UA FI 301 - Final Exam Study Guide (3 pages)

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Final Exam Study Guide



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F1 301 1st Edition Final Exam Study Guide Chapter 17 Demand of positive checking account what makes now checking account and money market checking accounts different from a normal checking account Some have minimum balances and you earn interest on them MMA Savings vs checking account you can write checks on checking account and you earn interest on savings account largest provider of funds for banks households sources of funds and uses of funds in banks working capital loan business operations term loan get a loan for anything such as a car or a house for a specified duration balloon notes are term loans balloon loan on real estate they will refinance after 3 5 or 7 years at end of term why do banks make consumer loan and issue credit cards to make higher returns want to diverse investments treasuries safer and provides liquidity Banks do not invest in stocks Bonds treasuries mortgage backed securities whats been happening to banks over past 15 years forming financial conglomerates larger in size smaller in quantity size they combined services such as buying insurance through them and invest with them Chapter 19 bank risk CHART liquidity risk dont have the money or cash to pay their interest they keep this cash in a vault and the federal reserve banks What causes this risk in banks is people withdrawing money which is called a bank run If they are making too many loans and they need to get more money They are most likely going to borrow money from another bank if this happens Low rate called called federal funds rate Securitization selling off of loans specifically mortgages A mortgage is a loan on real estate Can buy treasuries to solve this or minimum balance checking accounts Interest rate risk risk of fluctuating interest rates Risk of rising interest rates is worse they may not be able to pay their liabilities risk of falling rates are pre payment risk this means the banks make less interest Loans are very risky for them GAP formulas net interest margin big number for bank its their spread profit margin know how to do this 3 math problems on test Hedging hedging with futures swaps options derivatives bet opposite way of interest rates going to move maturity matching have similar loans to similar liabilities 2 year CD would also have 2 year loan CD certificate of deposit investment where you give them money and they give it back to you later with interest floating rate rates change with the market banks rather have floating rate loans Credit risk default risk risk that people will not pay you back we assess this with FICO prime is 740 or above appraisal How much your collateral is worth make sure you loan less solve credit risk sell mortgages keep short term loans and also diversify your loans diversify loans invest in some high risk and some low risk some long and some short so they all dont go bad at once Market risk Risk that the entire economy will do worse risk that the market will crash assess this using VALUE AT RISK ex chance of them loosing 1 million dollars is solve this is quit lending or investing which is not going to happen tell you if market is crashing market crash stocks crash commodity prices crash currencies crash interest rates will start to crash as well afterwards cause a recession is coming MORTGAGES difference between fixed rate and adjustable rate mortgage fixed rate stays the same and and adjustable rate moves with the market which one is lower when you start the loan adjustable rate is ceasar rate whats in adjustable rate annual cap and lifetime cap balloon note conventional vs insured mortgages insured are government backed mortgages which means theyre more expensive cause they charge fees cause of defaults key is government will pay back lender if it goes bad The 3 organizations that back mortgages FHA VA USDA veterans VA first homeowners association FHA Rural areas with low income USDA typical terms on mortgages 15 20 and 30 yrs started in 40s to provide securities Fannie Mae Jenny Mae make sure fannie mae or freddie mac couldnt pay they would Freddie Mac started to securitize and buy conventional loans 3 types of investments mortgage backed bonds mortgage pass throughs and CMOs collatorized mortgage obligations sold by freddie mac and fannie mae to investors short selling real estate when the bank allows you to sell your home for less than it is worthunderwater INSURANCE insurance transferring risk to another company for money which is called a premium we do this to litigate big losses high risk losses person who prices policies we pay actuary 2 reasons they have trouble pricing policies adverse selection and moral hazard whats life insurance money that is paid to you when you die to pay off debt and give to your relatives funeral expenses whole life insurance and term life insurance term is just for a specific period short period of time betting that you are going to die Whole life you pay it throughout your whole life and a set payment Whole life is more expensive at first Term is cheap at first then gets high health insurance insurance to cover medical costs designations that most people get cause they are cheaper now HMOs and PPOs pension funds saving structure for retirement defined benefit plan get paid a certain percentage of your salary the rest of your life know how much you are going to get defined contribution plan get paid based on your contributions and money made off of that know how much you have to live on more common now which is usually called a 401k insurance companies invest in long term bonds and mortgages because maturity matching They know they are going to be paying out debts over a long period of time so they need the same in investments long term investment from insurance companies that we use for retirement Annuity you get paid each month or year for a certain amount of years Loss exposures 6 slides long study step 1 4 or 5 slides benefits of risk management its on second page slide 8 4 or 5 slides


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