FORDHAM UNIVERSITY Global Financial Markets Assignment 1, Due 2/20/2014 N. K. Chidambaran
MULTIPLE CHOICE QUESTIONS: From the four choices given, select one that is the best answer to the question. 1. Which of the following statements is TRUE about FDIC deposit insurance? a) Insures the deposits of the bank against bank defaults and thereby has lead to banks making risky loans. b) Insures the deposits of the bank against banks going bankrupt and thereby has led to banks making safe loans. c) Insures the deposits of the bank against default and thereby has lead to banks ignoring credit risk in their loan portfolio. d) Insures the assets of the bank against default by the borrower and ...view middle of the document...
b) The economy goes into an expansion. c) Prices go up. d) None of the above.
Explain the difference between the following: a) b) Credit Risk and Interest Rate Risk Banks and Non-Bank financial institutions
You have recently been appointed as manager of the Endymion bank. One of your responsibilities is to understand how duration can be used to predict the effect of interest rate changes. Answer the questions below to show how duration works. Part 1: Calculate the duration of a bond with: Maturity Coupon Face Value YTM = = = = 4 years 5%, Annual Coupons $1,000 9%
Part 2: (a) Assume that the bank has $100,000 invested in a portfolio with the following components: i. 30% in a bond that has a duration of 6.5 years ii. 40% in a bond that has a duration of 2.5 years. iii. 30% in a bond that has a duration of 4.0 years. What is the duration of the portfolio? (Duration is the weighted average.) (c) (d) 3. Calculate the approximate percentage change in the value of the portfolio for a change in the yield from 8% to 7.5%. What is the approximate new value on the portfolio? Why are the answer only “approximate”? Explain using a graph. [3 point bonus]
Explain what is meant by Adverse Selection and Moral Hazard. Describe how a bank’s operations are affected by adverse selection and moral hazard. In answering this question, feel free to use information from class discussions or from outside material you have read. Give examples to illustrate your arguments.[10 points] (a) Using the T-account (all values in...