Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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QUESTION 1 : Protecting Interest Income/Revenue
• From the banker’s point of view, when the banker quotes a floating interest, in doing so, the banker is passing on the interest rate risk to the borrower.
• What if the banker has to quote a fixed interest rate but his cost of funds are floating?
In this case, the customer/borrower faces no risk but the banker does.
• Example: As a Credit Officer bank you have agreed to provide a customer with a fixed
rate, 3-month, RM 20 million loan 90 days from today. You had priced the loan at 12%
annual interest rate.
• The following quotes are available in the market.
3-month KLIBOR = 9 %
3-month KLIBOR futures = 90.0 (matures in 90 days)
How would you protect yourself from a rise interest rates?
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- Which of the following statement is TRUE? Select one: O a. None of the other options is correct. O b. Losses on real estate loans are first compensated by the investors in commercial paper issued by the financial institution. O c. In a syndicated loan, a group of lenders shares the return, but not the default risk of the loan Od. When a bank gives a secured loan, the bank has first claim on specific assets of the borrower in the event of a default. Oe. When the repayment probability of a loan is equal to zero, the financial institution investing in this loan faces low credit risk.arrow_forwardD4arrow_forwardQuestion: If most of the pool of conventional bank is permissible then why do you say the income of the income of conventional banker is impermissiblearrow_forward
- 4arrow_forwardWhat is evergreening in banking and why it may arise as an equilibrium choice of banks. Carefully explain all relevant concepts and mechanisms. Additionally discuss how much of a problem this may present in the aftermath of a banking crisis.arrow_forward1. What are the advantages and disadvantages of using financial leverage? Answer from the banker’s point of view and then from the bank regulator’s point of view.arrow_forward
- iii. iv. Describe how each of the following helps a bank control its credit risk: 1. Position limits 2. Conditions precedent 3. Loan covenants 4. Risk rating systemsarrow_forwardOne of the following statement is true about strategies of liquidity management Select one: O a. Asset Liquidity Management or Asset Conversion Strategy. This strategy calls for storing liquidity in the form of illiquid assets (T-bills, fed funds loans, CDs, etc.) and selling them when liquidity is needed b. Borrowed Liquidity or Liability Management Strategy. This strategy calls for the bank to purchase or borrow from the money market to cover all of its liquidity needs Balanced Liquidity Strategy. The C. use of liquid asset holdings (Asset Management) O d. No need to follow any strategy for liquidity managementarrow_forwardThe investment banker does all of the following except a. make long-term investments for banking institutions b. advise clients c. bear the risk of selling a security issue d. act as a middleman between the issuer and buyer of a new securityarrow_forward
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