Question

1. Explain why not every asset can be used as collateral on a loan.

2. ) Judy runs a bank and believes interest rates will increase in the future. Explain what size interest rate gap the bank should have and why.

3. Explain how the Volcker Rule was designated to limit market risk banks face.

Answer 1

1. Collateral is a property or an asset that a borrower offers to the lender for the purpose of securing a loan. Not all assets can be used as collateral for loan. Usually lenders accept those assets as collateral that can be readily be converted into cash by selling them and hence enabling them to adjust the cash so collected against their dues. For instance accounts receivables that are more than 90 days old will not be considered for the purpose of collateral because the risk of default will be high in such accounts receivables.

Assets that are usually used as collaterals are fixed assets like property, plant, equipment, vehicles, land and building. These assets can be easily sold in the market and cash so collected can be used to settle the loan. Besides it is simpler to determine the market value of these assets.