Midterm 2
1. Suppose a bank's balance sheet is summarized as follows.
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Assets
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Liabilities
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Fixed-Rate Asset $70 million
Rate-Sensitive Asset $30 million
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Fixed-Rate Liabilities $20 million
Rate-Sensitive Liabilities $40 million
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a. Compute net worth ratio and debt-to-equity ratio.
b. Assume the interest rate increases from 4% to 6%. According to Gap analysis, what will be the change in the bank's profit due to the increase in the interest rate?
2. Suppose a bank's balance sheet is summarized as follows. Assume that an average duration of fixed rate assets is 4 years and an average duration of fixed rate liabilities is 2 years. Suppose the interest rate decreases from 10% to 5%.
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Assets
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Liabilities
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Fixed-Rate Asset $80 million
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Fixed-Rate Liabilities $50 million
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a. According to Gap analysis, what will be the change in the bank's profit due to the decrease in the interest rate?
b. According to Duration analysis, what will be the resulting net worth of the bank due to the decrease in the interest rate?
3. There was a loophole in the Banking Holding Act of 1956 with respect to branching restrictions. What was it?
4. What is monetary base?
5. What will happen to a bank's balance sheet if you open a $100 checkable deposit account in the bank?
6. Suppose there are two possible states of world: state A and state B. State A occurs with probability 0.6 and state B occurs with probability 0.4. Consider a following asset. Compute the asset's expected return and standard deviation.
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State A
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State B
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Asset's return
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$100
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$20
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Probability
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0.6
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0.4
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7. Suppose there are two assets, asset 1 and asset 2, and two possible states of world, state A and state B. State A occurs with probability 0.4 and state B occurs with probability 0.6. If half of your portfolio is asset 1 and half of your portfolio is asset 2, what are the portfolio's expected return and standard deviation?
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State A
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State B
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Asset 1's return
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$50
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$100
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Asset 2's return
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$80
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$40
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Probability
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0.4
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0.6
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8. Suppose there are three possible states of world: state A, state B, and state C. Suppose there are three assets: asset 1, asset 2, and asset 3. State A occurs with probability 0.4, state B occurs with probability 0.5, and state C occurs with probability 0.1. You will construct a portfolio by combining these three assets to attain zero risk (i.e., standard deviation of your portfolio will be zero). Compute a proportion of each assts in your portfolio.
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State A
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State B
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State C
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Asset 1's return
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$200
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$0
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$0
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Asset 2's return
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$0
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$100
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$0
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Asset 3's return
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$0
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$0
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$400
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Probability
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0.4
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0.5
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0.1
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9. Suppose a required reserve ratio is 20%. What will be a simple deposit multiplier?
10. List items on the asset side of the Fed's balance sheet.
11. List items on the liability side of the Fed's balance sheet.
12. What is the difference between the payoff and the purchase methods of handling failed banks?
13. List entities of the Federal Reserve System.
14. List the three major monetary policy tools available for use by the Federal Reserve and the advantages and disadvantages of each tool. Which of these tools does the Fed use most often?
15. What is regulation Q? Which act did impose it? Which act did phase out it?
16. Which act did prohibit banks from branching across state lines? Which act did overturn it?
17. What is the discount rate? What is the federal funds rate?
18. What is Eurodollar? What is Edge Act corporation? What are international banking facilities (IBFs)?
19. What is securitization?
20. What are junk bonds? What are fallen angels?
21. What does the Office of Thrift Supervision do? What does the Savings Association Insurance Fund do?