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We examine how financial institutions manage credit risk, default risk, etc. We explore the tools available to managers to measure these risks and strategies to reduce them. Topics include:
Managing Credit Risk Managing Interest-Rate Risk
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or
lenders will only finance part of a project, requiring that the remaining part come from equity financing.
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Income Gap Analysis: Determining Rate Sensitive Items for First National Bank
Assets
assets with maturity less than one year variable-rate mortgages short-term commercial loans portion of fixed-rate mortgages (say 20%)
Liabilities
money market deposits variable-rate CDs short-term CDs federal funds short-term borrowings portion of checkable deposits (10%) portion of savings (20%)
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Income Gap Analysis: Determining Rate Sensitive Items for First National Bank
Rate-Sensitive Assets = $5m + $ 10m + $15m + 20% $20m = $5m + $25m + $5m + $10m + 10% $15m + 20% $15m RSL = $49.5m if i 5% Asset Income Liability Costs Income = +5% $32.0m = +5% $49.5m = $1.6m $ 2.5 = +$ 1.6m = +$ 2.5m = $ 0.9m
Estimate of % of checkable deposits and savings accounts that will experience rate change
RSA = $32m
Rate-Sensitive Liabs
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The concept of duration, which first appeared in chapter 3, plays a role here.
2012 Pearson Prentice Hall. All rights reserved.
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or:
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Net Worth:
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Chapter Summary
Managing Credit Risk: basic techniques for managing relationships and rationing credit were reviewed. Managing Interest-Rate Risk: the essential techniques of measuring interest-rate risk for both income and capital affects were presented.
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