1. State and explain two reasons why short-maturity loans are safer (meaning lower credit risk) to the lender than long-maturity loans (10 points).

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "1. State and explain two reasons why short-maturity loans are safer (meaning lower credit risk) to the lender than long-maturity loans (10 points)."

Transcription

1 Boston College, MF 820 Professor Strahan Midterm Exam, Fall State and explain two reasons why short-maturity loans are safer (meaning lower credit risk) to the lender than long-maturity loans (10 points). First, there is more uncertainty for longer term loan, so the value of the firm or the value of the collateral backing the loan may fall, leading to default. Second, short-term loans create more powerful incentives for borrowers to maximize value since they need to come back to the lender more frequently for capital. 2. Why are loans to small businesses rarely securitized (10 points)? Such loans are hard for outsiders other than the originating bank to value (e.g. ratings agencies). Thus, there would be high risk of adverse selection in the pool of loans if a bank were to try to securitize small business loans. Hence, securitization rarely happens. 3. Citigroup s stock price is currently trading for about $4 per share, even though the market value of Citi s assets is likely less than the market value of its liabilities. Provide two reasons why this might be possible (10 points). First, the market value of equity prices in PV of future growth opportunities, which may be positive for Citi. Second, Citi has support of government, which lowers its financing costs and acts as a subsidy that will raise the value of the equity. 4. Basel I sets the same level of required (equity) capital for all business loans, regardless of the credit rating. Why does this rule make the banking system riskier over time (10 points)? Under Basel I, banks have an incentive to sell off low-risk loans (since capital requirement is too high for them), and hold high-risk loans (since required capital is too low for them). This makes bank holdings grow increasingly risky over time. 1 of 6

2 5. Basel II ties required (equity) capital to the credit rating of the borrower. Explain why this rule may worsen business downturns relative to Basel I (10 points). Basel II leads to a mechanical increase in required capital when downgrades occur. Since downgrades occur en masse in recessions, bank required capital goes up in recessions, leading to a decline in credit supply and a worse downturn. Vice versa for booms (too much credit, bubbles, etc). 6. What are two ways that banks provide funding liquidity to customers (10 points)? Transactions deposits providing funding liquidity because they allow the deposit holder to get cash on demand; lines of credit also provide funding liquidity because they allow the borrower to draw funds up to a limit on demand. 7. State two reasons why Venture Capitalists do not finance their projects with standard debt (10 points). First, because projects have very high risk the moral hazard problem of asset substitution is unusually bad hence convertible preferred is a better contract than straight debt since it lessens the incentive for the insider to gamble. Second, projects tend to have low cash flow and can t meet interest burden of debt. Convertible preferred pays the VC with potential upside, thus eliminating the high cash flow burden of straight debt. Longer Questions 8. Your bank has the following balances sheet: Loans 1500 Cash 500 Deposits 1800 Equity 200 You have decided to securitize all of your loans ($1500). After working with your investment bank and the credit rating agencies, you have decided to sell the loans to an SPV, which will pay for the loans by issuing four classes of securities. The first two classes are AAA-rated; the SPV will sell $300 million of these bonds to outside investors, and the other class of AAA-rated bonds 2 of 6

3 ($1,000) will be sold to your bank; the third class are BBB-rated and will fund $150 million of the SPV; the bottom class is unrated and will fund the remaining $50 million. Your bank plans to retain the bottom (unrated) tranche. The unrated tranche will suffer all of the losses on the pool of loans until that tranche is exhausted; if losses exceed $50 million, then the BBB rated tranche will begin to experience losses. The AAA rated tranches will only experience losses if both of the other two are completely exhausted. The average annual yield on the loans in the pool is 12%. AAA-rated bonds yield 5% and BBB rated bonds yield 7%. The servicing and administrative costs for the loan pool are 2% per year. Expected losses are 1%. A) Write down the balance sheet of your bank after the securitization. Assume that your bank holds the proceeds of the securitization in cash. (10 points) Cash 950 Deposits 1800 Residual 50 Equity 200 AAA bonds 1000 B) Write down the balance sheet of the SPV. (10 points) Loans 1500 AAA rated bonds sold to Bank 1000 AAA rated bonds sold to investors 300 BBB rated bonds sold to investors 150 Residual sold to bank 50 C) What is the excess spread on the unrated tranche of the pool of loans? (10 points) 1500*12% *5% - 150*7% *3% = $ of 6

