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1、Chap007金融机构管理课后题答案精品文档Chapter SevenRisks of Financial IntermediationChapter OutlineIntroductionInterest Rate RiskMarket RiskCredit RiskOff-Balance-Sheet RiskTechnology and Operational RiskForeign Exchange RiskCountry or Sovereign RiskLiquidity RiskInsolvency RiskOther Risks and the Interaction of Ri
2、sksSummarySolutions for End-of-Chapter Questions and Problems: Chapter Seven1. What is the process of asset transformation performed by a financial institution? Why does this process often lead to the creation of interest rate risk? What is interest rate risk?Asset transformation by an FI involves p
3、urchasing primary assets and issuing secondary assets as a source of funds. The primary securities purchased by the FI often have maturity and liquidity characteristics that are different from the secondary securities issued by the FI. For example, a bank buys medium- to long-term bonds and makes me
4、dium-term loans with funds raised by issuing short-term deposits. Interest rate risk occurs because the prices and reinvestment income characteristics of long-term assets react differently to changes in market interest rates than the prices and interest expense characteristics of short-term deposits
5、. Interest rate risk is the effect on prices (value) and interim cash flows (interest coupon payment) caused by changes in the level of interest rates during the life of the financial asset.2. What is refinancing risk? How is refinancing risk part of interest rate risk? If an FI funds long-term fixe
6、d-rate assets with short-term liabilities, what will be the impact on earnings of an increase in the rate of interest? A decrease in the rate of interest?Refinancing risk is the uncertainty of the cost of a new source of funds that are being used to finance a long-term fixed-rate asset. This risk oc
7、curs when an FI is holding assets with maturities greater than the maturities of its liabilities. For example, if a bank has a ten-year fixed-rate loan funded by a 2-year time deposit, the bank faces a risk of borrowing new deposits, or refinancing, at a higher rate in two years. Thus, interest rate
8、 increases would reduce net interest income. The bank would benefit if the rates fall as the cost of renewing the deposits would decrease, while the earning rate on the assets would not change. In this case, net interest income would increase.3. What is reinvestment risk? How is reinvestment risk pa
9、rt of interest rate risk? If an FI funds short-term assets with long-term liabilities, what will be the impact on earnings of a decrease in the rate of interest? An increase in the rate of interest?Reinvestment risk is the uncertainty of the earning rate on the redeployment of assets that have matur
10、ed. This risk occurs when an FI holds assets with maturities that are less than the maturities of its liabilities. For example, if a bank has a two-year loan funded by a ten-year fixed-rate time deposit, the bank faces the risk that it might be forced to lend or reinvest the money at lower rates aft
11、er two years, perhaps even below the deposit rates. Also, if the bank receives periodic cash flows, such as coupon payments from a bond or monthly payments on a loan, these periodic cash flows will also be reinvested at the new lower (or higher) interest rates. Besides the effect on the income state
12、ment, this reinvestment risk may cause the realized yields on the assets to differ from the a priori expected yields.4.The sales literature of a mutual fund claims that the fund has no risk exposure since it invests exclusively in federal government securities that are free of default risk. Is this
13、claim true? Explain why or why not.Although the funds asset portfolio is comprised of securities with no default risk, the securities remain exposed to interest rate risk. For example, if interest rates increase, the market value of the funds Treasury security portfolio will decrease. Further, if in
14、terest rates decrease, the realized yield on these securities will be less than the expected rate of return because of reinvestment risk. In either case, investors who liquidate their positions in the fund may sell at a Net Asset Value (NAV) that is lower than the purchase price. 5.What is economic
15、or market value risk? In what manner is this risk adversely realized in the economic performance of an FI?Economic value risk is the exposure to a change in the underlying value of an asset. As interest rates increase (or decrease), the value of fixed-rate assets decreases (or increases) because of
16、the discounted present value of the cash flows. To the extent that the change in market value of the assets differs from the change in market value of the liabilities, the difference is realized in the market value of the equity of the FI. For example, for most depository FIs, an increase in interest rates will cause asset values to decrease more tha
