Asset and Liability Management Assignment

Asset and Liability Management Assignment
Asset and Liability Management
Mid Term 2020
Name:
Written Response Short Answer Questions (75 points):
Responses should be short and concise approximately 5-6 sentences, though some questions may take more space to cover adequately.
1. Identify and briefly explain the five risks common to financial institutions.
2. What were some of the causes of the Great Recession of 2008?
3. What is a subprime lender? Do they operate differently compared to other lenders?
4. Why would a manufacturing company create its own financial services company?
5. What is the adverse selection problem? How does adverse selection affect the profitable management of an insurance company?
6. Describe the Initial Public Offering process.
7. What is factoring? Why do companies factor?
8. The banking acts of the 1930s are considered landmark legislation in US Banking history. What did these laws do? What problems were they meant to solve?
9. How do Financial Institutions solve the information and related agency costs when household savers invest directly in securities issued by corporations? What are agency costs?
10. What is the primary function of an insurance company? How does this function compare with the primary function of a depository institution?
11. During the 1999’s The Financial Services Modernization Act of 1999 was enacted. What did this law do? What were some of the consequences for the US banking system?
12. What are three key activity areas for securities firms?
13. What is negative externality? In what ways do the existence of negative externalities justify the extra regulatory attention received by financial institutions?
14. a. Suppose a 65-year-old person wants to purchase an annuity from an insurance company that would pay $20,000 per year until the end of that person’s life. The insurance company expects this person to live for 15 more years and would be willing to pay 6 percent on the annuity. How much should the insurance company ask this person to pay for the annuity?
b. A second 65-year-old person wants the same $20,000 annuity, but this person is much healthier and is expected to live for 20 years. If the same 6 percent interest rate applies, how much should this healthier person be charged for the annuity?
Multiple Choice (15 points)
1. Safety and soundness regulations include all of the following layers of protection EXCEPT
a) the provision of guarantee funds.
b) requirements encouraging diversification of assets.
c) the creation of money for those FIs in financial trouble.
d) requiring minimum levels of capital.
e) monitoring and surveillance.
2. Which of the following would be a key area of activity for an investment bank specializing in the commercial side of the business?
a) Purchase of existing securities.
b) Sale of securities in the secondary market.
c) Brokerage of existing securities.
d) Underwriting issues of new securities.
e) All of these.
3. Which of the following is NOT true?
a) The finance company industry tends to be very concentrated.
b) Twenty of the largest finance companies account for more than 65% of the industry assets.
c) Many of the largest finance companies tend to be wholly owned or are captive subsidiaries of major manufacturing firms.
d) Finance companies specialize only in consumer loans and do not make business loans.
e) Finance companies often provide captive financing for the purchase of products manufactured by their parent company.
4. A coupon bond that pays interest annually has a par value of $1,000, matures in seven years, and has a yield to maturity of 9.3%. The current price of the bond today will be ______ if the coupon rate is 8.5%.
a) $712.99
b) $960.14
c) $1,123.01
d) $886.28
e) $1,000.00
5. The primary function of insurance companies is to
a) generate fees for the banks that sell insurance products.
b) sell a variety of consumer investment products.
c) protect policyholders from adverse events.
d) assist in the transfer of wealth into the future.
e) provide contracts that encourage policyholders to save current income.
6. An investment banker agrees to underwrite an issue of 10 million shares of stock for TWResearch, Inc. on a firm commitment basis. The investment banker pays $10.50 per share to TWResearch, Inc. for the 10 million shares of stock. It then sells those shares to the public for $11.20 per share.
If the investment bank can sell the shares for $9.75 per share, what is the profit (loss) to the investment banker?
a) Profit of $1,000,000.
b) Loss of $7,500,000.
c) Profit of $7,000,000.
d) Loss of $7,000,000.
e) Loss of $1,000,000.
7. What is the primary function of finance companies?
a) Protect individuals and corporations from adverse events.
b) Make loans to both individuals and corporations.
c) Extend loans to banks and other financial institutions.
d) Pool the financial resources of individuals and companies and invest in diversified portfolios of assets.
e) Assist in the trading of securities in the secondary markets.
8. All else equal, the price and yield on a bond are
a) positively related.
b) negatively related.
c) sometimes positively and sometimes negatively related.
d) not related.
e) indefinitely related.
9. A college professor is looking to retire in 30 years with $1,000,000. Currently, she has no savings. She believes she can earn 7% on money she saves during this time. Is she starts now, how much will she need to have saved at the end of each to reach her goal?
a) $11448.65
b) $10586.40
c) $11327.45
d) $9839.83
e) $33,333.33
10. A zero coupon bond with a face value of $1000 is for sale on the market. If the bond matures in 5 years and the current interest rate is 2%. What is the most you should pay for the bond?
a) $905.73
b) $923.84
c) $887.97
d) $1000
e) $883.85