4 D) Describe how you could achieve a similar outcome using a credit default swap as in BISTRO. Be sure to explain the balance sheets of both your bank and the SPV that you need to set up, and describe how much the bank needs to pay for the credit default swap (20 points). The securitization above insures 450 of losses out of the total pool of The first 50 in losses hit the bank because it holds the residual tranche, and the next 450 would be covered by investors, but the bank is exposed to catastrophic losses because it holds 1000 of the AAA rated bonds. A parallel CDS structure would work as follows. First, leave the bank s original balance sheet as is. The loans are never sold. Second, set of an SPV as follows: Treasury 500 AAA rated bonds sold to investors 300 BBB rated bonds sold to investors 150 Residual sold to bank 50 To buy the Treasuries, we use $450 proceeds from the SPV s sale of bonds to investors, plus the bank puts in the remaining $50 (the case calls this a reserve account). This could be achieved by annuitizing the $50 over 5 years (or whatever the term is). Third, the SPV writes a CDS on the whole $1500 loan portfolio with its holdings of Treasuries as collateral. The SPV collects a fee from the bank in return for the default protection equal to the additional yield over the Treasury rate needed to pay interest on the AAA and BBB bonds, plus the periodic payment needed to amass the additional $50 in Treasuries. Fee = 300*(5% - T-rate) + 150*(7% - T-rate) + $50 / Annuity Factor (5-years at the T-rate). If losses on the whole portfolio are less than $50, then the bank would effectively be uninsured since they put that money into the SPV (and would lose it in their investment in the residual). Losses between $50 and $500 would be taken on by the holders of the AAA and BBB bonds. Losses above $500 would be born by the bank. 4 of 6

5 9. Consider the following two syndication strategies for a $3.3 billion loan: Underwritten Sub-Underwritten Amount N Amount Amount Held Strategy #1 Lead Bank 1 $3,300 N/A $300 Sub Underwriter 0 Participant 20 $150 Strategy #2 Lead Bank 1 $3,300 $660 $300 Sub Underwriter 4 $660 $300 Participant 9 $200 A) Briefly compare the risks and rewards from the lead bank=s perspective of these two structures. (10 points) Strategy 1 has greater underwriter risk, but the lead gets 100% of the underwriter fees, so there is both more risk and more reward. Strategy 2 is safer for the lead bank because the possibility of holding more than the desired $300 is reduced. The downside is obviously lower fees. B) What is a market flex provision? How does it affect the risks and rewards to the lead bank (10 points)? Market flex allows the lead bank to change the terms of the loan prior to syndication if market conditions change. This reduces underwriter risk. Market flex may be resisted by borrower, but it could also be beneficial to them if conditions improve and the lead improves the terms of the deal. 5 of 6

6 C) Provide three reasons why the borrower might prefer the second strategy. Explain each briefly. (20 points) Sub-underwriter approach may help strengthen relationships between borrower and regional players by allowing those players to get a bigger piece of the action (fees). Sub-underwriter approach has fewer banks, which would make ex post renegotiation easier if the borrower got into trouble (e.g. violated a financial covenant or was late on a payment). Sub-underwriter approach has fewer banks, which reduces the risk of proprietary information leaking out to the market. 6 of 6

Chapter 14. Understanding Financial Contracts. Learning Objectives. Introduction

Chapter 14. Understanding Financial Contracts. Learning Objectives. Introduction Chapter 14 Understanding Financial Contracts Learning Objectives Differentiate among the different mechanisms of external financing of firms Explain why mechanisms of external financing depend upon firm

More information

Investor Presentation: Pricing of MRU s Private Student Loan. July 7, 2008 NASDAQ: UNCL

Investor Presentation: Pricing of MRU s Private Student Loan. July 7, 2008 NASDAQ: UNCL Investor Presentation: Pricing of MRU s Private Student Loan Securitization July 7, 2008 NASDAQ: UNCL Disclaimer and Disclosure Statement 1 Except for historical information contained herein, this presentation

More information

I. Introduction. II. Financial Markets (Direct Finance) A. How the Financial Market Works. B. The Debt Market (Bond Market)

I. Introduction. II. Financial Markets (Direct Finance) A. How the Financial Market Works. B. The Debt Market (Bond Market) University of California, Merced EC 121-Money and Banking Chapter 2 Lecture otes Professor Jason Lee I. Introduction In economics, investment is defined as an increase in the capital stock. This is important

More information

Bank Lending. -Doing due diligence before making loans in order to separate the wheat from the chaff; -Work-out/foreclose when loans go bad.

Bank Lending. -Doing due diligence before making loans in order to separate the wheat from the chaff; -Work-out/foreclose when loans go bad. Bank Lending A. Moral Hazard and Adverse Selection in Financial Contracting As we saw in the first week, a key role of intermediaries is to transform illiquid loans into liquid deposits. Loans are illiquid

More information

Saving and Investing. Chapter 11 Section Main Menu

Saving and Investing. Chapter 11 Section Main Menu Saving and Investing How does investing contribute to the free enterprise system? How does the financial system bring together savers and borrowers? How do financial intermediaries link savers and borrowers?

