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

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

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

Transcription

1 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 because only the bank holds the information needed to evaluate correctly how much they are worth. However, the bank itself is a trusted counter-party, so its obligations (deposits) are liquid. Lack of information acts as the key barrier to making efficient financial contracts. This is probably the most important idea in this class. Two key problems arise when information is poor. The first is adverse selection, which occurs before a financial contract is completed. The second is moral hazard, which occurs after a financial contract is completed. B. Financial Intermediaries Why is it important to have intermediaries? Information collection about a potential entrepreneur is key to solving the adverse selection problem (because it allows the lender to tell who s good and who s bad), and the ability to foreclose on a defaulting borrower was key to creating incentives for morally challenged borrowers to avoid cheating (if a bank cannot foreclose on a loan and collect substantial value in liquidation, then they are in a very weak bargaining position in a loan workout). So, intermediaries are specialists is: -Doing due diligence before making loans in order to separate the wheat from the chaff; -Work-out/foreclose when loans go bad. It would be very difficult for the ultimate saver (e.g. the bank depositor) to engage in these activities because they don t have the skills to do it. Intermediaries pool the savings of many individuals, allowing them to take advantage of economies of scale in information production and loan work-outs. At the same time, they also reap the benefits of diversification; by making many loans, an intermediary holds a much safer portfolio than any small investor could achieve on their own. Note that the beauty of a debt contract is that relatively little work needs to be done most of the time. After a loan is made, banks basically just have to collect checks. They do not get involved in running the business. It is only if borrowers are late on payments that banks become very active. 1 of 18

2 As you will study in detail in your corporate finance class, some financial institutions such as venture capital firms do much more than provide funds like banks, which make loans (debt contracts). VCs tend to become very actively involved in the running of the business. Here is a summary of what intermediaries accomplish: Financial contracting: They structure and enforce efficient financial contracts with borrowers that may be difficult to understand, and with borrowers that may have a strong incentive to chisel; Risk Management: Holding a well-diversified portfolio reduces the risks dramatically of the intermediary itself defaulting; Liquidity production: Because the intermediary itself is quite safe, it can fund itself by issuing very safe, and hence liquid, financial assets (e.g. deposits). These functions support each other. Economies of scale in financial contracting supports risk management because it is efficient for the intermediary to make many loans. Risk management supports the production of liquid assets. Because liquidity production is so valuable, intermediaries go to much greater lengths beyond diversification to manage risks. We will study this later. 2 of 18

3 C. Real Bank Balance Sheets As we said in the first lecture, banks are the dominant financial intermediary. So, we will now look more closely at what banks actually do. Here is (roughly) what the aggregate balance sheet for all banks in the U.S. looked like in 2011 (post-crisis), 2007 (eve of crisis) and back in 1980: Assets $s % Assets $s % Assets $s % Assets $s % Assets Cash 1, % 1, % % % Securities Held to Maturity 2, % 2, % 2, % % Loans (Gross) 7, % 6, % 6, % 1, % Commercial & Industrial 1, % 1, % 1, % % Real Estate 3, % 3, % 3, % % Consumer 1, % 1, % % % Other % 1, % % % Loan Loss Reserve % % % % Loans (Net) 7, % 6, % 6, % 1, % Other Assets 2, % 1, % 1, % % Total Assets ,381 10,864 1,857 Liabilities Deposits % 8, % 6, % 1, % Domestic Transactions Deposits % 1, % % % Other borrowed Funds 1, % 2, % 3, % % Total Liabilities % 10, % 9, % 1, % Net Worth (Capital) 1, % 1, % 1, % % Here is a little detail on what these categories mean: Assets: Cash Cash includes two items: literal currency held in the bank s vault, plus deposits at a Federal Reserve Bank. These deposits are called reserves, and these are the main source of cash to banks. Reserves are an asset to banks and a liability to the Federal Reserve, as is currency. (Aside: when non-financial companies report cash of their balance sheets, much of this item includes deposits with commercial banks. Non-financial firms cannot open accounts at a Federal Reserve Bank, only commercial banks and the US Treasury have accounts with the Fed.) Loans: Gross, Net and Loan Loss Reserve Gross loans are the total amount lent to customers. Since some loans will default, banks set up an account called a loan loss reserve that is deducted from gross loans to get net loans, which is what the bank expects to be paid. When a loan actually goes bad it is charged off, 3 of 18

4 thus leaving the balance sheet. The bank lowers both gross loans and the loan loss reserve account so that net loans is unaffected by the charged off loan. Securities held to maturity Includes U.S. Treasuries, municipal bonds, and investment grade corporate bonds and mortgage-backed securities (both residential and commercial). Commercial & Industrial Loans Loans to businesses, not secured by real estate. These loans are generally illiquid due to the information collection and monitoring services of the bank. Real Estate Loans Commercial (loans to businesses that are secured by real estate) Residential (e.g. home mortgages) Consumer Loans Savings association had been very important providers of finance for homes until the 1980s; then, commercial banks became much more important due to the collapse of the S&Ls. We will study this in detail later. Real estate loans tend to be long term; e.g. 30-year mortgages. Both commercial and residential mortgages are becoming increasingly liquid due to the rise of loan securitization. This is the process by which a loan is converted into a marketable security. It also played a huge role in the subprime mortgage debacle. We will study this phenomenon in detail later. Credit Card You are all familiar with these. CC loans had been very profitable through the 1980s and 90s, with interest rates averaging between 15 and 20%. Rates have fallen, as have profits. Losses in CC were a major problem after The CC business is one in which the ability to defeat adverse selection is key to profitability! Best customer: a revolver who does not default. If you can structure your program to get these people, you will be very successful. Auto These loans are short-term, fully secured loans. Finance companies are also very active in this area. 4 of 18

