Chapter 7 Saunder:
1. The process of asset transformation means that the bank using the short term deposit in
order to make the long term loan. They transform the short deposit into long loans.
Because the deposit is shorter than the loan so when the interest rate increase the
volatility of market value of loans will be larger than the volatility of deposit. Thus, the
bank may face the problem of insolvency. Interest rate risk is the risk that the market
value of instrument fluctuate along with the change of interest rate.
2. Refinancing risk is the risk raise when the duration of deposit is shorter than the
duration of the loans. It will cause problem when the deposit matures and the FI must
refinance at the higher interest rate and it means the higher interest rate cost for the FI
while the interest revenue is fixed.
3. Reinvestment risk is the risk of lower interest rate in the future and FI with short asset
must face this risk. Because when they reinvest the capital at lower rate means that the
interest income decrease and while the interest cost is fixed, which will reduce the NII of
FI.
4. It is false because the long term federal securities will face the interest rate risk, it means
that when interest rate increase the market value of portfolio will decrease sharply. If
the investor want to transfer their claim to other.
5. .
6. A. the profit spread = 3%, the dollar spread = 3 millions. B. the same as year 1. C. the
profit spread = -1%, the dollar value = -1 millions. D. spread = 5%, dollar value = 5millions
7. Similar to 6
8. A. net interest income = 1000 – 600 = 400 B. NII = 300 this is caused by the refinance
risk C. 846$. D. Higher than 1000 because the mảket value of asset increase.
E. Factor that cause the changes in operating performance and market value is:
the interest rate
9. To minimize the interest rate risk the FI may use the repricing model or the duration
model: devalue the adjusted weight duration equate 0
10. The coupon payment decrease will make the duration to be longer
11. The zero coupon bond will have the greater duration because it duration is 10 years and
the zero coupon bond will fluctuate lager given the change in the interest rate
12. If wanting to keep to the maturity, the coupon bond will have greater risk that is the
reinvestment risk
13. The mutual fund will face the risk of interest rate when the interest increase which
would decrease the market value of the bond.
14. No impact on the NII
15. The credit risk is the risk that the interest and principal of loans is not paid or partial
not paid to the lender. The longer term loan may face the more credit risk
16. The firm specific credit risk is the risk of deterioration of asset quality due to the bad
performance of the company. Why the systematic credit risk is the risk raised due to
the macro factors which affect the probability of default.
17. The credit risk because they invest concerntrate in this sector, the market risk involve the
systematic risk due to the oil price decrease in the whole system.
18. Liquidity risk is the risk that the FI can not have enough cash (liquidity) to pay for the
customer right away. When the asset of the company contain too much long term asset
and when the interest rate increase the value of these will decrease sharply. This make
the FI have unability to sell the asset for liquidity requirement. And when the depositor
come from the same type, their custom of withdrawing money will happen at the same
time and the FI face the huge problem when they withdrawal
19. Asset: 86.25 deposit: 100, E: - 13.75
20. They can take the advantage of higher benefit of foreign assets, avoid the systematic risk
of domestic market
21. Foreign exchange rate risk is the potential loss due to the change in the exchange rate.
Net long in foreign asset it means that the firm has more foreign asset than foreign
liability. In the case of net long foreign asset: the firm may face the loss due to the
appreciation of domestic currency make the interest income from the foreign asset
decrease in domestic currency term. And vice versa, when the exchange rate increase:
the appreciation of foreign currency make the liability to be larger
22. They will prefer net short because at that time the liability of them in US term will
decrease
23. They will preffer net long because beside the return earn from the asset, they can earn
extra return on the foreign exchange rate
24. They should be reduce the risk due to the difference in the duration, the other risk they
also should reduce like domestic but when reduce it to zero, we may earn no extra
return due to the different in interest rate
25. .
26. A. the dollar appreciate against the pound B. The value of net interest income decrease
C. exchange rate both decrease the value of asset and liabilitites in the term of
dollar
27. .
Chapter 8:
1. The increase in the money supply will cause the interest rate decrease
2. The increase in the financial market integration give them the power to control the
interest rate. For example, LIBOR rate now may be not considered to be the risk free rate
due to the manipulation of some big bank
3. The repricing gap is the different between pricable asset (interest sensitive asset) and
the repricable liability. Rate sensitive is which interest rate will fluctuate due to the
change in market interest rate, or it means that they will reprice when interest rate
change and they include floating rate asset/liabilities or short-term asset/liabilities. The
focus of repricing is the NII. Because it is calculated based on the book value of
asset/liabilitites thus it used to measure the short-term income and expense only.
4. The maturity bucket is the bucket of asset and liabilities that have the term defined from
some specific time to another specific time, in which the asset/liabilities will be repriced.
The length of time selected for repricing assets and liabilitites is very important because
it may cause the over aggregation if too long and may not significantly reflect the risk of
FI if too short.
5. CGAP is the sum of gap of each maturity bucket and reflect the risk of the FI must face
during the year or more depend on the choosen length. When the CGAP is positive, the
increase in the interest rate will benefit them while the decrease will reduce the NII
6. A and E
7. Increase the value of short-term assets, decrease short-term loans ….
8. Too easy
9. Too easy
10. Against in clusion: The expilit interest rate on demand deposit is 0 by regulation.
Moreover, NOW may pay the interest rate but that rate is less fluctuate when the market
interest rate change and demand deposit is the core deposit (long-term source of fund).
For inclusion: demand deposit pay implicit interest because FIs donot charge fees that
fully cover their cost for checking services. Further, if interest rate increase, they may run
off their demand deposit forcing the bank to replace them with higher yoelding.
11. That is measure the interest rate risk of the FI
12. .
13.
14. .
15. .
16. c and d
17. a b c
18. .
19. .
20. .
21. Do this
22.