Bank Mgt. 5th Ed, Chapter 4 Revised

Bank Mgt. 5th Ed, Chapter 4 Revised - Chapter 4 Foundations...

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1 Chapter 4 Chapter 4 Foundations of Foundations of Value In Banking Value In Banking
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2 How Is Economic Value How Is Economic Value Created In Banking? Created In Banking? Bank considers expanding its assets by entering a Bank considers expanding its assets by entering a high-return, high-risk loan market--is this a good high-return, high-risk loan market--is this a good idea? idea? Some managers say “bigger” is better. Some managers say “bigger” is better. Bigger could create losses in excess of returns. Bigger could create losses in excess of returns. Need to know if new business will add value--but that is Need to know if new business will add value--but that is not the point. not the point. Value is a forward looking concept, & up to now, we Value is a forward looking concept, & up to now, we have been applying accounting data to analyze past have been applying accounting data to analyze past performance. performance. * Continued
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3 How Is Economic Value How Is Economic Value Created In Banking? Created In Banking? EXAMPLE: Five years ago, Camelot Bank acquired long-term government bonds at par for $10 million. Interest rates have risen in last 5 years so if bank sold bonds today, they would receive only $9 million--yet the balance sheet still shows value as $10 million. While accounting values are useful, they do not give us current economic values. They disguise the impact of changing market conditions. *
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4 Nominal Contracts
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This note was uploaded on 09/30/2010 for the course FIN 468 taught by Professor Bexley during the Fall '10 term at Sam Houston State University.

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Bank Mgt. 5th Ed, Chapter 4 Revised - Chapter 4 Foundations...

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