5 Other assets Student loans Many of you have these... Other personal loans This includes assets that are held in banks trading accounts, which means they intend to trade them frequently (hopefully for a profit), rather than hold to maturity. Liabilities and Net Worth: Transactions deposits These are deposits that you can write a check against; they are the most liquid kind of deposit and offer a close substitute for cash. These include demand deposits and NOW accounts. Demand deposits are special type of deposits that is the most liquid; the bank must give you your funds on demand, and cannot pay interest on those funds. Because the funds are demandable, Federal Reserve has the power to require banks to hold a certain percentage of those funds on reserve at a Federal Reserve Bank. Discussion Questions: if demand deposits pay zero interest, why do people hold demand deposits? What happens to the supply of demand deposits when interest rates fall? Non-transaction deposits These include passbook savings and MMDA (money market deposit accounts), small time deposits, and large time deposits (CDs). Passbook savings and MMDAs pay interest and are liquid since the holder can withdraw funds at any time. Small time deposits (CDs) pay higher interest but are less liquid than the MMDAs and passbook accounts. These three categories represent the largest source of deposits to banks; however, they have been losing importance over time due to competition from the mutual fund business. Discussion Questions: Bank deposits generally pay lower interest than money market mutual funds. Why? Why do people continue to hold deposits? Why are bank deposits becoming less important as time goes by? Why have they rebounded in recent years? 5 of 18

6 Other liabilities The remainder of bank non-deposit liabilities include borrowing from other banks in the U.S. such as in the Federal Funds market, and borrowing from banks outside the U.S. Some large banks also issue bonds and other securities that are subordinated to their deposit liabilities. Net Worth (Capital) The difference between the book value of assets and liabilities is the net worth or capital of the bank. This residual is important as a buffer to prevent the bank from becoming insolvent. That is, if the value of assets falls below the value of liabilities. Net Worth is important in protecting the FDIC against possible losses, so it is an important tool for regulation of banks. (More later in the course.) Discussion question: What is the difference between net worth as defined here, and the market value of the bank to its shareholders? Specifically, what aspects of value are included in the market value of the bank that are not included in the book value of net worth? 6 of 18

7 D. Off-balance sheet banking There are many things that banks do that generate profits and/or risks but that do not appear on the balance sheet. Here are the main items: Loan Commitments Most loans to businesses and consumers are structured as lines of credit in which the borrower may decide at any time during the life of the loan to borrower an amount up to a contractually determined maximum. The difference between the amount actually borrowed and the amount committed is not on the balance sheet. However, banks often charge a fee for these undrawn funds (although not usually to consumers on credit cards.) Loan commitments are another area where banks are providing liquidity to their customers. Letters of Credit Derivatives These are guarantees sold by the bank to a firm for a fee to insure a third-party that the firm will perform a transaction such as delivering goods or making payment for goods that have been shipped overseas. Banks hold positions in F/X (spot, futures, and swaps), financial futures and forwards (and some commodity futures), interest rate swaps, credit default swaps and other derivatives. Small banks hold these positions to manage their own risk; large banks act as dealers in these markets too. In the second half of the semester, we will study how the structure of derivatives markets played a contributing role to the Financial Crisis. 7 of 18

8 E. Bank Income Statements Here s the banking system s income statement in 2011, 2007 and 1980, in billions $s % Assets $s % Assets $s % Assets $s % Assets Interest Income Interest Expenses Net Interest Income % % % % Non-interest Income % % % % Non-interest Expenses % % % % Provision for Loan Losses % % % 4 0.2% Net income ROE (net income / net worth) 9.3% 8.0% 9.0% 12.8% Interest expenses and interest income are just what they seem. Provisions for loan losses is a deduction from current income that represents a bank s expectation of future losses on its loans. These funds go into the loan loss reserve, which is a contra-asset account on the balance sheet. When a loan actually goes bad, the bank writes the loan down and lowers the loan loss reserve by a the same amount (so total assets does not change). If banks have unusually large losses that would deplete their loan loss reserve, they will be forced to increase their current loan loss provisions to build the account back up. Non-interest Income Includes fees earned on deposits, loans, off-balance sheet activities (loan commitments, letters of credit, etc.), fees for advisory services and trust services, fees for servicing loans that have been sold or securitized, gains and losses in trading activity, etc. Non-interest Expenses Salaries, costs of physical assets (land depreciation, branches, computers, etc.). About half of this item is salaries to the 1.5 million employees of banks. Questions for discussion: How and why has the aggregate balance sheet of the banking system changed over time? Why has the balance sheet changed so much between 2007 and 2011? How and why has the income statement for the banking system changed? What is driving the changes that you see? 8 of 18

9 F. Lending to Businesses Bank Lending is a key aspect of financing for businesses due to information problems described above. Large businesses have access to the commercial paper and corporate bond markets. Commercial paper (CP) is short-term borrowing from the capital markets. Large firms issue CP to finance their short-term assets. Many of them, however, use banks as a backup source of financing if the CP becomes hard to come by. These products are called CP backup lines of credit; they were very important in the Fall of 1998 following the Russian default, for example. Banks have lost substantial amounts of business for long-term corporate finance to the bond market, especially since the rise of the junk bond market in the 1980s. Prior to that time, only investment grade firms could issue bonds. Other firms had to borrow from banks. Comparing bonds and bank loans. The key difference between bonds and bank loans has to do with their ownership. Bonds are owned by many thousands of investors, whereas bank loans are owned by one or a few banks. Because bank loans are owned by one or a few banks: A lot of information is collected before the loan is made (due diligence) Banks loans are usually secured They have many covenants Distressed loans usually worked out And bank loans are illiquid (although secondary market is growing) Because bonds are owned by lots of investors: Information collection delegated to ratings agencies Loan usually not secured Loose covenants Distressed bonds often end up in Bankruptcy Court Liquid Discussion question: Compare bond market borrowers with firms that borrow from banks. 9 of 18

