how is a financial institution exposed to liquidity, interest rate and credit risks when it makes loan commitments
Financial Institutions are exposed to various type of risks such as liquidity, interest rate risk and credit risk when it make loan commitments. Below are the explainations given to each:
how is a financial institution exposed to liquidity, interest rate and credit risks when it makes...
10a. If the expected default rate on a credit card is 8.5% and the risk-free rate is 3.25%, what interest rate must a financial institution charge on the credit card in order for its expected return to equal the risk-free rate? If the financial institution assumes a 0% recovery rate in the event of default, what interest rate will the financial institution charge? b. If the expected default rate on a 1-year home equity loan is 2.5% and the financial...
Sally deposits her money in a financial institution that guarantees her an interest rate. The institution then loans her money to Mark who does not have an account with the institution. What type of institution did Morris deposit his money in? Select one: a. A Mutual Fund Family (Investment Management Company) b. Federal Reserve System c. A Commercial Bank d. A Credit Union e. An Investment Bank
As a Chief Financial Officer, how do you manage the risks the company is exposed to.
Part 2: Credit Cards Another type of personal loan is a credit card. A financial institution allows you to charge a purchase to your account, and you are required to pay the financial institution at a later time. As with other loans, credit cards charge interest. Interest rates can range from 3% - 22%. When you are paying for debt on a credit card, the financial institution will require a minimum balance be paid each month. The higher the interest rate that is charged...
9. A financial institution is considering a customer’s request for a 12-year $15 million loan, with annual interest payments and the principal due at maturity. The financial institution requires a 22.5% risk adjusted return on capital for this loan. Its cost of funds is 3.875% for this loan and it will charge a 2% risk premium. Historically, the worst 1% of comparable loans experience a 125 basis point increase in the credit risk premium. The financial institution’s typical origination fee...
If you deposit $10,000 into a financial institution today with a 5% annual interest rate, but interest is compounded continuously. How much would you have accumulated at the end of 3 years?
Bond ratings classify bonds based on: interest rate, inflation rate, and default risk. liquidity, interest rate, and default risk. liquidity, market, and default risk. default risk only. default and liquidity risks.
A financial institution has entered into an interest rate swap with company X. Under the terms of the swap, it receives 10% per annum and pays six-month LIBOR on a principal of $10 million for five years. Payments are made every six months. Suppose that company X defaults on the sixth payment date (end of year 3) when the interest rate (with semiannual compounding) is 8% per annum for all maturities. What is the loss to the financial institution? Assume...
“Companies with high credit risks are the ones that cannot access fixed-rate markets directly. They are the companies that are most likely to be paying fixed and receiving floating in an interest rate swap.” Assume that this statement is true. Do you think it increases or decreases the risk of a financial institution’s swap portfolio? Assume that companies are most likely to default when interest rates are high.
“Companies with high credit risks are the ones that cannot access fixed-rate markets directly. They are the companies that are most likely to be paying fixed and receiving floating in an interest rate swap.” Assume that this statement is true. Do you think it increases or decreases the risk of a financial institution’s swap portfolio? Assume that companies are most likely to default when interest rates are high.