Chapter 1

Study Questions for examList stock valuation models and give an answer the following question.

Classify mortgages in terms of their types and give their main characteristics.Explain the theory of purchasing power parity and its relationship with changes in foreign exchange rates.

Explain the effects of factors on the exchange rate and response of exchange rate.

Explain subprime crisis in the USA.Explain interest parity condition and solve the following problem.

Explain Exchange Rate Regimes in the International Financial System today

Explain currency board system by referring Bosnia and Herzegovina

Explain the general managerial fields of banks and their relationship with risks and returns

Explain the measures of bank performance and define return on assets and return on equityExplain the relationship between Asymmetric Information and Financial Regulation and consequences of this relationship

Explain the invention and development of Basel Accord shortly

Explain the differences in costs of rescuing banks among countries Explain the likely burdens of multiple regulatory agencies in the financial sector in the USA

Explanation the reasoning for Separation of the Banking and Other Financial Service Industries and universal banking model

Explain the reasons behind the invention and development of mutual funds and define types of mutual fundsExplain types and investments of insurance companies and their role in the long term economic development and their influence on the invested companies or institutionsExplain types and investments of pension funds and their role in the long term economic development and their influence on the invested companies or institutions The balance sheet of TriBank starts with an allowance for loan losses of $1.33 million. During the year, TriBank charges off worthless loans of $0.84 million, recovers $0.22 million on loans previously charged off, and charges current income for a $1.48 million provision for loan losses. Calculate the end-of-year allowance for loan losses. If you are a banker and expect interest rates to rise in the future, would you want to make short-term or long-term loans? Banking has become a more dynamic industry because of more active liability management. Is this statement true, false, or uncertain? Explain your answer What bank regulations are designed to reduce moral hazard problems created by deposit insurance? Will they completely eliminate the moral hazard problem? If inflation had not risen in the 1960s and 1970s, the banking industry might be healthier today. Is this statement true, false, or uncertain? Explain your answer

What is late trading when referred to by mutual funds?

What is market timingwhen referred to by mutual funds?

Why do people choose to buy insurance even if their expected loss is less than the payments they will make to the insurance company?

Distinguish between adverse selection and moral hazard as they relate to the insurance industry.

What was the motivation behind legislation separating commercial banking from investment banking?What is the difference between a hostile takeover and a merger?

A bank issues a $100,000 variable-rate 30-year mortgage with a nominal annual rate of 4.5%. If the required rate drops to 4.0% after the first six months, what is the impact on the interest income for the first 12 months?

A bank issues a $100,000 fixed-rate 30-year mortgage with a nominal annual rate of 4.5%. If the required rate drops to 4.0% immediately after the mortgage is issued, what is the impact on the value of the mortgage?

Calculate the duration of a commercial loan. The face value of the loan is $2,000,000. It requires simple interest yearly, with an APR of 8%. The loan is due in four years. The current market rate for such loans is 8%.

A banks balance sheet contains interest-sensitive assets of $280 million and interest-sensitive liabilities of $465 million. Calculate the income gap.

If the pension fund you manage expects to have an inflow of $120 million six months from now, what forward contract would you seek to enter into to lock in current interest rates?

If the portfolio you manage is holding $25 million of 6s of 2029 Treasury bonds with a price of 110, what forward contract would you enter into to hedge the interest-rate risk on these bonds over the coming year?

If at the expiration date, the deliverable Treasury bond is selling for 101 but the Treasury bond futures contract is selling for 102, what will happen to the futures price? Explain your answer.

If you buy a $100,000 February Treasury bond contract for 108 and the price of the deliverable Treasury bond at the expiration date is 102, what is your profit or loss on the contract?

Laura, a bond portfolio manager, administers a $10 million portfolio. The portfolio currently has a duration of 8.5 years. Laura wants to shorten the duration to 6 years using T-bill futures. T-bill futures have a duration of 0.25 years and are trading at $975

(face value = $1,000). How is this accomplished?