C) 50% of these assets count toward meeting required. D) they rank second to ban
ID: 2761748 • Letter: C
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C) 50% of these assets count toward meeting required. D) they rank second to bank vault cash in importance of bank holdings. Financial Engineering: Asset Price Bubble: Securitization: Return on Equity (ROE): Inverted Yield Curve: Shadow Banking System: Section II. Please circle the correct answer to the following questions. This section is worth 1 50% of your exam grade. Each question is worth 1.5 points. Which of the following is false? A) A bank's assets are its uses of funds. B) A bank issues liabilities to acquire funds. C) The ban's assets provide the bank with income. D) Bank capital is recorded as an asset on the bank balance sheet. Secondary reserves are so called because: A) They can be converted into cash with low transactions costs. B) They are not easily converted into cash, and are, therefore, of secondaryExplanation / Answer
Financial Engineering is a multidisciplinary field involving financial theory, the methods of engineering, the tools of mathematics and the practice of programming. The Financial Engineering Program at Columbia University provides full-time training in the application of engineering methodologies and quantitative methods to finance. It is designed for students who wish to obtain positions in the securities, banking, and financial management and consulting industries, or as quantitative analysts in corporate treasury and finance departments of general manufacturing and service firms.
Definition of asset bubble. When the prices of securities or other assets rise so sharply and at such a sustained rate that they exceed valuations justified by fundamentals, making a sudden collapse likely - at which point the bubble "bursts".
Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming them into a security.
A typical example of securitization is a mortgage-backed security (MBS), which is a type of asset-backed security that is secured by a collection of mortgages. The process works as follows:
First, a regulated and authorized financial institution originates numerous mortgages, which are secured by claims against the various properties the mortgagors purchase. Then, all of the individual mortgages are bundled together into a mortgage pool, which is held in trust as the collateral for an MBS. The MBS can be issued by a third-party financial company, such a large investment banking firm, or by the same bank that originated the mortgages in the first place. Mortgage-backed securities are also issued by aggregators such as Fannie Mae or Freddie Mac.
Regardless, the result is the same: a new security is created, backed up by the claims against the mortgagors' assets. This security can be sold to participants in the secondary mortgage market. This market is extremely large, providing a significant amount of liquidity to the group of mortgages, which otherwise would have been quite illiquid on their own.
Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.
ROE is expressed as a percentage and calculated as:
Return on Equity = Net Income/Shareholder's Equity
An inverted yield curve is an interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality. This type of yield curve is the rarest of the three main curve types and is considered to be a predictor of economic recession.
A shadow banking system refers to the financial intermediaries involved in facilitating the creation of credit across the global financial system, but whose members are not subject to regulatory oversight. The shadow banking system also refers to unregulated activities by regulated institutions.
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