10 Banks now often make syndicated bank loans to large corporations. A coalition of banks make a loan to very large firms. The terms of the loan are determined by the lead arranger; this bank holds the largest share of the loan, is responsible for servicing the loan, and receives a fee for these activities. Other banks that take smaller pieces are call participants. Banks sometimes sell their participation (or a part of their participation) in a syndicated loan to other banks after the loan has been made. Discussion question: How has the emergence of syndicated lending helped banks compete with the bond market for financing large firms long-term investments? We will discuss syndicated lending in detail in the Hong Kong Disneyland case. Banks have retained their importance in lending to small and medium sized businesses. Typical business exhibits a predictable financial life cycle : Early stage: Middle stage: Later stages: Entrepreneurs begin with their own funds, or with family funds. Business growth in the early and middle stages is financed with bank loans (and sometimes with venture capital). For reason described above, most external finance comes in the form of debt to reduce moral hazard problems. In the case of firms in very high risk, high potential reward businesses, arm s length debt finance is not sufficient to solve moral hazard problems. At these kinds of firms, capital in the middle stage tends to come from venture capital firms. Once a business has reached sufficient scale and maturity, it may have a chance to access public debt and equity markets. 10 of 18

11 G. Loan Valuation Loans can be valued just like any other financial asset. The key building blocks are the expected cash flow and the discount rate. For loans, expected cash flows are determined by: The principal of the loan (this obviously determines the initial outflow of funds to the lender) The promised per period interest rate on the loan, net of administrative costs (k) The probability of default per period (p) The expected salvage value (s) if the loan defaults (expressed as a % of total amount owed at default) The discount rate equals a base rate (e.g. LIBOR or the Federal Funds rate, which represents the bank s cost of raising debt to finance the loan), plus a spread to compensate for risk. For example, using the Capital-Asset Pricing Model (CAPM), the spread would equal the loan s β, multiplied by the market risk premium (say 5%). (There are other ways to compute discount rates, such as the weighted-average cost of capital. You will/have studied this topic in detail in your corporate finance class.) To make the analysis simple, let s assume the principal equal $1 and assume the loan matures one period in the future. Assume the discount rate is r. Here are the payoffs and probabilities Period 1 No Default (1) Cash Flow ($) (1+k) (2) Probability (1-p) Expected CF = (1)*(2) (1+k)(1-p) Default (1) Cash Flow ($) (1+k)s (2) Probability p Expected CF = (1)*(2) (1+k)*s*p So, the Expected Cash Flow when the 1-period loan matures = (1+k)(1-p) + (1+k)*s*p The Present Value of the loan is the expected cash flow discounted back 1 period by the discount rate = [ (1+k)(1-p) + (1+k)*s*p ] / (1+r) 11 of 18

12 The Net Present Value of the loan is the expected cash flow discounted back 1 period by the discount rate minus the initial investment: NPV = [ (1+k)(1-p) + (1+k)*s*p ] / (1+r) - 1 If the NPV > 0, then the loan is profitable. Let s do the same analysis for a loan with a 2-period maturity. Assume that the loan has a $1 principal. Here are the payoffs and probabilities: Period 1 Period 2 No Default Cash Flow ($) k (1+k) Probability (1-p) (1-p) 2 Expected CF ($) (k)*(1-p) (1+k)(1-p) 2 Default Cash Flow ($) (1+k)*s (1+k)*s Probability p (1-p)*p Expected CF ($) (1+k)*s*p (1+k)*s*(1-p)*p At the end of period 1, the borrower may be OK and not default, and thus pay the bank the $k that it owes in interest. This happens if there is no default. If there is a default at the end of the first period, then the bank gets the salvage value of (1+k)*s and the loan ends. With probability (1-p), the loan survives to the second period. In period 2, the whole thing repeats. So, the probability of getting to period 2 and NOT defaulting is (1-p) 2. On the other hand, the borrower may have gotten thru period 1 but then defaults in period 2. This occurs with probability (1-p)*p. So, the Present Value of this loan equals: [ k*(1-p) + (1+k)*s*p ] / (1+r) + [ (1+k)(1-p) 2 + (1+k)*s*(1-p)*p ] / (1+r) 2 The Net Present Value would simply subtract the $1 amount lent from this expression. This analysis easily generalizes to more than 2 periods. What you should see is that both the expected cash flows and the risk properties of the loan depend on the per-period default probability and the salvage value. In-Class Example. Suppose we have a 3-year loan with principal of $100, 50% salvage value, and 5% probability of default each year. The promised annual interest rate is 8% and the discount 12 of 18

13 rate is 4%. What is the Present Value of the loan? What is the Net Present Value? Is the loan profitable? (Try to work up a spreadsheet. Don t worry: I will cover this in class!) A very important point to keep in mind is that the performance of a loan depends very critically on the terms of the loan. For example, how can banks reduce the default probability on a loan? The simplest answer is: don t lend the guy too much money! The point here is that the price (interest rate) and the amount borrowed are not independent. More general question: What borrower and market attributes are related to the probability of repayment? What about the recovery rate? How can the bank control this? The most important instrument that may be used is priority. Debt obligations are almost always classified by the order in which various classes of creditors get paid if the firm goes bust. The order is: Senior, secured creditor Senior unsecured creditor Junior or subordinated creditors Preferred equity holders Common equity holders Typically, banks hold a senior, secured claim. But that is not the end of the story. Loans are structured to mitigate the credit risk with so-called non-price terms: Collateral Covenants Loan maturity This raises many questions: On collateral: How valuable is the collateral? Can the bank take possession of that collateral and sell it for a high price? How many legal fees will need to be paid before the bank can get a hold of the collateral? On covenants: What if a borrower breaks a covenant? Should the bank be tough or easy? What are the costs and benefits of each strategy? People sometimes summarize qualitative aspects of credit risk and loan valuation with the five Cs of credit: 1. Character: Borrower s reputation for probity and fairness (i.e. past willingness to pay bills can be checked, and this predicts future willingness to pay back the bank.) 2. Capacity: Projected future income of the borrower. Classic measure is the current and projected interest coverage ratio (gross cash flow divided by fixed interest payments). 3. Capital: Strength of borrower s balance sheet. Classic measure is the leverage ratio. 4. Collateral: Any credit enhancement offered, including implicit and explicit guarantees. Classic example is the loan-to-value ratio for a mortgage. Good collateral can be taken away by the lender and resold without a substantial loss in value. 13 of 18

