BANKING DIPLOMA EXAMINATION NOVEMBER-10Question:

InstrumentsAmount(Tk.in million)Risk Weight (%)

Treasury Securities12000

Municipal Bond100020

Residential Mortgage200050

Commercial Loan4500100

(1) Determine the amount of core capital (5%) and total minimum capital (10%) requirements from the given information.

Solution:InstrumentsAmount

(Tk.in Million) Risk weight (%) Risk weighted assets (RWA)

Treasury Securities 120000

Treasury Securities 100020200

Municipal Bond 2000501000

Commercial Loan 45001004500

87005700

a) Core capital = Total Capital x Ratio of core capital = 8700 5% = 435 Millionb) Total Minimum Capital = RWA x Ratio of Minimum capital requirements = 5700 10% = 570 MillionAns:

a) 435 Million b) 570 MillionBANKING DIPLOMA EXAMINATION NOVEMBER-10A Company has issued Tk. 2000, 10%, 15 years bonds that make half-yearly interest payments. The required rate of bondholders is 9%. Calculate the duration for changing yield 1%

Answer: (1+y)n -1 MPo = C[.] + --------- Here, C=contribution on Original Bond Amount y(1+y)n (1+y) n= Total No: of Instalment y= 9%, semiannually=9/2=4.5% P=Principal Amount C=2000x10%=200, so semiannually / Half yearly =200/2=100

n = 15x2=30 (1+0.045)30 - 1 2000Po = 100 [-------------------------] + -------------- 0.045(1+.045)30 (1+0.045)30 3.7453-1 2000

= 100[----------------- ] + ------------- 0.1685 3.7453 = 100 x 16.29+ 534.00 = 1629+534

= 2163.

P (+) , y=10%, Semiannually / Half Yearly = 10/2=5%

(1+0.05)30 - 1 2000

P(+) = 100 [-------------------------] + -----------------

0.05(1+.05)30 (1+0.05)30 4.3219-1 2000

= 100[-----------------] + -------------

0.2161 4.3219

= 100 x 15.37+ 462.7600

= 1999.76P(-), y=8%, Semiannually = 8/2=4%

(1+0.04)30 - 1 2000

P(-) = 100 [-------------------------] + -----------------

0.04(1+.04)30 (1+0.04)30 3.2434-1 2000

= 100[--------------------] + -------------

0.04 X 3.2434 3.24342.2434

= 100[-----------------] + 616.64 0.1297 = 100 x 17.2968+616.64 = 172968+616.64 = 2346.32 P(-) - P( +)Duration= --------------------- 2(Po) (y) 2346.32-1999.76

= ---------------------------

2 X 2163 X 0.01 346.56

= --------------- 43.26 = 8.01 yearsBANKING DIPLOMA EXAMINATION NOVEMBER-10XYZ Company has issued 11%, Tk. 1000, 18 years annual coupon bond in the market whose current price is Tk. 1120. What will be the yield to maturity of this bond?Solution: F-P CF + -----------

t

YTM= --------------------------- F + P 2 Here, CF = Cash Flow = 1000 X 11% = 110P= Market Price or Current purchase Price = 1120F= Face Value = 1000T= Time = No. of Years= 18 F-P 1000-1120

(-120) CF + ----------- 110 + ------------------- 110 + .. T 18 18

YTM= --------------------- = ----------------------------------- = ---------------

F + P 1000+ 1120 2120 2 2 2 110+ (- 6.67)

103.33 = ------------------- = ------------ = .09748 = 9.75% 1060 1060 BANKING DIPLOMA EXAMINATION MAY-11XYZ BANK LTD

Profit & Loss Account

For the year ended December 31, 2009

DebitTakaRevenueTaka

Interest Expense20,000Interest on advances90,000

Salaries8,000Interest on Investment15,000

Printing & stationery4,000Commission, Exchange & brokerage20,000

Postage & Telegram3,000Profit on sale of investment2,000

Repairs & Maintenance 3,000Other revenue receipts

10,000

Transfer of Reserve Fund25,000

Net profit transferred to Balance sheet74,000

Total137,000Total137,000

XYZ BANK LTD

Balance Sheet

For the year ended December 31, 2009

Equity & LiabilitiesTakaAssetsTaka

Share Capital200000Cash in hand & central Bank450000

Reserve Fund & other reserves115000Cash with other banks340000

Deposit & other accounts500000Investments208000

Borrowings600000Advances315000

Bills Payable60000Premises135000

Provision of loan loss75000Furniture & Fixture176000

Profit & loss Account74000

Total1624000Total1624000

Calculate the followings and make comments about the performance of the bank:-1. Debt-equity ratio

