41.Determine the percentage of the following portfolio that is investment grade:

a.       70%

b.       80%

c.       90%

d.       95%

42. The following items pertain to the balance sheet of the East Bank Holding Corporation as of December 31, 2006:

   ·Common Stock: USD 600,000,000

   ·Unrealized Long-Term marketable Equity Securities Gain: USD 5,000,000

   ·Allowance in Anticipation of Possible Credit Losses: USD 5,000,000

   ·Goodwill: USD 30,000,000

Based solely on the above information, calculate the Tier 1 and Tier 2 Capital of East Bank Holding Corporation as of December 31, 2006.

43. A bank is considering ways of significantly reducing or eliminating its credit exposure to defaults on a loan portfolio so that the bank’s shareholders do not absorb the losses arising from such defaults. Ignoring institutional issues (e.g., taxes, accounting, capital requirements), three of the following programs have a similar impact on the credit risk of the bank. Which alternative fails to reduce credit risk?

   a.  Borrow to finance an additional risk reserve to supplement existing loan-loss reserves.

   b.  Buy credit protection on the loan portfolio with credit default swaps.

   c.  Securitize the loan portfolio.

   d.  Sell the loan portfolio in its entirety to another bank.

44. Consider the following three method of estimating the profit and loss (P&L) of a bullet bond: full repricing, duration (PV01), and duration plus convexity. Rank the methods to estimate the P&L impact of a large negative yield shock from the lowest to the highest.

   a. Duration, duration plus convexity, full repricing.

   b. Duration, full repricing, duration plus convexity.

   c. Duration plus convexity, duration, full repricing.

   d. Full repricing, duration plus convexity, duration.

45. Bank B has a EUR 100million loan portfolio and has set aside a reserve to cover the first EUR 20 million in default-related losses. If the bank wants to acquire protection for the remaining EUR 80 million in risk exposure, which of the following solutions would work and would expose the bank to the least amount of counterparty risk?

   a.  Issue a credit-linked note in which interest and principal may be withheld from investors to cover up to EUR 80 million in losses above the first EUR 20 million on the loan portfolio.

   b.  Buy credit protection in a senior subordinated credit default swap that covers EUR 80 million in losses above the first EUR 20 million.

   c.  Buy credit insurance for losses up to EUR 80 million in excess of EUR 20 million on the loan portfolio.

   d.  All three of the above choices work and expose the bank to the same amount of counterparty risk.