14 5. Conditions: How the business is likely to be affected by changing economic conditions such as a general economic downturn. Bottom line: A bank should always understand how it is making a profit on each loan and whether or not to hold the loan. Thus, it must be able to answer the following three questions: 1. What are the expected cash flows of this loan (i.e. what is p? what is s?)? 2. What is the required return on this loan (i.e., what is the discount rate?), which will depend both on the bank s funding costs as well as the risk of the loan itself. Combining these two steps allows a lending to determine whether or not a loan is profitable. 3. How do the risks of this deal affect the bank overall portfolio? Should the bank hold the loan or should the bank attempt to transfer the financing or the risk of the loan to a third party? These are questions about how the bank should manage its own risk, which is distinct from whether or not the loan ought to be made in the first place. 14 of 18

15 H. Risk Transfer and Loan Securitization There are three ways that banks can transfer the risk of default to others after making a loan. First, the bank may sell the loan; second, the bank may securitize the loan (or a portfolio of loans); third, the bank may purchase protection against default from a third party using a credit default swap. We will study loans sales in the second case (class 5). For the material on Credit Default Swaps, be sure to read Introduction to Credit Default Swaps, which is in the course packet. The rest of these notes focuses on securitization. Securitization involves removing an asset (or often a pool of assets) from the balance sheet of an intermediary by selling the asset to a conduit firm, known as a Special-Purpose Vehicle (SPV), that in turn pays for these assets by issuing securities (bonds) into the capital market. The SPV typically issues senior and subordinated bonds. The most junior bonds absorb all of the losses on the assets (or pool of assets); if there are more losses than can be absorbed by the most junior loans, then the next most junior bonds begin to absorb losses, etc. The six steps toward securitization: 1. Set up a legally separate trust (SPV) to serve as a conduit for cash flows; 2. Sell designated loan or pool of loans to the trust (SPV); 3. Have the trust (SPV) issue securities that represent claims to the cash flows generated from the pool of loans, and sell those securities to the public; 4. Contract with an efficient servicing organization to collect the loan payments and forward those to securities owner (this outsourcing feature is optional); 5. To improve the price received for the securities, two approaches can be taken: a. arrange for credit enhancement by the bank or another reputable third party so that the securities can be highly rated; b. strip and reassemble the cash flows from the loan pool based on either timing (as in mortgage-backed securities), or seniority (as in collateralized loan obligations). 6. Make sure a liquid secondary market exists for the securities, or convey to the purchaser the right the put (re-sell) the securities back to the bank on good terms. 15 of 18

16 Example: Here is a simple example of how loan securitization alters bank balance sheets. In this example, the bank sells $100 million in loans to the SPV, that in turn issues securities: Bank balance sheet before securitization Assets Liabilities Cash $100 Deposits $800 Loans $900 Equity $200 Sale of $100 million in loans to SPV SPV balance sheet Assets Loans $100 Liabilities Senior Bonds $80 ===> Sold to Investors Junior Bonds $15 ===> Sold to Investors Residual $5 ===> Sold back to originating bank Bank balance sheet after securitization Assets Liabilities Cash $195 Deposits $800 Loans $800 Equity $200 Residual $5 Typically, the bank that originated the assets continues to service those assets (i.e. collect payments, effect workouts if the borrower defaults, etc.). Often the originating bank will purchase the most junior class of securities issued by the SPV (i.e. the residual, as in the example above). The three classes of securities created by the SPV in the example are known as tranches, which means slice in French. In securitization, the cash flows from the original bundle of assets get re-sliced based on priority in this example, and also sometimes based on the timing of principal repayment as in mortgage-backed securities. Key Questions for discussion: Why does it make sense from an incentive point of view for the originating bank to hold the residual tranche? How has the risk of this bank changed as a result of the securitization? How would the situation change if the bank used the $95 cash proceeds from the securitization illustrated above to make new loans? 16 of 18

17 Securitization and cash flows How does securitization affect income? The basic drivers are the cash flows generated from the pool of loans that are securitized, the required yields on the securities issued by the SPV, and the losses of funds due to administrative costs and loan defaults. Inflows. Let s assume that the $100 loan portfolio in my example has an average contracted interest rate of 15% per year, and that the loans have a 5-year maturity, with $100 principal owed in 5 years. The loan portfolio provides the inflow of cash that will be used to pay returns to the bondholders and the owner of the residual (also called equity) tranche. Outflows. The loans must be collected and payments made to the holders of the securities, which costs some real resources. Let s assume that these servicing expenses are equal to 2% per year, and the expected loss is 5% per year. These are reasonable figures, for example, if the loans are credit card loans or auto loans, which are often securitized. In this example, assume that the senior bonds sold by the SPV are rated AAA, and due to their high rating the market required yield is 5%. The junior class of bonds are riskier, and are thus rated BB; assume their market yield equals 8%. In addition, assume that cash can be invested at the risk-free rate of 3%. Question: To understand the mechanics of securitization, it is useful to model the flow of payments through the SPV to the holders of securities, and how the SPV s balance sheet evolves over time. The spreadsheet securization example.xlsx (at the website) provides such an analysis. We will go through this spreadsheet in class. 17 of 18

18 Motivation for Securitization Why do banks securitize loans? There are really several reasons. 1. Risk transfer. Securitization is a mechanism to shift downside risk away from the bank and toward the owners of the AAA and BB bond holders. 2. Diversification. Banks may simultaneously securitize some loans while buying securitized assets created by other banks. Why? Imagine a medium-sized bank that specializes in mortgage lending in one part of the country. The bank, absent securitization, would be very concentrated in its real estate exposure to one region. Securitization allows that bank to hold a well-diversified portfolio of real estate loans by investing in assets securitized by other banks. Much of the financial alchemy of securitization works through diversification. Be sure to read the article by Coval, Jurek and Stafford on the course website, who discuss this issue in detail. Also, please study the spreadsheet structured example.xls at the course webs, which we will go over in class. 3. Liquidity creation. By transforming assets from illiquid loans to liquid securities, the bank is creating market liquidity. Thus, the deal can be profitable to the bank. 4. Regulatory arbitrage. This is the bad reason for securitization. In many cases banks could reduce their required regulatory capital by securitizing assets. Read Capital Standard for Banks: The Evolving Basel Accord. This article discusses the problem of regulatory arbitrage and how it has led to changes known as Basel II. Later in the course we will discuss an additional round of changes Basel III that are now being worked out in response to the 2008 Financial Crisis. Questions: What is the purpose of capital requirements? How does Basel II reduce regulatory arbitrage? What additional problems were created by Basel II? 18 of 18

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

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).

