
Chapter 23 – Options, Caps, Floors, and Collars 23–15 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. BDx x A]x D k – D [ = NLA p […]
978-0078034800 Chapter 22 Part 2
Chapter 22 – Futures and Forwards Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 23. An FI is planning to hedge its $100 million bond instruments with a […]
978-0078034800 Chapter 22 Part 1
Chapter 22 – Futures and Forwards 22-1 Solutions for End-of-Chapter Questions and Problems: Chapter Twenty-Two 1. What are derivative contracts? What is the value of derivative contracts to the managers of FIs? Which type of derivative contracts had the highest […]
978-0078034800 Chapter 21
Chapter 21 – Product and Geographic Expansion 21-1 Solutions for End-of-Chapter Questions and Problems: Chapter Twenty One 1. How does product segmentation reduce the profitability and risk of FIs? How does it increase the profitability and risk of FIs? Product […]
978-0078034800 Chapter 20 Part 2
Chapter 20 – Capital Adequacy 20–15 Education. commercial paper 100 100 $30 million potential current exposure exposure v. $4 million five-year interest rate swap with no current exposure 5% $0 100 $20,000 w. $6 million two-year currency swap with $500,000 […]
978-0078034800 Chapter 20 Part 1
Chapter 20 – Capital Adequacy 20-1 Solutions for End-of-Chapter Questions and Problems: Chapter Twenty 1. Identify and briefly discuss the importance of the five functions of an FI’s capital? Capital serves as a primary cushion against operating losses and unexpected […]
978-0078034800 Chapter 2
Chapter 02 – Financial Services: Depository Institutions 2-1 Education. Solutions for End-of-Chapter Questions and Problems: Chapter Two 1. What are the differences between community banks, regional banks, and money-center banks? Contrast the business activities, location, and markets of each of […]
978-0078034800 Chapter 19
Chapter 19 – Deposit Insurance and Other Liability Guarantees 19-1 Solutions for End-of-Chapter Questions and Problems: Chapter Nineteen 1. What is a contagious run? What are some of the potentially serious adverse social welfare effects of a contagious run? Do […]
978-0078034800 Chapter 18
Chapter 18 – Liability and Liquidity Management 18-1 Solutions for End-of-Chapter Questions and Problems: Chapter Eighteen 1. What are the benefits and costs to an FI of holding large amounts of liquid assets? Why are Treasury securities considered good examples […]
978-0078034800 Chapter 17
Chapter 17 – Technology and Other Operational Risks 17-1 Education. Solutions for End-of-Chapter Questions and Problems: Chapter Seventeen 1. Explain how technological improvements can increase an FI’s interest and noninterest income and reduce interest and noninterest expenses. Use some specific […]
978-0078034800 Chapter 16
Chapter 16 – Off-Balance-Sheet Risk 16-1 Education. Solutions for End-of-Chapter Questions and Problems: Chapter Sixteen 1. Classify the following items as (1) on-balance-sheet assets, (2) on-balance-sheet liabilities, (3) off-balance-sheet assets, (4) off-balance-sheet liabilities, or (5) capital account. Classification a. Loan […]
978-0078034800 Chapter 15 Part 2
Chapter 15 – Market Risk 15–13 Education. 25. Consider the following discrete probability distribution of payoffs for two securities, A and B, held in the trading portfolio of an FI: Probability A Probability B 50.00% $80m 50.00% $80m 49.00 60m […]
978-0078034800 Chapter 15 Part 1
Chapter 15 – Market Risk 15-1 Education. Solutions for End-of-Chapter Questions and Problems: Chapter Fifteen 1. What is meant by market risk? Market risk is the risk related to the uncertainty of an FI’s earnings on its trading portfolio. Market […]
