Assignment Question(s): (Marks 5)

1) Alternative to fair value accounting, amortized cost accounting, uses expectations of cash flows and prices risks determined at initiation to account for financial instruments throughout their life. Discuss the three undesirable features of amortized cost accounting as compared to fair value accounting. (Marks 1.5)

2) Users of financial reports must assess banks’ current and expected future reserve and capital levels, because these levels affect the ability of banks to grow. Both thrifts and commercial banks can be either state or federally chartered, in what is referred to as the dual banking system. Explain the dual banking system along with the role of Comptroller of the Currency (COC), Office of Thrift Supervision (OTS) and Federal Deposits Insurance Corporation (FDIC). (Marks 1.5)

3) Financial Institutions speculate on the yield curve when they invest in financial assets with durations different from those of their financial liabilities. Thrifts bear interest rate risk when their financial assets and liabilities are imperfectly matched on duration. Discuss the interest rate risk of Thrifts with reference to Yield Curve Speculation. (Marks 02)