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). Boston College, MF 820 Professor Strahan Midterm Exam, Fall 2010 1. State and explain two reasons why short-maturity loans are safer (meaning lower credit risk) to the lender than long-maturity loans (10

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 9: Banking and the Management

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

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

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

Commercial paper collateralized by a pool of loans, leases, receivables, or structured credit products. Asset-backed commercial paper (ABCP)

Commercial paper collateralized by a pool of loans, leases, receivables, or structured credit products. Asset-backed commercial paper (ABCP) GLOSSARY Asset-backed commercial paper (ABCP) Asset-backed security (ABS) Asset-backed securities index (ABX) Basel II Call (put) option Carry trade Collateralized debt obligation (CDO) Collateralized

More information

Ipx!up!hfu!uif Dsfeju!zpv!Eftfswf

Ipx!up!hfu!uif Dsfeju!zpv!Eftfswf Ipx!up!hfu!uif Dsfeju!zpv!Eftfswf Credit is the lifeblood of South Louisiana business, especially for the smaller firm. It helps the small business owner get started, obtain equipment, build inventory,

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

Bond Mutual Funds. a guide to. A bond mutual fund is an investment company. that pools money from shareholders and invests

Bond Mutual Funds. a guide to. A bond mutual fund is an investment company. that pools money from shareholders and invests a guide to Bond Mutual Funds A bond mutual fund is an investment company that pools money from shareholders and invests primarily in a diversified portfolio of bonds. Table of Contents What Is a Bond?...

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

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

SAMA GENERAL DEPARTMENT OF FINANCE COMPANIES CONTROL. Prudential Returns Handbook (Finance Companies)

SAMA GENERAL DEPARTMENT OF FINANCE COMPANIES CONTROL. Prudential Returns Handbook (Finance Companies) SAMA GENERAL DEPARTMENT OF FINANCE COMPANIES CONTROL Prudential Returns Handbook (Finance Companies) 1. Introduction Submission schedule All licensed finance companies in Saudi Arabia are required to submit

More information

An index of credit default swaps referencing 20 bonds collateralized by subprime mortgages.

An index of credit default swaps referencing 20 bonds collateralized by subprime mortgages. ABX Asset-backed commercial paper (ABCP) Asset-backed security (ABS) Assets under management (AUM) Call (put) option Capital-to-risk-weighted assets ratio Carry trade Cash securitization CAT (catastrophe)

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

Accounts payable Money which you owe to an individual or business for goods or services that have been received but not yet paid for.

Accounts payable Money which you owe to an individual or business for goods or services that have been received but not yet paid for. A Account A record of a business transaction. A contract arrangement, written or unwritten, to purchase and take delivery with payment to be made later as arranged. Accounts payable Money which you owe

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

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 9 DEBT SECURITIES. by Lee M. Dunham, PhD, CFA, and Vijay Singal, PhD, CFA

CHAPTER 9 DEBT SECURITIES. by Lee M. Dunham, PhD, CFA, and Vijay Singal, PhD, CFA CHAPTER 9 DEBT SECURITIES by Lee M. Dunham, PhD, CFA, and Vijay Singal, PhD, CFA LEARNING OUTCOMES After completing this chapter, you should be able to do the following: a Identify issuers of debt securities;

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

CHAPTER 22: FUTURES MARKETS

CHAPTER 22: FUTURES MARKETS CHAPTER 22: FUTURES MARKETS PROBLEM SETS 1. There is little hedging or speculative demand for cement futures, since cement prices are fairly stable and predictable. The trading activity necessary to support

More information

Markets, Investments, and Financial Management FIFTEENTH EDITION

Markets, Investments, and Financial Management FIFTEENTH EDITION INTRODUCTION TO FINANCE Markets, Investments, and Financial Management FIFTEENTH EDITION Ronald W. Melicher Professor of Finance University of Colorado at Boulder Edgar A. Norton Professor of Finance Illinois

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

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

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

Capital Adequacy: Asset Risk Charge

Capital Adequacy: Asset Risk Charge Prudential Standard LPS 114 Capital Adequacy: Asset Risk Charge Objective and key requirements of this Prudential Standard This Prudential Standard requires a life company to maintain adequate capital

More information

Diane Delelis 21.10.2011. Securitization. Finance (Basics) Luděk Benada

Diane Delelis 21.10.2011. Securitization. Finance (Basics) Luděk Benada Diane Delelis 21.10.2011 Securitization Finance (Basics) Luděk Benada Index Introduction... 3 I. Detailed presentation...3 II. Vocabulary of securitization...4 III. An example...5 IV. Advantages...6 1.

More information

Solutions for End-of-Chapter Questions and Problems

Solutions for End-of-Chapter Questions and Problems Solutions for End-of-Chapter Questions and Problems 1. What are the differences between community banks, regional banks, and money-center banks? Contrast the business activities, location, and markets

More information

Introduction to Money & Banking Lecture notes 2010 Matti Estola

Introduction to Money & Banking Lecture notes 2010 Matti Estola Introduction to Money & Banking Lecture notes 2010 Matti Estola Literature Henderson & Poole: Principles of Economics, Mishkin: The Economics of Money, Banking, and Financial Markets, Extra material given

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 DICTIONARY

INVESTMENT DICTIONARY INVESTMENT DICTIONARY Annual Report An annual report is a document that offers information about the company s activities and operations and contains financial details, cash flow statement, profit and

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

Copyright 2009 Pearson Education Canada

Copyright 2009 Pearson Education Canada The consequence of failing to adjust the discount rate for the risk implicit in projects is that the firm will accept high-risk projects, which usually have higher IRR due to their high-risk nature, and

More information

Chapter 6 Interest rates and Bond Valuation. 2012 Pearson Prentice Hall. All rights reserved. 4-1