More information

Financial-Institutions Management. Solutions 6

Financial-Institutions Management. Solutions 6 Solutions 6 Chapter 25: Loan Sales 2. A bank has made a three-year $10 million loan that pays annual interest of 8 percent. The principal is due at the end of the third year. a. The bank is willing to

More information

Chapter 12 Practice Problems

Chapter 12 Practice Problems Chapter 12 Practice Problems 1. Bankers hold more liquid assets than most business firms. Why? The liabilities of business firms (money owed to others) is very rarely callable (meaning that it is required

More information

Public Policy and Innovation: Partnering with Capital Markets through Securitization. Antonio Baldaque da Silva November 2007

Public Policy and Innovation: Partnering with Capital Markets through Securitization. Antonio Baldaque da Silva November 2007 Public Policy and Innovation: Partnering with Capital Markets through Securitization Antonio Baldaque da Silva November 2007 Agenda 1. Motivation: Innovation and Public Policy 2. Traditional tools 3. Alternatives:

More information

Asset Securitization 1

Asset Securitization 1 Asset Securitization 1 No securitization Mortgage borrowers Bank Investors 2 No securitization Consider a borrower that needs a bank loan to buy a house The bank lends the money in exchange of monthly

More information

Lecture Notes on MONEY, BANKING, AND FINANCIAL MARKETS. Peter N. Ireland Department of Economics Boston College. irelandp@bc.edu

Lecture Notes on MONEY, BANKING, AND FINANCIAL MARKETS. Peter N. Ireland Department of Economics Boston College. irelandp@bc.edu Lecture Notes on MONEY, BANKING, AND FINANCIAL MARKETS Peter N. Ireland Department of Economics Boston College irelandp@bc.edu http://www2.bc.edu/~irelandp/ec261.html Chapter 2: An Overview of the Financial

More information

Conduits: Their Structure and Risk

Conduits: Their Structure and Risk Conduits: Their Structure and Risk Primary Functions of a Conduit Loan Originators (may or may not retain the servicing) Mortgage Bankers Mortgage Brokers Buy Side - set purchase guidelines - set underwriting

More information

Conceptual Framework: What Does the Financial System Do? 1. Financial contracting: Get funds from savers to investors

Conceptual Framework: What Does the Financial System Do? 1. Financial contracting: Get funds from savers to investors Conceptual Framework: What Does the Financial System Do? 1. Financial contracting: Get funds from savers to investors Transactions costs Contracting costs (from asymmetric information) Adverse Selection

More information

EC 341 Monetary and Banking Institutions, Boston University Summer 2, 2012 Homework 3 Due date: Tuesday, July 31, 6:00 PM.

EC 341 Monetary and Banking Institutions, Boston University Summer 2, 2012 Homework 3 Due date: Tuesday, July 31, 6:00 PM. EC 341 Monetary and Banking Institutions, Boston University Summer 2, 2012 Homework 3 Due date: Tuesday, July 31, 6:00 PM. Problem 1 Questions 1, 4, 6, 8, 12, 13, 16, 18, 22, and 23 from Chapter 8. Solutions:

More information

The Consumer and Business Lending Initiative

The Consumer and Business Lending Initiative March 3, 2009 The Consumer and Business Lending Initiative A Note on Efforts to Address Securitization Markets and Increase Lending Overview The Obama administration along with the Federal Reserve, the

More information

Bonds and preferred stock. Basic definitions. Preferred(?) stock. Investing in fixed income securities

Bonds and preferred stock. Basic definitions. Preferred(?) stock. Investing in fixed income securities Bonds and preferred stock Investing in fixed income securities Basic definitions Stock: share of ownership Stockholders are the owners of the firm Two types of stock: preferred and common Preferred stock:

More information

Chapter 9 Bonds and Their Valuation ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS

Chapter 9 Bonds and Their Valuation ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS Chapter 9 Bonds and Their Valuation ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS 9-1 a. A bond is a promissory note issued by a business or a governmental unit. Treasury bonds, sometimes referred to as

More information

Article 2014. Collateralized Loan Obligations. by Rob McDonough Chief Risk Officer, Angel Oak Capital Advisors, LLC

Article 2014. Collateralized Loan Obligations. by Rob McDonough Chief Risk Officer, Angel Oak Capital Advisors, LLC Article 2014 Collateralized Loan Obligations by Rob McDonough Chief Risk Officer, Angel Oak Capital Advisors, LLC Collateralized Loan Obligations Collateralized loan obligations ( CLOs ) are structured

More information

Introduction to Investments FINAN 3050

Introduction to Investments FINAN 3050 Introduction to Investments FINAN 3050 : Introduction (Syllabus) Investments Background and Issues (Chapter 1) Financial Securities (Chapter 2) Syllabus General Information The course is going to be organized

More information

Traditionally pension schemes invested in four main asset classes: Shares (Equities or Stocks), Bonds, Property and Cash.

Traditionally pension schemes invested in four main asset classes: Shares (Equities or Stocks), Bonds, Property and Cash. Asset Classes Traditionally pension schemes invested in four main asset classes: Shares (Equities or Stocks), Bonds, Property and Cash. Shares (also called Equities or Stocks) are shares bought in quoted

More information

Part 10. Small Business Finance and IPOs

Part 10. Small Business Finance and IPOs Part 10. Small Business Finance and IPOs In the last section, we looked at how large corporations raised money. In this section, we will examine some of the financing issues facing small and start-up businesses.

