Finance

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Finance

Chapter 4

Question 2

Discount window is an important tool of monetary policy that is used by central banks. It provides eligible organizations to source or borrow funds from the central bank for a short-term basis with an aim of meeting temporary liquidity shortages brought about by external and internal market disruptions. The Discount Rate is defined as an interest rate that is imposed or charged on depository institutions as well as banks for the loans that they receive from the United States Federal Reserve Banks program, the Discount Window. The discount rate is also a term that refers to an interest rate that is used in the discounted cash flow analysis to establish the overall present value of anticipated cashflows during a future financial period.

Question 5

The Federal Open Market Committee (FOMC) is a branch of the United States Federal Reserve board. The branch is tasked with the determination of the direction of monetary policies in the country. It comprises of governors and five of the presidents in the reserve bank.

Question 8

Some of the major assets include United States treasuries, bonds, liquidity swaps, and holdings in companies, securities, gold accounts, debt securities, mortgage back securities, and repurchase agreements.

Question 13

On January 9th 2003, the Federal Reserve replaced the adjustment and extended credit programs with the primary and secondary platforms.

Chapter 9

Question 6

A Negotiable order of withdrawal is termed as a type of transaction or checking account that has ownership restrictions. On the other hand, a Demand Deposit account is defined as a traction or checking account that does not have any form of ownership restrictions. Withdrawals can be made upon demand by the owner of the account.

Question 7

Retail Certificates of Deposit (CD) is a despite that is worth US$100,000 or lower amount making it eligible to the Federal deposit insurance protection, which is provided by the Federal Deposit Insurance Corporation. Wholesale CDs are instruments resold to investors by deposit institutions. They can be resold to dealers, which provide a secondary market for deposit certificates.

Question 8

Core deposits are attributable to deposits made into a financial institution within its natural demographic market. It is a stable source of funding for the landing base of such institutions. On the other hand, a purchased fund is likened to a sinking fund provision. This is because it is a feature within preferred stock and bond indentures that demands the issue to ensure that they purchase the agreed amount of securities in the event that such deteriorate to prices lower than the one stipulated.

Chapter 12

Question 12 (LG12-5)

For a retail entity, the turnover ratio is compared to the asset utilization ratio. The assets of retail entities are usually in the form of merchandise, equipment, holdings, and financial instruments. On the other hand, banks usually have financial instruments. The revenues between the two are also different given that banks derive revenues from interest charged on deposits and loans whereas retail entities rely in sale of commodities.

Part 3(pg 372)

Question 2

Deposits are the primary source of funds for banks in the United States. In addition, they also source funds from the interest rates charged on the loans issued to clients. Furthermore, they also collect payments from debt securities that they own as well as making payments for interests on deposits, short-term borrowings, and certificates of deposits.

Question 5

The liabilities of commercial banks include customer deposits. The checkable deposits are the largest form of liabilities. Other forms of liabilities include other types of deposits such as savings, certificates of deposits, and deposits in the market money.  It is indicative that the liability structure is largely made up of borrowings and client deposits. The risks are largely centered on possible external and internal market shocks.

Question 11

This refers to the absence of items that would belong to other the asset or liability section in the balance sheet. This is items which the financial institution lacks responsibility or legal claims. For instance, the sale of loans as investments, securitization of such eliminates the inclusion of such times from the balance sheet of a bank. It also refers to items that may be of interest to investors in determination of the financial health of an entity. They are a challenge to identity and may arise as liabilities such as in the case of collateralized debts.

Question 18

The three, regional, community, and money center banks arte all types of depository institutions in the United States. They are forms of commercial banks but differ in terms of categorization.  Community banks are amongst ht largest financial institutions in terms of geographical capacity and assets. They have assets smaller than $1billion to serve an immediate community of small businesses and consumers. Regional banks have significant assets across state and extensive asset bases. The money centers rely on funding rather than deposits. They engage in business with corporations, regular banks, and governments.

Part 3.2 (pg 432)

Question 1

The 2007-2008 financial crisis is indicative of the need for strict regulation for financial institutions. Regulation of banks is at state and federal levels with banks being mandated to operate under either national or state charters. The state banks are regulated by state agencies whereas the national charter banks operate beyond state regulations.

Question 8

The market value of equity held by a financial institution is indicative of its overall capitalization. It enables investors to evaluate the size of an entity and in the process enabling them to undertake diversity measures for their investments across entities due to varied intensities of risk. It is demonstrated by multiplication the prevailing value of stock and the outstanding shares. The value of equity is usually changing given that it does not take into consideration the potential for growth by the entity.

Question 12

The Basel Accord was established by Basel Committee on Bank Supervision that delivers recommendations on the appropriate and effective regulations to financial institutions over market risk, capital risks and operation risk. It is driven to ensure that financial institutions possess adequate capital to meet the various demands and obligations such as unexpected losses.

Question 16

Tier 1 capital refers to the overall adequacy of a financial institution. It is the core capital of the entity is made up of items such as disclosed reserves and equity capital held. Tier 2 capital refers to the supplementary funds of a bank, which is made up of items such as undisclosed reserves, revaluation reserves, subordinated term debt and hybrid instruments.

Question 17

Credit risk adjusted assets are calculated by summation of the credit risk weighted assets and the risk weighted assets for the operational risks. The excess eligible credit reserves are deducted from the resulting sum.