Chapter 6 Interest rates and Bond Valuation. 2012 Pearson Prentice Hall. All rights reserved. 4-1 Chapter 6 Interest rates and Bond Valuation 2012 Pearson Prentice Hall. All rights reserved. 4-1 Interest Rates and Required Returns: Interest Rate Fundamentals The interest rate is usually applied to

More information

Topics in Chapter. Key features of bonds Bond valuation Measuring yield Assessing risk

Topics in Chapter. Key features of bonds Bond valuation Measuring yield Assessing risk Bond Valuation 1 Topics in Chapter Key features of bonds Bond valuation Measuring yield Assessing risk 2 Determinants of Intrinsic Value: The Cost of Debt Net operating profit after taxes Free cash flow

More information

NHMFC S HOUSING LOAN RECEIVABLES PURCHASE PROGRAM (HLRPP) Presentation to the 20 TH CREBA National Convention 6-7October, 2011 Marriot Hotel, Manila

NHMFC S HOUSING LOAN RECEIVABLES PURCHASE PROGRAM (HLRPP) Presentation to the 20 TH CREBA National Convention 6-7October, 2011 Marriot Hotel, Manila NHMFC S HOUSING LOAN RECEIVABLES PURCHASE PROGRAM (HLRPP) Presentation to the 20 TH CREBA National Convention 6-7October, 2011 Marriot Hotel, Manila ITEMS FOR DISCUSSION NHMFC CHARTER AND MANDATE A SHORT

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

The Effects of Funding Costs and Risk on Banks Lending Rates

The Effects of Funding Costs and Risk on Banks Lending Rates The Effects of Funding Costs and Risk on Banks Lending Rates Daniel Fabbro and Mark Hack* After falling for over a decade, the major banks net interest margins appear to have stabilised in a relatively

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

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

Balanced fund: A mutual fund with a mix of stocks and bonds. It offers safety of principal, regular income and modest growth.

Balanced fund: A mutual fund with a mix of stocks and bonds. It offers safety of principal, regular income and modest growth. Wealth for Life Glossary Aggressive growth fund: A mutual fund that aims for the highest capital gains. They often invest in smaller emerging companies that offer maximum growth potential. Adjustable Rate

More information

ASPE AT A GLANCE Section 3856 Financial Instruments

ASPE AT A GLANCE Section 3856 Financial Instruments ASPE AT A GLANCE Section 3856 Financial Instruments December 2014 Section 3856 Financial Instruments Effective Date Fiscal years beginning on or after January 1, 2011 1 SCOPE Applies to all financial instruments

More information

3/22/2010. Chapter 11. Eight Categories of Bank Regulation. Economic Analysis of. Regulation Lecture 1. Asymmetric Information and Bank Regulation

3/22/2010. Chapter 11. Eight Categories of Bank Regulation. Economic Analysis of. Regulation Lecture 1. Asymmetric Information and Bank Regulation Chapter 11 Economic Analysis of Banking Regulation Lecture 1 Asymmetric Information and Bank Regulation Adverse Selection and Moral Hazard are the two concepts that underlie government regulation of the

More information

3. How does a spot loan differ from a loan commitment? What are the advantages and disadvantages of borrowing through a loan commitment?

3. How does a spot loan differ from a loan commitment? What are the advantages and disadvantages of borrowing through a loan commitment? Solutions for End-of-Chapter Questions and Problems 1. Why is credit risk analysis an important component of FI risk management? What recent activities by FIs have made the task of credit risk assessment

More information

READING 1. The Money Market. Timothy Q. Cook and Robert K. LaRoche

READING 1. The Money Market. Timothy Q. Cook and Robert K. LaRoche READING 1 The Money Market Timothy Q. Cook and Robert K. LaRoche The major purpose of financial markets is to transfer funds from lenders to borrowers. Financial market participants commonly distinguish

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

4. The minimum amount of owners' equity in a bank mandated by regulators is called a requirement. A) reserve B) margin C) liquidity D) capital

4. The minimum amount of owners' equity in a bank mandated by regulators is called a requirement. A) reserve B) margin C) liquidity D) capital Chapter 4 - Sample Questions 1. Quantitative easing is most closely akin to: A) discount lending. B) open-market operations. C) fractional-reserve banking. D) capital requirements. 2. Money market mutual

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

account statement a record of transactions in an account at a financial institution, usually provided each month

account statement a record of transactions in an account at a financial institution, usually provided each month GLOSSARY GLOSSARY Following are definitions for key words as they are used in the financial life skills resource. They may have different or additional meanings in other contexts. A account an arrangement

More information

Business Studies - Financial Planning and Management Study Notes. Financial Planning and Management Study Notes:

Business Studies - Financial Planning and Management Study Notes. Financial Planning and Management Study Notes: Business Studies - Financial Planning and Management Study Notes Financial Planning and Management Study Notes: The Role of Financial Planning: The strategic role of financial management: Organisational

More information

Diversify Your Portfolio with Senior Loans

Diversify Your Portfolio with Senior Loans January 2013 Diversify Your Portfolio with Senior Loans White Paper INVESTMENT MANAGEMENT For financial professional or qualified institutional investor use only. Not for inspection by, distribution or

More information

Web. Chapter FINANCIAL INSTITUTIONS AND MARKETS

Web. Chapter FINANCIAL INSTITUTIONS AND MARKETS FINANCIAL INSTITUTIONS AND MARKETS T Chapter Summary Chapter Web he Web Chapter provides an overview of the various financial institutions and markets that serve managers of firms and investors who invest

More information

Chapter 14: Savings and Investing Savings and Investing

Chapter 14: Savings and Investing Savings and Investing Savings and Investing Consumers can use any money left over from purchasing goods and services toward savings or investing. Saving means putting money aside for future use. Investing is using savings to

More information

SSAP 24 STATEMENT OF STANDARD ACCOUNTING PRACTICE 24 ACCOUNTING FOR INVESTMENTS IN SECURITIES

SSAP 24 STATEMENT OF STANDARD ACCOUNTING PRACTICE 24 ACCOUNTING FOR INVESTMENTS IN SECURITIES SSAP 24 STATEMENT OF STANDARD ACCOUNTING PRACTICE 24 ACCOUNTING FOR INVESTMENTS IN SECURITIES (Issued April 1999) The standards, which have been set in bold italic type, should be read in the context of

