Chapter+7+hwk[1]

Chapter+7+hwk[1] - s with repricing every six months Yes...

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es with repricing every six months Yes Yes ds Yes Yes e CDs Yes Yes CDs Yes Yes e CDs with annual repricing Yes Yes o No Chapter 7 What is refinancing risk ? How is refinancing risk part of interest rate risk? If an FI funds long-term fixed-rate assets with short-term liabilities, what will b the impact on earning of an increase in the rate of interest? A decrease in the rate of interest? Refinancing risk occurs when an FI is holding assets with maturities greater than the maturities of its liabilities. For example, if a bank has a ten-year fixed-rate loan funded by a 2-year time deposit, the bank faces a risk of borrowing new deposits, or refinancing, at a higher rate in two years. Thus, interest rate increases would reduce net interest income. The bank would benefit if the rates fall as the cost of renewing the deposits would decrease. In this case, net interest income would increase. 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? Reinvestment risk occurs when an FI holds assets with maturities that are less than the maturities of its liabilities. For example, if a bank has a two-year loan funded by a ten-year fixed-rate time deposit, the bank faces the risk that it might be forced to lend or reinvest the money at lower rates after two years, perhaps even below the deposit rates. Also, if the bank receives periodic cash flows, such as coupon payments from a bond or monthly payments on a loan, these periodic cash flows will also be reinvested at the new lower (or higher) interest rates. The sales literature of a mutual fund claims that the fund has no risk exposure since it invests exclusively in federal government securities that are free of default risk. Is this claim true? Explain why or why not. Although the fund's asset portfolio is comprised of securities with no default risk, the securities remain exposed to interest rate risk. For example, if interest rates increase, the market value of the fund's Treasury security portfolio will decrease. Investors who liquidate their positions in the fund may sell at a Net Asset Value (NAV) that is lower than the purchase price. What is economic or market value risk
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This note was uploaded on 03/28/2010 for the course BUS 011823 taught by Professor Smith during the Spring '10 term at ITT Tech Flint.

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Chapter+7+hwk[1] - s with repricing every six months Yes...

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