attached finance technical assignment

FIN20 013 Assignment 2 2016 Page 2 Question PART A The book value of DRAGON SLAYER BANK’s balance sheet is listed below. The current m arket yield for the securities is in parentheses. The amounts are in millions. Asset Liability & Equity Cash 55 Demand deposits 300 6 month T -bills (4.25%) 50 Savings accounts (2.0%) 205 2 year personal fixed rate loan at 6.50% 10 0 3 month CD (2.50%) 150 3 year T bills (4.85%) 10 0 9 months CDs (3.85%) 15 0 3 year 5.5% semi -annual coupon T-notes (5.25%) 90 1 year term deposit (4.0%) 52 0 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) 730 Subordinate notes: 15 -year commercial loan at 10% interest (repriced monthly) 220 3-year fixed rate (5.65%) 230 20 -year sovereign bonds 12.0% annual -coupon issued by Cambodian government with BB rating 150 6-year fixed rate (6.00%) 150 Ordinary Equity 20 20 -year mortgages at 8.5% interest (LVR 65%, no mortgage insurance) , balloon payment ^ 390 Preference shares 20 Retained Earnings 40 Total Assets 2485 Total liability and equity 2485 FIN20 013 Assignment 2 2016 Page 3 Required 1. What is the cumulative repricing gap if the planning period is (a) 3 month (b) 2 year (2 + 2 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 6 0 basis points and rate-sensitive liabilities to increase 25 basis points in 6 months’ time? (4 marks) 3. Due to the uncertainty in the economy, based on the bank’s estimate there is a potential of decrease in the demand deposits. What are some of the impact may that have on the bank’s overall asset- liability? (4 marks) 4. Does the bank have sufficient liquid capital to cushion any unexpected losses as per the Basle III requirement? (ignore 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 Liability 5 year semi -annual 6.45%pa coupon bond 250 6 months treasury bills 250 10 year 3.5% annual coupon bond 10 0 3 year semi annual coupon 5.50% bond 200 10 year treasury bond 7.5 % semi annual coupon 350 6 year annual coupon (6.30%pa) bond 200 Equity 50 700 700 5. Assume current market yield is flat at 6.5% p.a. What is the duration gap of the bank (6 marks) 6. 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 1.5%p.a.?....................................................... (4 marks) 7. What is the maturity gap of the bank (2 m arks) PART C (8 marks) -- word limit : 500 words The Basel Banking supervision committee has proposed the Basle III standards. • Compare and discuss the differences between Basle II and the Basle III. • What are some of the requirements (and issues) faced by the financial institutions in trying to meet these new requirements?

(8 marks) FIN20 013 Assignment 2 2016 Page 4 Some n otes:

• Question 2 - Read Chapter 5. Or refer tutorial (topic 5) question 16 • Questions 2 to 4 - There is no word limit. However if you know the key issues, you should be able to explain your answer within 500 words.

• 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