More information

Diversify Your Portfolio with Senior Loans

Diversify Your Portfolio with Senior Loans Diversify Your Portfolio with Senior Loans White Paper April 2015 Not FDIC Insured May Lose Value No Bank Guarantee For financial professional or use qualified only. Not institutional for inspection investor

More information

t = 1 2 3 1. Calculate the implied interest rates and graph the term structure of interest rates. t = 1 2 3 X t = 100 100 100 t = 1 2 3

t = 1 2 3 1. Calculate the implied interest rates and graph the term structure of interest rates. t = 1 2 3 X t = 100 100 100 t = 1 2 3 MØA 155 PROBLEM SET: Summarizing Exercise 1. Present Value [3] You are given the following prices P t today for receiving risk free payments t periods from now. t = 1 2 3 P t = 0.95 0.9 0.85 1. Calculate

More information

GOLDMAN SACHS BANK USA AND SUBSIDIARIES

GOLDMAN SACHS BANK USA AND SUBSIDIARIES Consolidated Financial Statements As of and for the years ended December 31, 2013 and December 31, 2012 Independent Auditor s Report To the Board of Directors and Shareholder of Goldman Sachs Bank USA:

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

i T-bill (dy) = $10,000 - $9,765 360 = 6.768% $10,000 125

i T-bill (dy) = $10,000 - $9,765 360 = 6.768% $10,000 125 Answers to Chapter 5 Questions 1. First, money market instruments are generally sold in large denominations (often in units of $1 million to $10 million). Most money market participants want or need to

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

a. If the risk premium for a given customer is 2.5 percent, what is the simple promised interest return on the loan?

a. If the risk premium for a given customer is 2.5 percent, what is the simple promised interest return on the loan? Selected Questions and Exercises Chapter 11 2. Differentiate between a secured and an unsecured loan. Who bears most of the risk in a fixed-rate loan? Why would bankers prefer to charge floating rates,

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

Understanding Financial Statements. For Your Business

Understanding Financial Statements. For Your Business Understanding Financial Statements For Your Business Disclaimer The information provided is for informational purposes only, does not constitute legal advice or create an attorney-client relationship,

More information

Measuring Financial Performance: A Critical Key to Managing Risk

Measuring Financial Performance: A Critical Key to Managing Risk Measuring Financial Performance: A Critical Key to Managing Risk Dr. Laurence M. Crane Director of Education and Training National Crop Insurance Services, Inc. The essence of managing risk is making good

More information

GOLDMAN SACHS BANK USA AND SUBSDIARIES

GOLDMAN SACHS BANK USA AND SUBSDIARIES GOLDMAN SACHS BANK USA AND SUBSDIARIES Consolidated Financial Statements As of and for the years ended December 31, 2014 and December 31, 2013 Financial Statements INDEX Page No. Consolidated Financial

More information

Guide to Financial Statements Study Guide

Guide to Financial Statements Study Guide Guide to Financial Statements Study Guide Overview (Topic 1) Three major financial statements: The Income Statement The Balance Sheet The Cash Flow Statement Objectives: Explain the underlying equation

More information

Recourse vs. Nonrecourse: Commercial Real Estate Financing Which One is Right for You?

Recourse vs. Nonrecourse: Commercial Real Estate Financing Which One is Right for You? Recourse vs. Nonrecourse: Commercial Real Estate Financing Which One is Right for You? Prepared by Bill White Director of Commercial Real Estate Lending In this white paper 1 Commercial real estate lenders

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

Sankaty Advisors, LLC

Sankaty Advisors, LLC Leveraged Loans: A Primer December 2012 In today s market environment of low rates and slow growth, we believe that leveraged loans offer a unique diversification option for fixed income portfolios due

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

Review for Exam 1. Instructions: Please read carefully

Review for Exam 1. Instructions: Please read carefully Review for Exam 1 Instructions: Please read carefully The exam will have 21 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation

More information

9. Short-Term Liquidity Analysis. Operating Cash Conversion Cycle

9. Short-Term Liquidity Analysis. Operating Cash Conversion Cycle 9. Short-Term Liquidity Analysis. Operating Cash Conversion Cycle 9.1 Current Assets and 9.1.1 Cash A firm should maintain as little cash as possible, because cash is a nonproductive asset. It earns no

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

Basel Committee on Banking Supervision. Frequently Asked Questions on Basel III s January 2013 Liquidity Coverage Ratio framework

Basel Committee on Banking Supervision. Frequently Asked Questions on Basel III s January 2013 Liquidity Coverage Ratio framework Basel Committee on Banking Supervision Frequently Asked Questions on Basel III s January 2013 Liquidity Coverage Ratio framework April 2014 This publication is available on the BIS website (www.bis.org).

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

ACCOUNTING III Cash Flow Statement & Linking the 3 Financial Statements. Fall 2015 Comp Week 5

ACCOUNTING III Cash Flow Statement & Linking the 3 Financial Statements. Fall 2015 Comp Week 5 ACCOUNTING III Cash Flow Statement & Linking the 3 Financial Statements Fall 2015 Comp Week 5 CODE: CA$H Administrative Stuff Send an email to trentnelson@college.harvard.edu if you have not been added

More information

CANADIAN TIRE BANK. BASEL PILLAR 3 DISCLOSURES December 31, 2014 (unaudited)

CANADIAN TIRE BANK. BASEL PILLAR 3 DISCLOSURES December 31, 2014 (unaudited) (unaudited) 1. SCOPE OF APPLICATION Basis of preparation This document represents the Basel Pillar 3 disclosures for Canadian Tire Bank ( the Bank ) and is unaudited. The Basel Pillar 3 disclosures included

More information

Current liabilities - Obligations that are due within one year. Obligations due beyond that period of time are classified as long-term liabilities.