More information

Saving and Investing Tools

Saving and Investing Tools STUDENT MODULE 5.3 SAVING AND INVESTING PAGE 1 Standard 5: The student will analyze the costs and benefits of saving and investing. Saving and Investing Tools Miley and Hanna are both turning 16 this year

More information

Regulating Shadow Banking. Patrick Bolton Columbia University

Regulating Shadow Banking. Patrick Bolton Columbia University Regulating Shadow Banking Patrick Bolton Columbia University Outline 1. Maturity Mismatch & Financial Crises: a classic story Low interest rates and lax monetary policy Real estate boom 2. New twist in

More information

What s on a bank s balance sheet?

What s on a bank s balance sheet? The Capital Markets Initiative January 2014 TO: Interested Parties FROM: David Hollingsworth and Lauren Oppenheimer RE: Capital Requirements and Bank Balance Sheets: Reviewing the Basics What s on a bank

More information

Corporate System Resolution Cause of the Corporate System Crisis Frequently Asked Questions (FAQs)

Corporate System Resolution Cause of the Corporate System Crisis Frequently Asked Questions (FAQs) 1 Corporate System Resolution Cause of the Corporate System Crisis Frequently Asked Questions (FAQs) 1. What does this FAQ cover? This document takes a look at the types of investments that were held by

More information

Lecture 16: Financial Crisis

Lecture 16: Financial Crisis Lecture 16: Financial Crisis What is a Financial Crisis? A financial crisis occurs when there is a particularly large disruption to information flows in financial markets, with the result that financial

More information

Chapter 7. . 1. component of the convertible can be estimated as 1100-796.15 = 303.85.

Chapter 7. . 1. component of the convertible can be estimated as 1100-796.15 = 303.85. Chapter 7 7-1 Income bonds do share some characteristics with preferred stock. The primary difference is that interest paid on income bonds is tax deductible while preferred dividends are not. Income bondholders

More information

The Truth About Fixed Indexed Annuities

The Truth About Fixed Indexed Annuities The Truth About Fixed Indexed Annuities Index annuities were first introduced in the United States nearly two decades ago. They were initially created as an alternative to mutual funds and variable annuities,

More information

Answers to Review Questions

Answers to Review Questions Answers to Review Questions 1. The real rate of interest is the rate that creates an equilibrium between the supply of savings and demand for investment funds. The nominal rate of interest is the actual

More information

Exploring Off-Balance Sheet Accounting and Fraudulent Accounting Practices

Exploring Off-Balance Sheet Accounting and Fraudulent Accounting Practices Exploring Off-Balance Sheet Accounting and Fraudulent Accounting Practices Art Lightstone, October 2011 Off-Balance Sheet Entities Also known as: conduits special purpose vehicles (SPV) special interest

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) When a new depositor opens a checking account at the First National Bank, the bank's

More information

Attempting to Protect the Value Accumulated in a GRAT

Attempting to Protect the Value Accumulated in a GRAT INSIGHTS Attempting to Protect the Value Accumulated in a GRAT The primary goal of a GRAT is the ability to allow assets to potentially increase in value, then have the appreciated amounts pass on to beneficiaries

More information

Personal Financial Literacy Vocabulary

Personal Financial Literacy Vocabulary TEACHER GUIDE 5.3 SAVING AND INVESTING PAGE 1 Standard 5: The student will analyze the costs and benefits of saving and investing. Saving and Investing Tools Priority Academic Student Skills Personal Financial

More information

FLOATING RATE BANK LOANS: A BREAK FROM TRADITION FOR INCOME-SEEKING INVESTORS. Why does the bank loan sector remain so attractive?

FLOATING RATE BANK LOANS: A BREAK FROM TRADITION FOR INCOME-SEEKING INVESTORS. Why does the bank loan sector remain so attractive? FLOATING RATE BANK LOANS: A BREAK FROM TRADITION FOR INCOME-SEEKING INVESTORS Bank loans present a compelling income opportunity and a portfolio diversifier that provides protection against traditional

More information

CHAPTER 17. Financial Management

CHAPTER 17. Financial Management CHAPTER 17 Financial Management Chapter Summary: Key Concepts The Role of the Financial Manager Financial managers Risk-return trade-off Executives who develop and implement their firm s financial plan

More information

Citigroup Global Transaction Services

Citigroup Global Transaction Services Citigroup Global Transaction Services Cash Management Trade Services and Finance Securities and Fund Services Uncovering the Hidden Value in Accounts Receivables Olivia Xu Director, NA Trade Sales Kate

More information

VISUAL 1 TERMS OF MODERN FINANCIAL MARKETS

VISUAL 1 TERMS OF MODERN FINANCIAL MARKETS VISUAL 1 TERMS OF MODERN FINANCIAL MARKETS Instruments Asset-backed security Credit default swap Bond Common stock Mortgage-backed security Mutual fund Option Futures contract Subprime mortgage Institutions

More information

Building a Business Plan Part B: Getting Money to Start Your Business

Building a Business Plan Part B: Getting Money to Start Your Business Session Eight Building a Business Plan Part B: Getting Money to Start Your Business It is not necessary to do extraordinary things to get extraordinary results. Warren Buffett Overview: One of the great

