Exam (elaborations)
ECN 460 Exam 2 Questions And Answers Latest Update
- Course
- ECN 460
- Institution
- Arizona State University
ECN 460 Exam 2 Questions And Answers Latest Update
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Solution 2024/2025Pepper
ECN 460 Exam 2 Questions And Answers Latest
Update
What is asset transformation? ANS✔✔ use of short-term liabilities like
deposits to make long-term loans (assets); borrowing short and lending
long; selling liabilities with one set of characteristics and using the proceeds
to buy assets w/ a different set of characteristics (ALM - Asset Liability
Management)
List the 6 primary concerns of a bank manager (balance sheet management
basics)? ANS✔✔ asset management, liquidity management, liability
management, capital adequacy management, interest rate risk
management, credit risk management
asset management ANS✔✔ seek highest possible return on all assets
subject to minimizing risks
interest rate risk management ANS✔✔ managing interest rate risk with gap
and duration analyses on the susceptibility of assets to interest rate
changes
credit risk management ANS✔✔ lowering credit risk w/ tools to mitigate
asymmetric information
liquidity management ANS✔✔ making adequate provisions for liquidity
, Solution 2024/2025
Pepper
liability management ANS✔✔ low cost methods to attract and maintain
liabilities
capital adequacy management ANS✔✔ maintain adequate capital to
cushion losses, for emergencies, regulatory requirements, and just enough
not to lower return to equity holders
required reserves ANS✔✔ reserves that a bank is legally required to hold,
based on its checking account deposits set by the FED
excess reserves ANS✔✔ reserves greater than the required amounts
nontransaction deposits ANS✔✔ Primary source of bank funds ex. savings
accounts
discount loans ANS✔✔ loans the federal reserve makes to banks
Fed funds loans ANS✔✔ loans from other banks with a rate set by the Fed
3 goals and 4 tools of asset management ANS✔✔ Highest possible return
(tool 1: attract borrowers who will pay high interest rates w low default
rates; tool 2: purchase securities w high returns and low risk) reduce risk
(tool 3: diversify asset base w combos of short and long-term products)
maintain adequate liquidity (tool 4: balance the need for liquidity against
increased returns from less liquid assets w/o incurring huge costs)
asset management measures ANS✔✔ Return on assets (basic measure of
bank profitability; = net profit after taxes/assets) and risk weighted assets
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