Current liabilities - Obligations that are due within one year. Obligations due beyond that period of time are classified as long-term liabilities. Accounting Fundamentals Lesson 8 8.0 Liabilities Current liabilities - Obligations that are due within one year. Obligations due beyond that period of time are classified as long-term liabilities. Current

More information

SOME NOTES ON WHAT CAN BE LEARNED BY OTHER COUNTRIES FROM AMERICAN SECONDARY MORTGAGE MARKETS. By Robert Van Order

SOME NOTES ON WHAT CAN BE LEARNED BY OTHER COUNTRIES FROM AMERICAN SECONDARY MORTGAGE MARKETS. By Robert Van Order SOME NOTES ON WHAT CAN BE LEARNED BY OTHER COUNTRIES FROM AMERICAN SECONDARY MORTGAGE MARKETS By Robert Van Order Mortgage securitization has worked reasonably well in the United States; it has allowed

More information

ZAG BANK BASEL II & III PILLAR 3 DISCLOSURES. December 31, 2014

ZAG BANK BASEL II & III PILLAR 3 DISCLOSURES. December 31, 2014 ZAG BANK BASEL II & III PILLAR 3 DISCLOSURES December 31, 2014 Zag Bank (the Bank ) is required to make certain disclosures to meet the requirements of the Office of the Superintendent of Financial Institutions

More information

Chapter 3 Fixed Income Securities

Chapter 3 Fixed Income Securities Chapter 3 Fixed Income Securities Road Map Part A Introduction to finance. Part B Valuation of assets, given discount rates. Fixed-income securities. Stocks. Real assets (capital budgeting). Part C Determination

More information

http://angel.bfwpub.com/section/content/default.asp?wci=pgt...

http://angel.bfwpub.com/section/content/default.asp?wci=pgt... Hmwk 14 1. Let's find out what counts as money. In this chapter, we used a typical definition of money: A widely accepted means of payment. Under this definition, which people are using money in the following

More information

Interest Rates and Bond Valuation

Interest Rates and Bond Valuation Interest Rates and Bond Valuation Chapter 6 Key Concepts and Skills Know the important bond features and bond types Understand bond values and why they fluctuate Understand bond ratings and what they mean

More information

Understanding Leverage in Closed-End Funds

Understanding Leverage in Closed-End Funds Closed-End Funds Understanding Leverage in Closed-End Funds The concept of leverage seems simple: borrowing money at a low cost and using it to seek higher returns on an investment. Leverage as it applies

More information

Contribution 787 1,368 1,813 983. Taxable cash flow 682 1,253 1,688 858 Tax liabilities (205) (376) (506) (257)

Contribution 787 1,368 1,813 983. Taxable cash flow 682 1,253 1,688 858 Tax liabilities (205) (376) (506) (257) Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2012 Answers 1 (a) Calculation of net present value (NPV) As nominal after-tax cash flows are to be discounted, the nominal

More information

International Monetary Policy

International Monetary Policy International Monetary Policy 2 Preliminary concepts 1 Michele Piffer London School of Economics 1 Course prepared for the Shanghai Normal University, College of Finance, April 2011 Michele Piffer (London

More information

11.437 Financing Community Economic Development Class 6: Fixed Asset Financing

11.437 Financing Community Economic Development Class 6: Fixed Asset Financing 11.437 Financing Community Economic Development Class 6: Fixed Asset Financing I. Purpose of asset financing Fixed asset financing refers to the financing for real estate and equipment needs of a business.

More information

ADVISORSHARES TRUST. AdvisorShares Pacific Asset Enhanced Floating Rate ETF NYSE Arca Ticker: FLRT

ADVISORSHARES TRUST. AdvisorShares Pacific Asset Enhanced Floating Rate ETF NYSE Arca Ticker: FLRT ADVISORSHARES TRUST AdvisorShares Pacific Asset Enhanced Floating Rate ETF NYSE Arca Ticker: FLRT Supplement dated February 26, 2016 to the Summary Prospectus, Prospectus, and Statement of Additional Information

More information

Answers to Concepts in Review

Answers to Concepts in Review Answers to Concepts in Review 1. An investment is any asset into which funds can be placed with the expectation of preserving or increasing value and earning a positive rate of return. An investment can

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

RISK FACTORS AND RISK MANAGEMENT

RISK FACTORS AND RISK MANAGEMENT Bangkok Bank Public Company Limited 044 RISK FACTORS AND RISK MANAGEMENT Bangkok Bank recognizes that effective risk management is fundamental to good banking practice. Accordingly, the Bank has established

More information

Commercial paper collateralized by a pool of loans, leases, receivables, or structured credit products.

Commercial paper collateralized by a pool of loans, leases, receivables, or structured credit products. Asset-backed commercial paper (ABCP) Asset-backed security (ABS) Asset-backed securities index (ABX) Auction rate security Basel II Call (put) option Carry trade Commercial paper collateralized by a pool

More information

GUIDE TO THE SURVEY FINANCIAL BALANCE STATISTICS

GUIDE TO THE SURVEY FINANCIAL BALANCE STATISTICS 1(16) GUIDE TO THE SURVEY FINANCIAL BALANCE STATISTICS 1 GENERAL INFORMATION... 3 2 DEFINITION OF DATA... 3 2.1 Positions... 3 2.2... 3 2.3... 4 3 DEFINITION OF VARIABLES... 4 3.1 Financial assets... 4

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

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

Investing Offers Rewards And Poses Risks. Investment Basics: The Power of Compounding. How Do Americans Invest Their Savings? (HA)

Investing Offers Rewards And Poses Risks. Investment Basics: The Power of Compounding. How Do Americans Invest Their Savings? (HA) How Do Americans Invest Their Savings? (HA) Learning how to save money for future use is an important first step in reaching your long-term goals. But saving alone is not enough. You will also need to

More information

Understanding A Firm s Financial Statements

Understanding A Firm s Financial Statements CHAPTER OUTLINE Spotlight: J&S Construction Company (http://www.jsconstruction.com) 1 The Lemonade Kids Financial statement (accounting statements) reports of a firm s financial performance and resources,

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

J. Gaspar: Adapted from Jeff Madura International Financial Management

J. Gaspar: Adapted from Jeff Madura International Financial Management Chapter3 International Financial Markets J. Gaspar: Adapted from Jeff Madura International Financial Management 3-1 International Financial Markets Can be segmented as follows: 1.The Foreign Exchange Market

More information