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. ECON 4110: Sample Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Economists define risk as A) the difference between the return on common

More information

Chapter 7: Capital Structure: An Overview of the Financing Decision

Chapter 7: Capital Structure: An Overview of the Financing Decision Chapter 7: Capital Structure: An Overview of the Financing Decision 1. Income bonds are similar to preferred stock in several ways. Payment of interest on income bonds depends on the availability of sufficient

More information

Venture Debt Overview

Venture Debt Overview Venture Debt Overview Introduction When utilized appropriately, venture debt can reduce dilution, extend a company s runway or accelerate its growth with limited cost to the business If utilized poorly

More information

CFCM CENTRE FOR FINANCE AND CREDIT MARKETS

CFCM CENTRE FOR FINANCE AND CREDIT MARKETS CFCM CENTRE FOR FINANCE AND CREDIT MARKETS Current Issues Briefing Why Firms Will Feel The Effects Of The Credit Crunch Prof. Paul Mizen Director, CFCM. Produced By: Centre for Finance and Credit Markets

More information

Money Market. The money market is the market for low-risk, short-term debt.

Money Market. The money market is the market for low-risk, short-term debt. Money Market The money market is the market for low-risk, short-term debt. 1 Substitution Different money-market assets are close substitutes. Since an investor in the money market can choose which asset

More information

Click Here to Buy the Tutorial

Click Here to Buy the Tutorial FIN 534 Week 4 Quiz 3 (Str) Click Here to Buy the Tutorial http://www.tutorialoutlet.com/fin-534/fin-534-week-4-quiz-3- str/ For more course tutorials visit www.tutorialoutlet.com Which of the following

More information

Rigensis Bank AS Information on the Characteristics of Financial Instruments and the Risks Connected with Financial Instruments

Rigensis Bank AS Information on the Characteristics of Financial Instruments and the Risks Connected with Financial Instruments Rigensis Bank AS Information on the Characteristics of Financial Instruments and the Risks Connected with Financial Instruments Contents 1. Risks connected with the type of financial instrument... 2 Credit

More information

NOTE ON LOAN CAPITAL MARKETS

NOTE ON LOAN CAPITAL MARKETS The structure and use of loan products Most businesses use one or more loan products. A company may have a syndicated loan, backstop, line of credit, standby letter of credit, bridge loan, mortgage, or

More information

FLOATING RATE BANK LOANS: A BREAK FROM TRADITION FOR INCOME-SEEKING INVESTORS

FLOATING RATE BANK LOANS: A BREAK FROM TRADITION FOR INCOME-SEEKING INVESTORS FLOATING RATE BANK LOANS: A BREAK FROM TRADITION FOR INCOME-SEEKING INVESTORS With about $713 billion in assets, the bank loan market is roughly half the size of the high yield market. However, demand

More information

3. If an individual investor buys or sells a currently owned stock through a broker, this is a primary market transaction.

3. If an individual investor buys or sells a currently owned stock through a broker, this is a primary market transaction. Spring 2012 Finance 3130 Sample Exam 1A Questions for Review 1. The form of organization for a business is an important issue, as this decision has very significant effect on the income and wealth of the

More information

Finding the Right Financing Mix: The Capital Structure Decision. Aswath Damodaran 1

Finding the Right Financing Mix: The Capital Structure Decision. Aswath Damodaran 1 Finding the Right Financing Mix: The Capital Structure Decision Aswath Damodaran 1 First Principles Invest in projects that yield a return greater than the minimum acceptable hurdle rate. The hurdle rate

More information

asset classes Understanding Equities Property Bonds Cash

asset classes Understanding Equities Property Bonds Cash NEWSLETTER Understanding asset classes High return Property FIND OUT MORE Equities FIND OUT MORE Bonds FIND OUT MORE Cash FIND OUT MORE Low risk High risk Asset classes are building blocks of any investment.

More information

BOND - Security that obligates the issuer to make specified payments to the bondholder.

BOND - Security that obligates the issuer to make specified payments to the bondholder. Bond Valuation BOND - Security that obligates the issuer to make specified payments to the bondholder. COUPON - The interest payments paid to the bondholder. FACE VALUE - Payment at the maturity of the

More information

Special Purpose Entities (SPEs) and the. Securitization Markets

Special Purpose Entities (SPEs) and the. Securitization Markets Special Purpose Entities (SPEs) and the Securitization Markets Prepared by: The Bond Market Association International Swaps & Derivatives Association Securities Industry Association February 1, 2002 Special

More information

Benefits of SME Securitisation for Economic & Regulatory Purposes. Associated Risks and Considerations

Benefits of SME Securitisation for Economic & Regulatory Purposes. Associated Risks and Considerations Benefits of SME Securitisation for Economic & Regulatory Purposes Associated Risks and Considerations John D. Pollner Lead Financial Officer (Financial & Risk Markets) The World Bank Agenda Benefits of