978-0078034800 Chapter 14
Chapter 14 – Sovereign Risk 14-1 Solutions for End-of-Chapter Questions and Problems: Chapter Fourteen 1. What risks are incurred in making loans to borrowers based in foreign countries? Explain. When making loans to borrowers in foreign countries, two risks need […]
978-0078034800 Chapter 13 Part 2
Chapter 13 – Foreign Exchange Risk 13–16 Education. At the end of the year, the FI must pay the pound CD holders their principal and interest, €160 million (1.07) = €171.20 million. If the euro increases to $1.35/€1 over the […]
978-0078034800 Chapter 13 Part 1
Chapter 13 – Foreign Exchange Risk 13-1 Solutions for End-of-Chapter Questions and Problems: Chapter Thirteen 1. What are four FX risks faced by FIs? Four risks include (1) trading in foreign securities, (2) making foreign currency loans, (3) issuing foreign […]
978-0078034800 Chapter 12
Chapter 12 – Liquidity Risk 12-1 Solutions for End-of-Chapter Questions and Problems: Chapter Twelve 1. How does the degree of liquidity risk differ for different types of financial institutions? Due to the nature of their asset and liability contracts, depository […]
978-0078034800 Chapter 11
Chapter 11 – Credit Risk: Loan Portfolio and Concentration Risk 11-1 Solution for End-of-Chapter Questions and Problems: Chapter Eleven 1. How do loan portfolio risks differ from individual loan risks? Loan portfolio risks refer to the risks of a portfolio […]
978-0078034800 Chapter 10 Part 2
Chapter 10 – Credit Risk: Individual Loan Risk 10–15 Education. b. What is the implied probability of default on A-rated bonds over the next 93 days? Over 175 days? The probability of repayment of the 93-day A-rated bond is: p(1 […]
978-0078034800 Chapter 10 Part 1
Chapter 10 – Credit Risk: Individual Loan Risk 10-1 Solutions for End-of-Chapter Questions and Problems: Chapter Ten 1. Why is credit risk analysis an important component of FI risk management? What recent activities by FIs have made the task of […]
978-0078034800 Chapter 1
Chapter 01 – Why Are Financial Institutions Special? 1-1 Solutions for End-of-Chapter Questions and Problems: Chapter One 1. What are five risks common to all financial institutions? Default or credit risk of assets, interest rate risk caused by maturity mismatches […]
978-0078034671 Chapter 9 Lecture Note
Chapter 09 – Risk Management: Asset-Backed Securities, Loan Sales, Credit Standbys, and Credit Derivatives 9-1 CHAPTER 9 RISK MANAGEMENT: ASSET-BACKED SECURITIES, LOAN SALES, CREDIT STANDBYS, AND CREDIT DERIVATIVES Goal of This Chapter: The purpose of this chapter is to learn […]
978-0078034671 Chapter 9 Excel
Chapter 09 Problem 01 Input Area: Average expected gross annual yield 6.00% Interest on securities issued 4.00% Expected default rate 3.00% Investment banking fees 0.50% Liquidity facility 0.50% Credit guarantee 0.60% Output Area: Sum of expected costs 8.60% Estimated residual […]
978-0078034671 Chapter 8 Lecture Note
Chapter 08 – Risk Management: Financial Futures, Options, Swaps, and Other Hedging Tools 8-1 CHAPTER 8 RISK MANAGEMENT: FINANCIAL FUTURES, OPTIONS, SWAPS, AND OTHER HEDGING TOOLS Goal of This Chapter: The purpose of this chapter is to examine how financial […]
978-0078034671 Chapter 8 Excel
Chapter 08 Problem 04 Input Area: Current Scenario Future Scenario Amount borrowed 500,000,000 500,000,000 Interest rate 3.50% 4.50% Maturity in days 180 180 Output Area: Interest cost 8,750,000 11,250,000 Chapter 08 Problem 07 Input Area: Bond duration (years) 10.48 Price […]
978-0078034671 Chapter 7 Lecture Note
