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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