More information

THE STOCK MARKET GAME GLOSSARY

THE STOCK MARKET GAME GLOSSARY THE STOCK MARKET GAME GLOSSARY Accounting: A method of recording a company s financial activity and arranging the information in reports that make the information understandable. Accounts payable: The

More information

RELEVANT TO ACCA QUALIFICATION PAPER F9

RELEVANT TO ACCA QUALIFICATION PAPER F9 RELEVANT TO ACCA QUALIFICATION PAPER F9 Analysing the suitability of financing alternatives The requirement to analyse suitable financing alternatives for a company has been common in Paper F9 over the

More information

An Introduction to the Impact of Mark to Market Accounting on MBIA and Financial Guarantors

An Introduction to the Impact of Mark to Market Accounting on MBIA and Financial Guarantors An Introduction to the Impact of Mark to Market Accounting on MBIA and Financial Guarantors MBIA provides credit protection on municipal, essential asset and securitized financings, and the terms and conditions

More information

René Garcia Professor of finance

René Garcia Professor of finance Liquidity Risk: What is it? How to Measure it? René Garcia Professor of finance EDHEC Business School, CIRANO Cirano, Montreal, January 7, 2009 The financial and economic environment We are living through

More information

Review of what we studied so far

Review of what we studied so far Review of what we studied so far We have studied 2 reasons why banks (more generally a financial system) are useful: 1. by monitoring firms and making it harder for entrepreneurs to shirk banks allow projects

More information

Raising Capital Part 1: Debt

Raising Capital Part 1: Debt Giddy Raising Capital: Debt /1 Raising Capital Part 1: Debt Prof. Ian Giddy New York University Corporate Finance CORPORATE FINANCE DECISONS INVESTMENT FINANCING RISK MGT MGT PORTFOLIO CAPITAL M&A DEBT

More information

How credit analysts view and use the financial statements

How credit analysts view and use the financial statements How credit analysts view and use the financial statements Introduction Traditionally it is viewed that equity investment is high risk and bond investment low risk. Bondholders look at companies for creditworthiness,

More information

Richard Rosen Federal Reserve Bank of Chicago

Richard Rosen Federal Reserve Bank of Chicago Richard Rosen Federal Reserve Bank of Chicago The views expressed here are my own and may not represent those of the Federal Reserve Bank of Chicago or the Federal Reserve System. Why was this crisis different

More information

Chapter 2. Practice Problems. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Chapter 2. Practice Problems. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Chapter 2 Practice Problems MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Assume that you borrow $2000 at 10% annual interest to finance a new

More information

Investment risk Balancing investment risk and potential reward

Investment risk Balancing investment risk and potential reward Investment risk Balancing investment risk and potential reward This guide has been produced for educational purposes only and should not be regarded as a substitute for investment advice. Vanguard Asset

More information

City National Rochdale High Yield Bond Fund a series of City National Rochdale Funds

City National Rochdale High Yield Bond Fund a series of City National Rochdale Funds City National Rochdale High Yield Bond Fund a series of City National Rochdale Funds SUMMARY PROSPECTUS DATED JANUARY 31, 2015, AS SUPPLEMENTED MAY 1, 2015 Class: Institutional Class Servicing Class Class

More information

Priority Senior Secured Income Fund, Inc.

Priority Senior Secured Income Fund, Inc. Priority Senior Secured Income Fund, Inc. This material is neither an offer to sell nor the solicitation of an offer to buy any security. Such an offer can be made only by prospectus, which has been filed

More information

Managing Home Equity to Build Wealth By Ray Meadows CPA, CFA, MBA

Managing Home Equity to Build Wealth By Ray Meadows CPA, CFA, MBA Managing Home Equity to Build Wealth By Ray Meadows CPA, CFA, MBA About the Author Ray Meadows is the president of Berkeley Investment Advisors, a real estate brokerage and investment advisory firm. He

More information

Investments. To meet your financial goals you will need a plan. Part of this plan is to create a portfolio.

Investments. To meet your financial goals you will need a plan. Part of this plan is to create a portfolio. Investments To meet your financial goals you will need a plan. Part of this plan is to create a portfolio. This portfolio reflects what type of risk you are willing to accept. Within this portfolio, you

More information

INTEREST RATES: WHAT GOES UP MUST COME DOWN

INTEREST RATES: WHAT GOES UP MUST COME DOWN 3 INTEREST RATES: WHAT GOES UP MUST COME DOWN John M. Petersen Melvin Mark Capital Group, LLC What an interesting time to be asked to write something about interest rates! Our practice emphasis is commercial

More information

Chapter 6. Interest Rates And Bond Valuation. Learning Goals. Learning Goals (cont.)

