Banc One use following investment to manage interest rate exposure.
In the early 1980s, Esty, Tufano and Headley (1998) mentioned thatit managed its exposure to interest rate risk by adding balancing assets to its investment portfolio until it felt it had enough fixed-rate investments to offset its fixed-rate liabilities.
In 1983, Banc one began to use interest rate swaps to manage interest rate exposure. Swaps would be discussed in the later paragraphs.
In 1986, Mortgage-Backed Securities(MBSs) was introduced. About this, Esty, Tufano and Headley (1998) described that “Banc One replaced many of its municipal investments with MBSs, which were fixed-income investments whose payment stream was backed by pools of mortgage loans and which were
Soonly after that, Banc One realized that swaps could also be used as an alternative for some of its conventional fixed-rate investments. Thus from 1983, Banc one began to use interest rate swaps to manage interest rate exposure. Banc One had more long term fixed rate liabilities than long term fixed rate assets and swaps could help in increasing their inflows of fixed rate when inflows of floating rate decreases and achieving perfectly match in their asset and liability. Therefore, mo matter increasing or decreasing in interest rate would result in a equal effect and offset each other’s impact on balance sheet. The benefits of using swaps as a kind of synthetic investment over conventional
However, the comparable CMO could receive 100 basis points over Treasuries. Because the AIRS is a kind of synthetic CMO, why the yield rate is higher than the CMO? The reason is that the price of the CMO is related to long-term interest rate. The volatility of the AIRS is bigger than the CMO, so the yield rate of return is higher. the requirement of the policy claimed that the earnings could not change more than 5% and the Banc One has to adjust the bank’s earnings sensitivity.Because the Banc One was more asset sensitive than the policy would permit.The Banc One would add AIRS to help move the bank to a liability-sensitive position. To illustrate in more detail, if the interest rate rises, the floating-rate payment will reduce the earnings producing liability sensitivity. At the same time, for the greater earnings , the Banc needs more swaps.From the Exhibit 4,with the amount of swaps such as the AIRS increasing, the earning sensitivity is
The Corporation’s objective is to minimize its exposure to credit risk from customers in order to prevent losses on financial assets by performing regular monitoring of overdue balances and to provide allowance for potentially uncollectible accounts receivable. The Corporation has also insured a portion of its outstanding accounts receivable with Export Development Canada.
...nt interest. The company wanted to invest extra mortgage-backed securities with $100 million and get 7 percent interest. Then the company borrows a short term loan for $100 million at 4 percent interest. The leverage of company is $10 in a debt for every $1 of equity. The return on equity would be 3.7million on equity of $10million. Hence, investor was willing to obtain short term loan in the bank while they would be given a higher premium. Diamond and Rajan (2009) suggest that the short term debt is seemed like cheaper compared to the future illiquidity’s cost and the long term capital. Therefore, heavy short term leverage market becomes more common in the market of bank capital structure. While the risk-averse banker is unlikely bear the excessive risk, the illiquidity’s costs would be more salient. This had enforced the market into a heavy capital structure.
Even though most of us may not realized it, interest rate actually play an important role in our everyday lives due to its great effect on the buying power. For instances, if the interest rate is higher, people tend to reduce their spending and rather save it in the deposit account due to the large interest that they can gained. However, if the interest rate is lower, they rather spend it than keeping it in the deposit account. The reason for this is because the ups and down of the interest rates have a significant impact on their personal income. Furthermore, since interest rate have a major impact on investment it is important for the investors to keep track on these interest rate’s trend before making any decision.
【b】Frederics S, Mishikin and Apostolos Serletis. "Chapter 13: Banking and the Management of Financial Institutions " The economics of money, banking and financial market. 5th Canadian. Pearson, 306. Print.
The implications of these findings are as follows. The works of these academics highlight the important point that there is higher volatility of capital charges for better quality credits (Goodhart & Taylor, 2004). This is because these credits face a steeper risk curve, as the movement within the ratings scale (from one rating to another) is much greater.
Ross, S.A., Westerfield, R.W., Jaffe, J. and Jordan, B.D., 2008. Modern Financial Management: International Student Edition. 8th Edition. New York: McGraw-Hill Companies.