2. Net interest income3. Net interest income4. Net interest margin5. Operating efficiency ratio6. Provision for loan loss (%)7. Burden (%) 8. Return on assets9. Return on equity and

10. Earnings per share (#2000). 01.Debt-equity ratio: Here, Total debt= (Deposit & other accounts+ Borrowings+ Bills Payable+ Provision of loan loss)= (5, 00,000/-+6, 00,000/-+60,000/-+75,000/-)

=12, 35,000/- Total Equity = (Share Capital + Reserve Fund & other reserves + Profit & loss account)

=( 200000/- +115000/- +74000)

= 389000/-

Total debt 12, 35,000/-

Debt-equity Ratio = ------------------------ = ------------------ = 3.17 : 1.00

Total equity capital389000/-

Comments: Above Ratio analysis we assume that Bank equity is greater than Debt. So, Shareholder benefit is more secured. Bank can meet its liability with its own equity.02.Net interest income = (Total interest incomes) (Total interest expenses)

= (Interest on advance + interest on investment) (interest expenses)

= (90,000/-+15,000/-) (20,000/-)

= 1, 05,000/- - 20,000/-

= 85,000/-

Comments: Net Interest income is satisfactory. Banks earn profit.03. Net Non-interest income = (Total Non-interest incomes) - (Total Non-interest Expenses)= (Commission, exchange & Brokerage +Profit on sale of investment + Other revenue receipts) - (Salaries + Printing stationeries + Postage & Telegram + Repairs and maintenance)

= (20,000/- + 2,000/- + 10,000/-) - (8,000/- +4,000/- +3,000/- +3,000/-)= 32,000/- - 18,000/-

=14,000/-

Comments: Net Non- Interest income is satisfactory. Because Banks lend lower interest rate and Invest higher interest rate.

Net interest incomes04. Net interest margin= ----------------------------------------------- 100

Total investment (advance + investment)

85,000/-

85,000/-

= -------------------------- 100 = ---------------- 100 =16.25%

(2,08,000/-+ 3,15,000/-)

5,23,000/-Comments: Net Interest income is satisfactory. Because banks earn profit.

Non-interest expenses

18,000/-

5. Operating efficiency ratio = -------------------------- 100 = --------------- 100 = 24.32%

Net revenue

74000/-

Comments: Operating Efficiency Ratio is satisfactory. Because Invest in 1 taka its earn profit .24.

Provision

75,000/-06.Provision for loan loss (PLL) (%) = -------------------------- 100 = ----------- 100 =23.80%

Advance or investment 3,15,000/-

Comments: Banks provision capacity is not up to mark because provision for bad loss should be 100% according to BRPD Circular.

Net profit

Net profit

74,000/-

07. Burden (%) = ----------------- 100 = -------------------------------------- 100 = -------- 100

Earning before tax (Net profit + Transfer to reverse fund)99,000/-= 74.74%

Comments: Banks can meet obligation by its own net profit. So banks earning capacity is satisfactory.

Net profit

74,000/-08. Return on assets= -------------- 100 = ------------------------ 100 =4.56%

Total assets

16, 24,000/-

Comments: Banks ROA is satisfactory.

Net profit

74,000/-

09. Return on equity = ---------------------- 100 = ------------------ 100 =19.02%

Total equity

389000/-

Comments: Banks ROE is satisfactory.

Net profit 74,000/-

10. Earnings per share (#2000) = ---------------- = ------------ = 37

No. of shares 200000

BANKING DIPLOMA EXAMINATION MAY-11Question: Neon Bank Ltd Presents figure for the year just ended. Please find out core and supplementary capital of the bank:-Paid up capital -------------------------------------------------Tk.2000 Million.Share Premium Account--------------------------------- -----Tk. 200 Million.