Chapter 6. Interest Rates And Bond Valuation. Learning Goals. Learning Goals (cont.) Chapter 6 Interest Rates And Bond Valuation Learning Goals 1. Describe interest rate fundamentals, the term structure of interest rates, and risk premiums. 2. Review the legal aspects of bond financing

More information

Financing a New Venture

Financing a New Venture Financing a New Venture A Canadian Innovation Centre How-To Guide 1 Financing a new venture New ventures require financing to fund growth Forms of financing include equity (personal, family & friends,

More information

Structured Financial Products

Structured Financial Products Structured Products Structured Financial Products Bond products created through the SECURITIZATION Referred to the collection of Mortgage Backed Securities Asset Backed Securities Characteristics Assets

More information

http://www.investopedia.com/university/bonds/ Thanks very much for downloading the printable version of this tutorial.

http://www.investopedia.com/university/bonds/ Thanks very much for downloading the printable version of this tutorial. Bond Basics Tutorial http://www.investopedia.com/university/bonds/ Thanks very much for downloading the printable version of this tutorial. As always, we welcome any feedback or suggestions. http://www.investopedia.com/contact.aspx

More information

Asset Securitisation in Australia 1

Asset Securitisation in Australia 1 Asset Securitisation in Australia 1 1 8 6 4 2 Graph 1 Australian Securitisation Vehicles Selected assets and liabilities $b Assets Liabilities $b Non-residential mortgages Other loans 1995 1998 21 24 Sources:

More information

Athens University of Economics and Business

Athens University of Economics and Business Athens University of Economics and Business MSc in International Shipping, Finance and Management Corporate Finance George Leledakis An Overview of Corporate Financing Topics Covered Corporate Structure

More information

Investment insight. Fixed income the what, when, where, why and how TABLE 1: DIFFERENT TYPES OF FIXED INCOME SECURITIES. What is fixed income?

Investment insight. Fixed income the what, when, where, why and how TABLE 1: DIFFERENT TYPES OF FIXED INCOME SECURITIES. What is fixed income? Fixed income investments make up a large proportion of the investment universe and can form a significant part of a diversified portfolio but investors are often much less familiar with how fixed income

More information

[ 2 ] Basic Securitization Structure. [ 1 ] Securitization and Monetization. Ⅰ Basic Structure of Real Estate Securitization. Structured finance

[ 2 ] Basic Securitization Structure. [ 1 ] Securitization and Monetization. Ⅰ Basic Structure of Real Estate Securitization. Structured finance Ⅰ Basic Structure of Real Estate Securitization [ 1 ] Securitization and Monetization Asset securitization is where a financial institution or other business that owns assets places those assets in a structure

More information

Prof Kevin Davis Melbourne Centre for Financial Studies. Current Issues in Bank Capital Planning. Session 4.4

Prof Kevin Davis Melbourne Centre for Financial Studies. Current Issues in Bank Capital Planning. Session 4.4 Enhancing Risk Management and Governance in the Region s Banking System to Implement Basel II and to Meet Contemporary Risks and Challenges Arising from the Global Banking System Training Program ~ 8 12

More information

CHAPTER 20 LONG TERM FINANCE: SHARES, DEBENTURES AND TERM LOANS

CHAPTER 20 LONG TERM FINANCE: SHARES, DEBENTURES AND TERM LOANS CHAPTER 20 LONG TERM FINANCE: SHARES, DEBENTURES AND TERM LOANS Q.1 What is an ordinary share? How does it differ from a preference share and debenture? Explain its most important features. A.1 Ordinary

More information

Financial-Institutions Management. Solutions 5. Chapter 18: Liability and Liquidity Management Reserve Requirements

Financial-Institutions Management. Solutions 5. Chapter 18: Liability and Liquidity Management Reserve Requirements Solutions 5 Chapter 18: Liability and Liquidity Management Reserve Requirements 8. City Bank has estimated that its average daily demand deposit balance over the recent 14- day reserve computation period

More information

BOND FUNDS L SHARES. October 1, 2004

BOND FUNDS L SHARES. October 1, 2004 BOND FUNDS A SHARES L SHARES October 1, 2004 CLASSIC INSTITUTIONAL U.S. GOVERNMENT SECURITIES SUPER SHORT INCOME PLUS FUND FLORIDA TAX-EXEMPT BOND FUND GEORGIA TAX-EXEMPT BOND FUND HIGH INCOME FUND INVESTMENT

More information

of Investments Fundamentals Security Types C h a p t e r Valuation & Management second edition Charles J.Corrado Bradford D.

of Investments Fundamentals Security Types C h a p t e r Valuation & Management second edition Charles J.Corrado Bradford D. 3 C h a p t e r Security Types 3-1 Fundamentals of Investments Valuation & Management second edition Charles J.Corrado Bradford D.Jordan Slides by Yee-Tien (Ted) Fu 3-2 Security Types Goal Our goal in

More information

Answers to Concepts in Review

Answers to Concepts in Review Answers to Concepts in Review 1. (a) In the money market, short-term securities such as CDs, T-bills, and banker s acceptances are traded. Long-term securities such as stocks and bonds are traded in the

More information

Investment Bond. Funds key features. This is an important document. Please keep it safe for future reference.