The horizontal analysis shows that IQ’s total current assets increased by 25% and its total current liabilities increased by 40% during 2005. This is largely explained by the increase in trade receivables, the increase in inventory, the increase in trades payable, and the increase in term loans (notes 5, 6, 12, and 13 of the 2005 financial statement). The higher increase in total current liabilities than in total current assets explains why the current and acid-test ratios decreased from 4.66 to 4.17 and from 4.02 to 3.5, respectively. However, IQ seems to remain highly liquid considering the values of the mentioned liquidity ratios.
Credit rating agencies take a wide range of factors – debt raising purpose, industry outlook, corporate profile and financial measures into account when performing corporate bond rating service. Debt is raised to repurchase shares rather than the normal case of capturing expansion opportunities to strengthen cash flow. This is not going to be regarded favorable to debt holders since the debt coverage ability in terms of cash or collateral is not strengthened. UST is characterized positively by commanding market share position in the moist smokeless tobacco market, strong brand name recognition, premium product offering, pricing flexibility; negatively by lack of geographical and product diversification, market share erosion, lackluster non-core investment performance, and recent key executive reshuffle and anti-trust dispute with Conwood Co.. Besides its cash generative nature, smokeless tobacco market still is faced with legal challenges (legislation, litigation, marketing ban), slowing down growth and possibility of future health research negatively influencing customer behavior. Financial measures will be conducted in the form of pro-form income statement, key data and...
...t the overall WACC. It will change the risk premium expected by equity holders. Less debt equates to a lower risk premium versus greater debt.
This pronouncement required the deferral method of accounting for income taxes. When the accounting net income exceeded taxable net income, balancing credit should be recognized, when the taxable net income exceeded the accounting, a balancing debit should be recognized. This was considered a deferred credit and a deferred debit. Deferred charges and credits were default classification and were placed on the Balance Sheet in what was called "no man's land," or some undefined region, between liabilities and owner's equity for deferred credits and between assets and liabilities for deferred charges. Under APB Opinion #11 it was believed that the balancing credits and debits would eventually reverse and cancel out and therefore it was to be treated as a temporary measure.
...ence of Capital Measurement and Capital Standards’, Basle Committee on Banking Supervision, vol.1, no.1, p1-28.
This paper will encourage readers to learn more about Bank of America, the second largest in the world and is the fastest growing business in America, the investments that the bank has to offer is up to standards. Its revenue is one of the highest in the country, the headquarters is in Charlotte, NC, with dates of starting as back as far as the 1900’s. Also, people may not realize that Merrill Lynch is part of Bank of America, the bank is also with the NYSE. The company has expanded and grown over these years, and are still improving their services to continue with the work that is offered for individuals, corporations, international operations as well as the investment managements.
Standard Chartered Bank support flexible working hours. It is because energy efficiency and productivity can be increased by flexible working hours and it usually cause the higher employee morale and enthusiasm. But managing an employee who has a flexible working hours can be challenging according to the finding part above. First of all, Standard Chartered Bank should analysing the advantage and costs of the flex time program to decide whether flex time is viable for your business. If it is viable, evaluate the type of flex time and planning a best and suitable plan for your business. Second, determine which level of employee are most conducive to flex time program, and document the reasons to prove that they determine with
In this case study it was stated that there were a problem happen in the outsourcing for the Royal Bank of Scotland. What happen was there were an error that happen during the routine software upgrade that cause million of that bank customer cant access to their account. The error happen when one junior technician in India was accidently wiped all the information during the routine software upgrade. The member of staff that was working under the program for the Royal Bank of Scotland, NatWest and Ulster Bank and it was based in Hyderabad, India.
Functions performed by financial intermediaries can be categorized into three functions; (1) maturity transformation, (2) risk transformation, and (3) convenience denomination. With maturity transformations, intermediaries convert short-term liabilities to long term assets. This conversion is common with banks and other institutions that provide liquidity for entrepreneurs, giving a short term debt a match with a long term loan. Rather than constantly evaluating short term loan options and rolling over the debt balance, a longer term commitment is able to be made that locks in a lower rate to benefit all parties. Additionally, intermediaries can provide risk transformation, which offer the ability to convert risky investments into relatively risk-free by lending to multiple borrowers to spread the risk. By pooling the funds of multiple investors, the intermediary – such as a mutual fund – inherently provides diversification and tolerance against a single investment producing undesirable results. Finally, convenience denomination is provided by an intermediary. With a large quantity of deposits being held at a financial intermediary, they are able to match small deposits with large loans, and larger deposit...