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Asset Liability Management | Risk Factors [Video]

Asset Liability Management | Risk Factors

We know that ALM is about properly matching assets and liabilities to manage risk, but what specific risks are faced by a typical bank?

The most significant risk is interest rate risk.

There are several different types of interest rate risk, as discussed below.

Interest rate gap risk occurs when:
(a) there is a mismatch between floating-rate and fixed-rate instruments
(b) the timing of rate-setting for floating-rate instruments is not aligned

Interest rate basis risk occurs when floating-rate assets and floating-rate liabilities are set to different indexes.

Option risk occurs when a counterparty exercises an option that changes the expected cash flows of a financial instrument (terminating a contract early, altering the contract, etc.).
• This is a type of interest rate risk because option risk is closely linked to the interest rate

Prepayment risk occurs when a borrower repays the principal sooner than required, and the bank gets stuck re-lending the money at a less favorable interest rate.
• Prepayment risk is a specific type of option risk and is closely linked to the interest rate
• Prepayment happens when interest rates decline and borrowers decided to refinance

Banks also face risk factors aside from interest rate risks. These include:

Exchange rate risk occurs when exchange rates change and the bank translates foreign currency back into its functional currency (the bank will recognize a gain or a loss).

Price risk occurs when there are changes to the price of investments in a bank’s trading portfolio.

Credit risk occurs when a counterparty defaults (e.g., a borrower fails to pay).

Liquidity risk occurs when the bank is unable to satisfy its obligations without suffering extreme losses when one or more sources of funding suddenly become unavailable.
• A liquidity crisis could be caused by a run on the repo market, an inability to roll over maturing debt, etc.
• Liquidity risk can be severe and cause the bank to become insolvent

Edspira is the creation of Michael McLaughlin, who went from teenage homelessness to a PhD.
Edspira’s mission is to make a high-quality business education accessible to all people.

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Starting a business is an exciting and challenging endeavor that requires careful planning and strategic execution. Whether you are launching a small startup or a large enterprise, understanding the key steps and strategies involved is essential for turning your vision into a successful venture. This video outlines the crucial stages and tactics to help you navigate the complexities of starting a business and increase your chances of long-term success.

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How to Account for Early Retirement of Bonds [Video]

This video explains how to account for the early retirement of bonds (aka early extinguishment of debt or early redemption of bonds).When a company retires (redeems) its bonds prior to the maturity date, the company must do several things:-Reduce the cash account by the amount used to repurchase the bonds (if cash is used to retire the bonds)-Remove the bonds payable-Zero out the unamortized discount or unamortized premium-Record a gain or loss IF the repurchase price is different from the carrying value (aka book value) of the bonds on the date the bonds are retiredThere are two ways to calculate the gain or loss on the early retirement of the bonds:(1) record the journal entry; if a debit is required to make the journal entry balance, then debit a loss on early retirement (or loss on bond redemption, loss on early extinguishment of debt, etc.). If a credit is instead required to make the journal entry balance, the credit a gain on early retirement (or gain on bond redemption, gain on early extinguishment of debt, etc.)(2) calculate the difference between the repurchase price (the amount paid to retire the bonds) and carrying value (aka book value) of the bonds at the time they are retired. If the repurchase price is less than the carrying value, there is a gain. If the repurchase price is greater than the carrying value, there is a loss.0:00 Introduction0:39 4 things to do when retiring bonds1:20 Example3:59 T-account for discount on bonds payable4:18 Journal entry to record gain on retirement of bonds5:53 Alternative situation (loss on retirement of bonds)— Edspira is the creation of Michael McLaughlin, an award-winning professor who went from teenage homelessness to a PhD. Edspira’s mission is to make a high-quality business education freely available to the world.— SUBSCRIBE FOR A FREE 53-PAGE GUIDE TO THE FINANCIAL STATEMENTS, PLUS: • A 23-PAGE GUIDE TO MANAGERIAL ACCOUNTING• A 44-PAGE GUIDE TO U.S. TAXATION• A 75-PAGE GUIDE TO FINANCIAL STATEMENT ANALYSIS• MANY MORE FREE PDF GUIDES AND SPREADSHEETS* http://eepurl.com/dIaa5z— SUPPORT EDSPIRA ON PATREON*https://www.patreon.com/prof_mclaughlin— GET CERTIFIED IN FINANCIAL STATEMENT ANALYSIS, IFRS 16, AND ASSET-LIABILITY MANAGEMENT * https://edspira.thinkific.com — LISTEN TO THE SCHEME PODCAST * Apple Podcasts: https://podcasts.apple.com/us/podcast/scheme/id1522352725 * Spotify: https://open.spotify.com/show/4WaNTqVFxISHlgcSWNT1kc * Website: https://www.edspira.com/podcast-2/ — GET TAX TIPS ON TIKTOK * https://www.tiktok.com/@prof_mclaughlin — ACCESS INDEX OF VIDEOS * https://www.edspira.com/index — CONNECT WITH EDSPIRA * Facebook: https://www.facebook.com/Edspira * Instagram: https://www.instagram.com/edspiradotcom * LinkedIn: https://www.linkedin.com/company/edspira — CONNECT WITH MICHAEL * Twitter: https://www.twitter.com/Prof_McLaughlin * LinkedIn: https://www.linkedin.com/in/prof-michael-mclaughlin — ABOUT EDSPIRA AND ITS CREATOR * https://www.edspira.com/about/* https://michaelmclaughlin.com

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