Financial Institutions Chapter 13 exam with complete solution & latest update

the risk that a borrower will not pay interest or premium as promised - answer-Credit Risk - Character - Capacity - Capital - Collateral - Valuation - Liquidity - Conditions - answer-The "Five Cs" of Credit Risk Control - answer-Sometimes a "Sixth C" is added to the list also known as "credit history," a detailed report on how an individual has attained and used credit in the past. also often include information on the person's employment history, past residential addresses, legal action taken against the person, and number of past credit report inquiries - answer-Credit Report a numerical value that is reportedly a measurement of how an individual has used credit in the past. Often it is used as a barometer of credit risk, where a higher credit score signals lower credit risk - answer-Credit Score - Monthly income versus the amount of monthly fixed payments - Suggested maximum fixed payments: - 50% of net income - 35% of gross income - answer-Fixed-Income Approach - Total monthly debt burden, excluding mortgage payments, relative to net (after-tax) monthly income - Suggested maximum debt-to-income ratio: - 20% of net income - Excludes mortgage payments - answer-Debt-to-Income Ratio Approach the chance that the value of an asset will change because of a change in interest rates - answer-Interest Rate Risk the difference between the amount of assets and the amount of liabilities on which interest rates are due to reset during a specific time period - answer-Interest Rate Gap Analysis If an asset's or liability's interest rate will change within a year or sooner, it usually is labeled ________________ - answer-"interest rate (IR) sensitive" IRSA IRSL - answer-the gap is positive IRSA IRSL - answer-the gap in negative IRSA = IRSL - answer-the gap is zero the weighted average of time until repayment of the price of a bond with a fixed cash flow; also called a Macaulay duration - answer-Duration of a bond - Asset/Liability Maturity Matching - Write Adjustable Interest Rate Loans - Use Interest Rate Derivative Contracts - answer-Reducing Interest Rate Risk Maturity or Duration Matching - answer-Asset/Liability Maturity Matching Protects against increasing interest payment on deposits - answer-Write Adjustable Interest Rate Loans - Interest Rate Futures Contracts - Interest Rate Swaps - answer-Use Interest Rate Derivative Contracts - Lock in the price at which a financial contract, such as a loan or savings account, can be bought or sold at a specific date in the future - Help control a bank's net interest rate spread - answer-Interest Rate Futures Contracts - Financial agreements to exchange fixed interest payments for variable rate payments or vice versa - Used to alter a bank's interest rate exposure - answer-Interest Rate Swaps the risk that a financial firm will not be able to meet its current and/or future cash needs - answer-Liquidity Risk - Primary Reserves - Secondary Reserves - Bank Loans - Securities - answer-Sources of Liquidity - Vault cash and deposits at the Fed and other commercial banks - Most liquid assets the bank holds, but very low yields - answer-Primary Reserves - Treasury bills, federal funds sold, federal government agency debt, commercial paper - Higher yields than primary reserves, but less liquid - answer-Secondary Reserves Securitization and secondary market can provide liquidity - answer-Bank Loans - Longer-term securities (Treasury bonds and notes, corporate bonds) - Secondary market provides liquidity - answer-Securities - Borrow Federal Funds - Borrow from the Fed - Increase Deposits - Sell Liquid Assets - Issue Commercial Paper - Securitization of Assets - answer-Solutions to Lack of Liquidity the ratio of a financial firm's liquid assets to its projected net cash outflows - answer-Liquidity Coverage Ratio the proportion of a bank's long-term assets funded by stable, long-term sources, including bank customer deposits, long-term bank borrowing, and bank capital - answer-Net Stable Funding Ratio - Operational Risk - Market Risk - answer-Other Risks - the risk of loss resulting from an inadequate or failed internal process or external event - Loss of reputation - Losses from failed strategic moves - Technology risk - answer-Operational Risk the risk of loss occurring as a result of the decline in the market value of an asset - answer-Market Risk a ban on banks holding assets for the purpose of trading and speculating for their own gain - answer-Volcker Rule Generated primarily from loans - answer-Gross Interest Income Funds the bank must pay out in interest - answer-Gross Interest Expense = Gross Interest Income - Gross Interest Expense - answer-Net Interest Income (NII) a noncash expense that banks set aside as an allowance to cover losses on loans - answer-Loan Loss Provision Fee income - answer-Noninterest Income Operating expenses - answer-Noninterest Expense = NII + Noninterest Income - Noninterest Expense - answer-Pretax Net Income = Net Income/Total Assets - answer-Return on Assets (ROA) = Net Income/Equity Capital - answer-Return on Equity (ROE) = Total Assets/Equity Capital - answer-Equity Multiplier (EM)