Mini Project 4: The development of MBS market
A mortgage backed security (MBS) is a debt instrument backed by a pool of mortgages. Most
MBSs are issued by the Government National Mortgage Association (Ginnie Mae), the Federal
National Mortgage Association
Answers to Chapter 2
5. According to the pure expectations theory, the one year rate one year from now is expected to
be less than the one year rate today.
3. 1R2 = [(1 + .052)(1 + .058)]1/2 - 1 = 5.50%
1 + 1R2 = cfw_(1 + 1R1)(1+E(
Analyzing Bank Financials
Example: 2012 financial statements of Associated Bank,
N.A., a $23 billion bank in Green Bay, WI.
Financial statement data for Associated Bank (BHC
1199563, FDIC cert 5296) are ava
Loan Syndication, Sales and Securitization
Loan syndication: a group of FIs, possibly with different
roles in the transaction, jointly make a loan.
Loan sale: an FI or a syndicate of FIs originates a loan
75 minutes exam
5 multiple choices questions
4 short answer questions
4 computational questions
Why do we need financial intermediaries?
The Federal Reserve System
Responsibilities of the Fe
Issued by corporations to raise funds from the capital market.
Pay interest semi-annually and principal at maturity.
Bonds usually are unsecured (no collateral).
Bonds are sen
Regulating and Supervising Banks
Commercial banks are special.
o Transmission belt for monetary policy.
o Soft information about borrowers.
o Access to safety net protection-FDIC deposits insurance.
Types of Lending Institutions
Industry size # FIs
~6,600 all types of loans
investment securities CDs
Categories of mortgage borrowers:
o 1-to-4 family mortgages (about of all outstanding mortgage debt)
o Multi-unit residential mortgages
o Commercial mortgages
o Farm mortgages
We will focus
Managing Credit Risk on the Balance Sheet
Banks take risks to earn profits:
Banks are expert at evaluating credit risk.
Interest Rate Risk
They do not want to eliminate all this risk!
Finance 430, Financial Markets and Intermediaries (64559)
Professor Lei Li
Spring 2015, TR 8:00-9:15 am, Summerfield 424
Course description: This course explores the financial institutions that create credit and liquidity for
businesses and other borrower
Answers to Chapter 11
2. The major sources of funds for commercial banks in the U.S. are reported on the liability side
of the balance sheet:
Deposits: Transaction accounts (demand deposit and NOW accounts); and Time deposits (small savings acc
Eurodollar market: Money markets in which U.S. dollars are
loaned and borrowed for short-run.
International money markets often operate in U.S. dollars,
rather than in local currencies.
Money Market Instruments
Money market instruments are IOUs issued by firms,
financial institutions, or governments to raise funds for
less than one year.
o Fed Funds purchased
o Repurchase Agreemen
Mini Project 5: The CDS market
The credit default swap (CDS) is a bilateral contract designed to transfer the credit risk of a
reference entity between the parties. The first credit default swap was introduced in the early
1990s to help banks hedge credit
Risks at Financial Institutions
Financial intermediaries face a number of risks:
o Credit risk
o Liquidity risk
o Interest rate risk
o Market risk
o Off-balance sheet risk
o Foreign exchange risk
Answers to Chapter 6
4. General obligation (GO) bonds are backed by the full faith and credit of the issuer, i.e., the
state or local government promises to use all of its financial resources (e.g., its taxation powers)
to repay the bond. GO bo
Answers to Chapter 4
5. The main responsibilities of the FOMC are to formulate policies to promote full employment,
economic growth, and price stability. The FOMC seeks to accomplish this by setting guidelines
regarding open market operations.
Chapter 02 - Determinants of Interest Rates
Answers to Chapter 1
8. Financial institutions consist of:
Commercial banks - depository institutions whose major assets are loans and major liabilities are
deposits. Commercial banks loans are broade
Professor Lei Li
What will you learn from this course?
o Commercial banks, mutual funds, investment banks, securities
o Risk management.
o Bank loan