FIN 461 – FINANCIAL INTERMEDIATION

FIN 461 – FINANCIAL INTERMEDIATION

Subject: Business    / Finance
Question

FINANCIAL INTERMEDIATION

1.

What is NOT necessarily true of the equity tranche of a securitization?

a) It has the greatest credit risk (the âfirst lossâ piece).
b) It has the highest expected return.
c) It trades in the most liquid secondary market.
d) It is not rated by a credit rating agency.

2. A bank has an allowance for loan loss of $4.5m at the beginning of the year and $4.2m at the end of the year, non performing loans of $6.2m at the beginning of the year and $5.8m at the end of the year, and has net charge offs of $2.7m in bad loans. What was the bankâs provision for loan loss for the year?

a) $2.4 million.
b) $3.8 million.
c) $4.5 million.
d) $9.2 million.

3. The buyer of a floating-for-fixed interest rate swap:

a) Could be hedging against a rise in interest rates.

b) Could, alternatively, have used a floor to hedge.
c) Makes payments that are determined by a fixed interest rate.
d) Could have sold interest rate futures contracts to obtain a similar hedge.

4. Which of the following steps raises a bankâs (Basel) total required capital?

a) Bank takes proceeds from maturing BB-rated commercial loans and makes
new BB-rated commercial loans.
b) Bank purchases Fed funds and uses the funds to make A-rated commercial loans.
c) Bank issues new CDs and buys US Treasury bills with the proceeds.
d) Bank issues new subordinated bonds and uses the proceeds to buy US Treasury bills.

5. Suppose a bankâs loan portfolio suffers a large number credit downgrades, increasing risk-weighted assets (RWA). Which of the following approaches would help the bank meet its new (increased) regulatory capital requirements?

a) Increase Tier 1 capital by paying out dividends
b) Increase Tier 2 capital by issuing more subordinated debt or preferred stock
c) Purchase treasury securities to reduce the overall riskiness of its loan portfolio
d) Increase Tier 2 capital by issuing senior secured debt