Investment Bond. Funds key features. This is an important document. Please keep it safe for future reference. Investment Bond Funds key features. This is an important document. Please keep it safe for future reference. 2 WHAT ARE THE FUNDS KEY FEATURES? This document is part of the information we provide you to

More information

Seix Total Return Bond Fund

Seix Total Return Bond Fund Summary Prospectus Seix Total Return Bond Fund AUGUST 1, 2015 (AS REVISED FEBRUARY 1, 2016) Class / Ticker Symbol A / CBPSX R / SCBLX I / SAMFX IS / SAMZX Before you invest, you may want to review the

More information

Investments GUIDE TO FUND RISKS

Investments GUIDE TO FUND RISKS Investments GUIDE TO FUND RISKS CONTENTS Making sense of risk 3 General risks 5 Fund specific risks 6 Useful definitions 9 2 MAKING SENSE OF RISK Understanding all the risks involved when selecting an

More information

CHAPTER 20: OPTIONS MARKETS: INTRODUCTION

CHAPTER 20: OPTIONS MARKETS: INTRODUCTION CHAPTER 20: OPTIONS MARKETS: INTRODUCTION PROBLEM SETS 1. Options provide numerous opportunities to modify the risk profile of a portfolio. The simplest example of an option strategy that increases risk

More information

Understanding Margin and Its Risks

Understanding Margin and Its Risks Understanding Margin and Its Risks www.siebertnet.com Before opening a margin account, you should have a clear understanding of the basic facts about margin and the risks of trading securities on margin.

More information

Financial Statements and Ratios: Notes

Financial Statements and Ratios: Notes Financial Statements and Ratios: Notes 1. Uses of the income statement for evaluation Investors use the income statement to help judge their return on investment and creditors (lenders) use it to help

More information

Accounting for securitizations treated as a financing (on-balance sheet) verses securitizations treated as a sale (off-balance sheet)

Accounting for securitizations treated as a financing (on-balance sheet) verses securitizations treated as a sale (off-balance sheet) Accounting for securitizations treated as a financing (on-balance sheet) verses securitizations treated as a sale (off-balance sheet) The hypothetical example below is provided for informational purposes

More information

Understanding Fixed Income

Understanding Fixed Income Understanding Fixed Income 2014 AMP Capital Investors Limited ABN 59 001 777 591 AFSL 232497 Understanding Fixed Income About fixed income at AMP Capital Our global presence helps us deliver outstanding

More information

http://www.bofabusinesscapital.com/resources/capeyes/a08-02-115.html...

http://www.bofabusinesscapital.com/resources/capeyes/a08-02-115.html... 1 of 5 10/29/2006 5:34 PM Locations Contact Us FAQ Site Map Article Archive: August 2002 Browse Article Archive Asset-Based Finance The Making of a Syndicated Deal August 2002 To say these are turbulent

More information

BUS303. Study guide 2. Chapter 14

BUS303. Study guide 2. Chapter 14 BUS303 Study guide 2 Chapter 14 1. An efficient capital market is one in which: A. all securities that investors want are offered. B. all transactions are closed within 2 days. C. current prices reflect

More information

Bank Regulatory Capital Quick Reference. Very simply: to limit risk and reduce our potential, unexpected losses.

Bank Regulatory Capital Quick Reference. Very simply: to limit risk and reduce our potential, unexpected losses. Bank Regulatory Capital: Why We Need It Very simply: to limit risk and reduce our potential, unexpected losses. Unlike normal companies, banks are in the business of issuing loans to individuals and businesses

More information

American Options and Callable Bonds

American Options and Callable Bonds American Options and Callable Bonds American Options Valuing an American Call on a Coupon Bond Valuing a Callable Bond Concepts and Buzzwords Interest Rate Sensitivity of a Callable Bond exercise policy

More information

Chapter 10. Fixed Income Markets. Fixed-Income Securities

Chapter 10. Fixed Income Markets. Fixed-Income Securities Chapter 10 Fixed-Income Securities Bond: Tradable security that promises to make a pre-specified series of payments over time. Straight bond makes fixed coupon and principal payment. Bonds are traded mainly

More information

Slide 2. What is Investing?

Slide 2. What is Investing? Slide 1 Investments Investment choices can be overwhelming if you don t do your homework. There s the potential for significant gain, but also the potential for significant loss. In this module, you ll

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following is the primary source of external funds used by American businesses

More information

Savings, Investment Spending, and the Financial System

Savings, Investment Spending, and the Financial System Savings, Investment Spending, and the Financial System 1. Given the following information about the closed economy of Brittania, what is the level of investment spending and private savings, and what is

More information

The Young Investor s Guide To Understanding The Terms Used In Investing.

The Young Investor s Guide To Understanding The Terms Used In Investing. The Young Investor s Guide To Understanding The Terms Used In Investing. The Young Investor Dictionary compliments of Integrity Mutual Funds. YOUNG INVESTOR DICTIONARY Asset Something of value. The property

More information

How Dilution Affects Option Value

How Dilution Affects Option Value How Dilution Affects Option Value If you buy a call option on an options exchange and then exercise it, you have no effect on the number of outstanding shares. The investor who sold the call simply hands

More information