Ch 12 HW FIN4345

Ch 12 HW FIN4345 - Chapter 12 Special Industries: Banks,...

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395 Chapter 12 Special Industries: Banks, Utilities, Oil and Gas, Transportation, Insurance, Real Estate Companies QUESTIONS 12- 1. Interest income, service charges, and earnings in investments are the main sources of revenue for banks. 12- 2. Loans are assets because they are an investment of the banks’ money. They are like receivables; money is owed to the bank, not by the bank. 12- 3. Savings accounts are liabilities because they hold cash owed to customers. 12- 4. Loans/deposits is a type of debt coverage, since loans are a main amount to repay depositors. 12- 5. Banks report to the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and to their shareholders; and they must publish their reports in newspapers for the general public. 12- 6. Bank holding companies own banks and other types of subsidiaries that may not be financially related. These holdings can affect the special bank ratios. 12- 7. Interest expense will usually be the biggest expense item for banks. 12- 8. Total deposits times capital is a measure of liabilities to equity, of creditors' to owners' funds. 12- 9. Interest margin to average assets, earnings per share, return on equity, and return on assets are all ratios that indicate a bank's profitability. 12-10. Earning assets are those that generate interest from which the firm earns its profits. 12-11. The loan loss coverage ratio measures the quality of the loans and the level of protection related to loan payment. 12-12. Deposits times capital is a type of debt to equity or leverage ratio. 12-13. A review of assets may indicate that the bank has a substantial investment in long-term bonds. Such an investment could reflect substantial risk if interest rates increase. Another example would be a bank holding long-term, fixed-rate mortgages. The value of these mortgages could decline substantially if interest rates increase.
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396 12-14. This review may indicate that investments have a market value that is substantially above or below the book amount. 12-15. In general, foreign loans are perceived as being more risky than domestic loans. 12-16. It may indicate a significant change and/or significant losses charged. 12-17. In general, nonperforming assets are assets that the bank is not receiving income on or that are receiving inadequate income. The amount and trend of nonperforming assets should be observed closely. This can be an early indication of troubles to come for a bank. 12-18. A decreasing amount in savings deposits would indicate that the bank is losing one of its cheapest source of funds. 12-19. This note may reveal significant additional commitments and contingent liabilities. 12-20. Utilities have heavy investment in fixed assets, necessitating long-term debt.
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Ch 12 HW FIN4345 - Chapter 12 Special Industries: Banks,...

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