Section 1: Multiple Choice Questions
You have been unclear in several issues. Please note the following:
Community bank is commercial and savings bank, usually small locally offer narrower but more
personalized financial services.
Convergence refers to expansion of a financial service firm into other product lines
Financial advice refers to service that banks provides to customers such as helping customers
developing a financial plan and making investment decisions.
Manageing cash for customers is a service whereby banks invests idle customers’ fund for higher
interest rate until customers need to use the fund for their own purpose.
A financial institution's bad-debt reserve, as reported on its balance sheet, is Allowance for possible
loan losses (ALL). ALLat the end of a period equals ALL at beginning of a period (quarter, year ...)
minus charge – off in the period, plus any recovery in the period, plus charges from the current income
in that period. But Provision for possible loan losses is an item on a bank’s report of income.
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Cash and deposits due from bank is sometimes called the bank's primary reserves.
Checking account maintenance fees are not included in Fee income arising from fiduciary transactions.
High asset utilization (AU) ratio indicates that banks have allocated assets to most productive
investment.
A bank with a negative interest-sensitive GAP has a greater dollar volume of interest-sensitive liabilities
than interest-sensitive assets and will generate a higher interest margin if interest rates fall.
A bank's asset duration exceeds its liability duration, the market value of the bank's net worth will tend
to decrease if interest rates rise
A repriceable asset or liability is an asset or liability which is about to mature and its rate is going to be
fixed again.
Section 2
The way to solve problem 1 of version A and B is same.
PROBLEM 1 (10 pts): Milan Bank has an average asset duration of 3.25 years and an average liability
duration of 1.75 years. Its liabilities amount to $485 million, while its assets total $512 million. Suppose
that interest rates were 7 percent and then rise to 8 percent.
1.1 (7 pts) What will happen to the value of the Milan bank's net worth as a result of a decline in interest
rates? (Hint: calculate risk-adjusted duration gap
1.2 (3 pts) Briefly describe “immunization” term in duration gap management? How we can apply this
term in the context of Milan Bank ?
To answer this question, you just calculate duration gap and then the change in networth using duration
you have just calculated. All formulas are provided at the end of the test.
Immunization refers to a duraction gap management technique that keeps Duration Gap = 0. the bank
networth therefore is unaffected by any change in interest rate.
PROBLEM 2 (10 pts): Suppose a bank reports net income of $12, pre-tax net income of $15, operating
revenues of $100, assets of $600, and $50 in equity capital.
2.1 (6 pts) What is the bank's ROE? Tax-management efficiency indicator? Expense control efficiency
indicator? Asset management efficiency indicator? Funds management efficiency indicator?
2.2 (4 pts) Suppose this bank finds its ROA climbing by 50 percent, with assets and equity capital
unchanged. What will happen to its ROE? Why?
The way to solve problem 2 in Version A and B is the same. You just simple apply the formulas given.
But, you should be careful of “unit” of each ratio (percent, or times).
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