FIN 320 : Final Project Financial Analyst Report
2024/2025 with complete solution
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.
2024/2025 with complete solution
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.