Chapter 07 – Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques 7-1 CHAPTER 7 RISK MANAGEMENT FOR CHANGING INTEREST RATES: ASSET-LIABILITY MANAGEMENT AND DURATION TECHNIQUES Goals of This Chapter: The purpose of this chapter is to explore […]
978-0078034671 Chapter 7 Excel
Chapter 07 Problem 01 Input Area: Today’s price $1,195.00 Annual coupon payment $75.00 Time-to-maturity (years) 14.00 Redemption value $1,000.00 Output Area: Yield to maturity 5.47% Chapter 07 Problem 02 Input Area: Today’s price $1,150.00 Annual coupon payment $75.00 Time-to-maturity (years) […]
978-0078034671 Chapter 6 Lecture Note Part 2
Chapter 06 – Measuring and Evaluating the Performance of Banks and Their Principal Competitors 6-14 Asset utilization: Positive value reflects a good portfolio management policies and yield on assets. Equity multiplier: Positive value reflects efficient financial policies. Expense control efficiency, […]
978-0078034671 Chapter 6 Lecture Note Part 1
Chapter 06 – Measuring and Evaluating the Performance of Banks and Their Principal Competitors 6-1 CHAPTER 6 MEASURING AND EVALUATING THE PERFORMANCE OF BANKS AND THEIR PRINCIPAL COMPETITORS Goal of This Chapter: The purpose of this chapter is to discover […]
978-0078034671 Chapter 6 Excel
Chapter 06 Problem 01 Input Area: Expected Dividend $4.75 Dividend growth rate 3.00% Risk-adjusted cost of capital 14.00% Output Area: Current stock price per share $43.18 Chapter 06 Problem 02 Input Area: Years to receipt Expected dividend 1 1 $2.50 […]
978-0078034671 Chapter 5 Lecture Note
Chapter 05 – The Financial Statements of Banks and Their Principal Competitors 5-1 CHAPTER 5 THE FINANCIAL STATEMENTS OF BANKS AND THEIR PRINCIPAL COMPETITORS Goal of This Chapter: The purpose of this chapter is to acquaint the reader with the […]
978-0078034671 Chapter 5 Excel
Chapter 05 Problem 01 Input Area: Report of Condition Total assets 4,000.00 Cash and due from depository institutions 90.00 Securities 535.00 Federal funds sold & reverse repurchase agreements 45.00 Gross loans & leases ? Loan loss allowance 200.00 Net loans […]
978-0078034671 Chapter 4 Lecture Note
Chapter 04 – Establishing New Banks, Branches, ATMs, Telephone Services, and Websites 4-1 CHAPTER 4 ESTABLISHING NEW BANKS, BRANCHES, ATMS, TELEPHONE SERVICES, AND WEBSITES Goal of This Chapter: The purpose of this chapter is to learn how new banks are […]
978-0078034671 Chapter 4 Excel
Chapter 04 Problem 01 Input Area: Initial cost of banking facility $3,300,000.00 Initial other organizing expenses $500,000.00 Year 1 revenue $400,000.00 Year 1 operating expense $160,000.00 Annual growth rate in revenues 4.00% Annual growth rate in expenses 2.00% Required annual […]
978-0078034671 Chapter 3 Lecture Note
Chapter 03 – The Organization and Structure of Banking and the Financial-Services Industry 3-1 CHAPTER 3 THE ORGANIZATION AND STRUCTURE OF BANKING AND THE FINANCIAL-SERVICES INDUSTRY Goal of This Chapter: The goal of this chapter is to explore the different […]
978-0078034671 Chapter 20 Lecture Note
Chapter 20 – International Banking and the Future of Banking and Financial Services 20-1 CHAPTER 20 INTERNATIONAL BANKING AND THE FUTURE OF BANKING AND FINANCIAL SERVICES Goal of the Chapter: The purpose of this chapter is to learn the different […]
978-0078034671 Chapter 20 Excel
Chapter 20 Problem 06 Input Area: U.S. dollar-denominated assets 475,000,000 U.S. dollar-denominated liabilities 469,000,000 U.S. dollars purchased 75,000,000 U.S. dollars sold 50,000,000 Output Area: Net Exposure to Risk 31,000,000 Chapter 20 Problem 07 Input Area: Net long position 12,000,000 U.S. […]