FIN20013 Banking Operations and Governance Assignment 2

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FIN20013 Banking Operations and Governance
Assignment 2
Semester 1 2020
Instructions
NOTE: THIS ASSIGNMENT IS DUE ON 1st May 2020
1. This assignment is to be completed individually.
2. Students should make themselves aware of the Extensions Policy and Late Penalties Policy, which can be found in the FIN20013 Unit Outline. ** REQUEST FOR EXTENSION ON OR ONE DAY BEFORE DUE DATE WILL NOT BE ENTERTAINED **.
F I N 2 0 0 1 3 A s s i g n m e n t 2 Page 2
Question
PART A
The book value of DRAGON SLAYER BANK’s balance sheet is listed below. The current market yield for the securities is in parentheses. The amounts are in millions.
Asset
Liability & Equity
Cash
55
Demand deposits
100
6 month T-bills (4.25%)
50
Savings accounts (2.0%)
205
2 year personal fixed rate loan at 6.50%
100
3 month CD (2.50%)
150
3 year T bills (4.85%)
100
9 months CDs (3.85%)
350
3 year 5.5% semi-annual coupon T-notes (5.25%)
90
1 year term deposit (4.0%)
520
5 year 6.2% semi-annual coupon T-notes (5.75%)
100
2 year term deposits (4.30%)
200
5 year personal loan (11.5%, repriced yearly)
350
5 year bond 8.0% annual coupon issued by Spanish government with rating credit rating B
150
5-year bonds at 6.75% semiannual interest, balloon payment
250
20-year bonds at 7.5% interest, balloon payment
250
10 year commercial loan (12.25% repriced @ 6 months)
700
Subordinate notes:
15-year commercial loan at 10% interest (repriced monthly)
230
3-year fixed rate (5.65%)
290
20-year sovereign bonds 12.0% annual-coupon issued by Cambodian government with BB rating
150
6-year fixed rate (6.00%)
100
Ordinary Equity
20
20-year mortgages at 8.5% interest (LVR 65%, no mortgage insurance), balloon payment^
260
Preference shares
10
Retained Earnings
40
Building
150
Total Assets
2485
Total liability and equity
2485
F I N 2 0 0 1 3 A s s i g n m e n t 2 Page 3
Required
1. What is the cumulative repricing gap if the planning period is
(a) 1 year
(b) 3 year
(1 + 1 marks)
2. What will happen to the net interest income of the bank, if interest on the banks rate sensitive assets is forecasted to decrease by 30 basis points and rate-sensitive liabilities to increase 50 basis points in 6 months’ time? (4 marks)
3. Does the bank have sufficient liquid capital to cushion any unexpected losses as per the Basle III requirement? Please ignore the cyclical buffer requirement (8 marks)
PART B
The following is the balance sheet of a VRY-SMPL Bank. All the items are recorded based on the book value and they were purchased at par value.
Asset ($mil)
Liability ($mil)
2-year annual 6.45%pa coupon bond
$200
12 year treasury bonds
$250
6-year 3.5%pa semi-annual coupon bond
$150
15 year semi-annual coupon (6.30%pa) bond
$300
15-year treasury bond 7.5 % annual coupon bond
$350
Equity
$150
$700
$700
4. Assume current market yield is flat at 8.0% p.a. What is the duration gap of the bank?
(3 marks)
5. Using the duration gap estimated from question 6, what will happen to the net worth of the bank if the market yield goes up by 2.5%p.a.?……………………………………………… (2 marks)
6. What is the maturity gap of the bank (1 marks)
Some notes:
• Question 2 – Read Chapter 5. Or refer tutorial (topic 5) question 16
• Questions 3 and 4 – There is no word limit. However, if you know the key issues, you should be able to explain your answer within the 500 word limit.
• Question 4, To avoid any confusion, please use the following link from APRA for conversion purpose. You mainly only require to refer to Attachment A and Attachment F.
http://www.apra.gov.au/adi/PrudentialFramework/Documents/Basel-III-Prudential-Standard-APS-112-(January-2013).pdf

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