FIN 320 FINAL EXAM GUIDE 2024|EXAM BASED EXAM QUESTIONS AND CORRECT ANSWERS ALL GRADED A+|GUARANTEED SUCCESS|LATEST UPDATE
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FIN 320
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FIN 320
FIN 320 FINAL EXAM GUIDE 2024|EXAM BASED ,EXAM QUESTIONS AND CORRECT ANSWERS ALL GRADED A+|GUARANTEED SUCCESS|LATEST UPDATE .
Yield to Maturity of a coupon bond - ANSWER-The interest rate at which the present value of a bond's payments equals its price today. If yield is higher than...
FIN 320 FINAL EXAM GUIDE 2024|EXAM BASED
EXAM QUESTIONS AND CORRECT ANSWERS ALL
GRADED A+|GUARANTEED SUCCESS|LATEST
UPDATE 2024-2025.
Yield to Maturity of a coupon bond - ANSWER-✔The interest rate at which the
present value of a bond's payments equals its price today. If yield is higher than
coupon its a premium, if yield is lower than coupon its a discount.
What is interest rate risk and why is it important that banks manage it? - ANSWER-
✔Interest rate risk is the effect of a change in market interest rates on a banks profit
or capital. Risk is caused by a mismatch of maturity of bank assets and bank liabilities.
Banks manage this by making adjustable rate loans that better match interest rate
sensitivity of the banks liabilities. Banks need to manage it because if they didn't
they would be able to make fewer loans, failure to identify and quantify risk
exposure could lead to insolvency, losses in excess of bank capital.
What does Gap analysis measure? - ANSWER-✔Gap analysis looks at the gap
between cash flows from assets and cash flows from liabilities. It tells you how a
change in interest rates will affect bank profits
What bank assets are variable-rate? - ANSWER-✔Variable rate bank assets are
assets with interest rates that can soon change (i.e. short term gov securities, 3
month treasury bill, adjustable rate loan) its variable rate because it will soon mature
and money can be used to buy a security at current market interest rates.
What bank assets are not variable-rate? - ANSWER-✔Fixed-rate assets: 10 year T-
bill, 30 year fixed mortgage
What bank liabilities are variable-rate? - ANSWER-✔Checking/money market
deposits or 3 month certificates of deposit
What bank liabilities are not variable-rate? - ANSWER-✔Fixed-rate liabilities: long
term bonds, Long maturity Certificates of deposit
, What is the Gap? - ANSWER-✔Looks at the difference (or gap) between the dollar
value of the banks variable rate assets and the dollar value of its variable rate
liabilities. (variable rate assets - variable rate liabilities)
Is the Gap of a typical bank positive or negative? Why? - ANSWER-✔Negative gap
because main source of funds are short term deposits (liabilities) and their main use
of funds are long term loans.
Positive GAP + increase in market rates= - ANSWER-✔Profits Increase
Positive GAP + decrease in market rates= - ANSWER-✔Profits Decrease
Negative GAP + increase in market rates= - ANSWER-✔Profits Decrease
Negative GAP + increase in market rates= - ANSWER-✔Profits Increase
What does duration analysis measure? - ANSWER-✔Difference between the
average duration of the bank's assets and the average duration of the bank's
liabilities. Measure sensitivity of bank capital to changes in market interest rates.
Is the Duration Gap of a typical bank positive or negative? Why? - ANSWER-
✔Positive because most bank's main use of funds is long-term loans - their assets
(mainly loans and securities) have longer duration than their liabilities (deposits)
Positive Duration gap - ANSWER-✔duration of banks assets is greater than duration
of the banks liabilities (increase in market interest rates = reduce the value of banks
assets more than the value of its liabilities - will decrease banks capital)
Negative Duration gap - ANSWER-✔duration of liabilities is greater than duration of
assets
Positive Duration GAP + increase in market rates= - ANSWER-✔Bank Capital
Decreases
Positive Duration GAP + decrease in market rates= - ANSWER-✔Bank Capital
Increases
Negative Duration GAP increase in market rates= - ANSWER-✔Bank Capital
Increases
Negative Duration GAP decrease in market rates= - ANSWER-✔Bank Capital
Decreases
Definition and main purpose of Derivatives - ANSWER-✔Derivatives are an asset
that derives its economic value from an underlying asset, such as a stock or bond.
They are used to transfer risk.
, Futures contracts - ANSWER-✔Standardized contracts to buy or sell a specified
amount of a commodity or financial asset on a specific future date at a
predetermined price. This increases liquidity since the contract is standardized.
Trade on exchanges, buyer or seller of futures is trading with the exchange as the
counterpart. Reduces information costs. No payments are made initially between
buyers and sellers when the contract is agreed to.
Futures contract Settlement date/delivery date - ANSWER-✔The prearranged
future date for the exchange is called the settlement date or the delivery date. On
the settlement date of the futures contract, the price of the futures contract must
equal the price of the underlying asset.
Underlying asset - ANSWER-✔is the financial instrument (stocks, futures,
commodity, currency, index) on which a derivatives price is based
What happens to the price of a futures contract if the price of the underlying asset
goes up or down? - ANSWER-✔The financial futures price moves with the market
price of the underlying financial instrument
What is the price of a futures contract on the settlement date? - ANSWER-✔Equals
the price of the underlying asset (today)
What are interest rate futures? What kind of interest rate futures did we use in our
example of bank hedging with futures? - ANSWER-✔An interest rate future is a
financial derivative (a futures contract) with an interest-bearing instrument as the
underlying asset. It is a particular type of interest rate derivative. Examples include
Treasury-bill futures, Treasury-bond futures and Eurodollar futures.
Long interest rate futures and short interest rate futures positions: What are they
and how do their values change with the price and yield of the underlying asset? -
ANSWER-✔Long position- in interest rate futures contract represents a party that
will buy an interest bearing financial instrument on some future date at a
prearranged price. They benefit if the price of the underlying financial instrument
increases, or if the interest rate on the underlying financial instrument decreases.
Short position- in interest rate futures contract represents a party that will deliver
(sell) an interest-bearing financial instrument to a buyer on some future date at a
predetermined price, they benefit if the price of the underlying financial instrument
decreases, also benefit if the interest rate on the underlying financial instrument
increases.
Margin-What is it and why is it necessary? - ANSWER-✔1. Put up money showing
"skin in the game"
- To reduce default risk, the exchange requires both the buyer and seller to place an
initial deposit called a margin requirement into a margin account (CBOT 0requires
deposits minimum of $1,100 x 100 notes instead of $1,000 x 100 notes ($110,000
face value vs. $100,000)
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