County Bank offers one-year loans with a stated rate of 9 percent but requires a
compensating balance of 10 percent. What is the true cost of this loan to the borrower?
How does the cost change if the compensating balance is 15 percent? If the compensa
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_ are the most diversified of depository
institutions and _ are on average the
largest depository institutions.: D. Banks ; banks
_ are examples of investment bankers
personally owned business up and ru
Calculate the repricing gap and the impact on net interest income of a 1 percent
increase in interest rates for each of the following positions:
Rate-sensitive assets = $200 million. Rate-sensitive liabilities = $100 million.
Repricing gap =
Interest Rate Risk II
Two banks are being examined by the regulators to determine the interest rate sensitivity of
their balance sheets. Bank A has assets composed solely of a 10-year, 12 percent, $1
million loan. The loan is financed wit
Managing Interest Rate Risk
Interest Rate Risk
The potential loss from unexpected changes in interest rates which can significantly
alter a banks profitability and market value of equity.
When a banks assets and liabilities do not reprice at the same ti
Interest Rate Risk
Interest rate changes have significant effects on many
financial firms net income, asset value, liability value and
equity value (net difference between assets and liabilities).
Three Traditional Ways to Measure Interest Rate Risk
Financial Institutions Management, 3/e
By Anthony Saunders
Importance of Capital Adequacy
Preserve confidence in the FI
Protect uninsured depositors
Protect FI insurance funds and taxpayers
To acquire real i
4. A financial intermediary has the following balance sheet (in millions) with all assets and liabilities in market values: Assets 6 percent semiannual 4-year Treasury notes (par = $12) 7 percent annual 3-year AA-rated bonds (par=$15) 9 percent annual 5-y
You have discovered that the price of a bond rose from $975 to $995 when the yield to
maturity fell from 9.75 percent to 9.25 percent. What is the duration of the bond?
= 4.5 years D = 4.5 years
(1 + R )
Consider the following balance sheet for WatchoverU Savings, Inc. (in millions):
(currently 10% annually)
30-year fixed-rate loans
(currently 7% annually)
Liabilities and Equity
1-year time deposits
Solutions for End-of-Chapter Questions and Problems: Chapter Twenty
Identify and briefly discuss the importance of the four functions of an FIs capital?
Capital serves as a primary cushion against operating losses and un