Asset revaluation reserve -------------------------------------Tk. 250 Million

Exchange Equalization Account -----------------------------Tk. 300 Million

General Provision (1% of Unclassified Loan)--------------Tk.190 Million

Retained earnings----------------------------------------------Tk. 120 Million;Statutory reserve------------------------------------------------Tk. 370 million

General reserve-------------------------------------------------Tk. 160 million

SolutionList of core capital is given:

Paid up capital------------------------------Tk. 2000 MillionShare Premium------------------------------Tk. 200 Statutory Reserve---------------------------Tk. 370 General Reserve----------------------------Tk. 160 Retained earnings---------------------------Tk. 120 -------------------------------------------------------------------

Core Capital = Tk. 2850 MillionList of Supplementary capital is given:

Asset revaluation reserve----------------------Tk. 125 Million (50% of 250 Million)Exchange Equalization A/C-------------------Tk. 300 General Provision (1%of UC Loan)---------Tk. 190 ---------------------------------------------------------------------- Supplementary capital =Tk. 615 MillionAnswer: Core capital is Tk. 2850 Million; Supplementary Capital is Tk. 615 Million.(Note: According to risk based capital guideline (RBCA), Asset revaluation & Security revaluation 50% and Equity revaluation 10%) BANKING DIPLOMA EXAMINATION MAY-11Question

Following are the figures relating to loans and advances of Delux Bank Ltd. as on 31-12-2010:-

UC :---------------------Tk. 21200 Million.SS : ----------------------Tk. 3100 Million.DF :----------------------Tk. 200 Million.BL :----------------------Tk. 175 Million

Eligible securities are adjusted.

Calculate additional provision required given provision held is Tk. 1910 Million.AssetAmount

Tk. in MillionProvision (%)Provision ( Amount)

UC212001212

SS310020620

DF20050100

BL175100175

1107

Provision held = Tk. 1910 MillionAdditional Provision = Tk. 1107 Million

Ans: Additional Provision required Tk. 1107 Million.

BANKING DIPLOMA EXAMINATION NOVEMBER-11QuestionMadison Independence Bank has this year ended financial data for the most recent period:- ROA 1.25% , ROE 13.5%,Net Income Tk. 20,00,000

i) Calculate the banks equity multiplier and equity to asset ratio:

ii) Calculate the banks total assets and equity:iii) If liabilities are increased by Tk.10, 00,000 and equity is decreased for the same amount and net income is increased by Tk.2, 00,000 then what will be neSolutioni)

We know that, Net Profit /income ROA= ------------------------------ 100

Total Asset 20,00,000 => 1.25% = ---------------- 100 Total Asset => Total asset 1.25% = 20,00,000 100 20,00,000 100

=> Total asset= --------------------- = 16,00,00,00,000 1.25% => Total asset = 16, 00,00, 00,000We know that, Net Profit /income

ROE = ------------------------- -------- X 100

Equity

20,00,000

=> 13.5% = ---------------- ---- 100

Equity

=> Equity 13.5% = 20,00,000 100

20,00,000 X 100

=> Equity = ------------------

13.5% => Equity = 1,48,14,81,481 1, 48, 14,81,481 Equity to asset ratio = ---------------------------- 100 = 0.0926 100 =9.26% 16, 00, 00,00,000 And Banks Equity to asset ratio = 9.26% Total Asset 16, 00, 00,00,000Equity Multiplier ( EM) = --------------------- = ----------------------------- = 10.80 Total Equity 1,48,14,81,481ii) From i we findBanks total equity

=16, 00, 00, 00,000/-Banks total asset ratio

=1, 48, 14, 81,481/-

iii) Asset = Liability + Equity 16,00,00,00,000 = Liability + 1,48,14,81,481

Liability = 16,00,00,00,000 - 1,48,14,81,481

Liability = 1451,85,18,519

New Liability = 1451, 85, 18,519 + 10, 00,000

= 1451, 95, 18,519 New Equity = 148, 14, 81,481 10, 00,000

= 148, 04, 81,481New Net Income = 20, 00,000 + 2, 00,000

= 22, 00,000 Net Income

New ROE = ---------------------

New Equity

22, 00,000 = ---------------------

148, 04, 81,481 = 14.86%

BANKING DIPLOMA EXAMINATION NOVEMBER-11Question

One Bank Ltd., Profit & Loss Account, for the year ended December 31, 2010

Expenses Taka(000)RevenuesTaka(000)

Interest Paid19500Interest on advances80000

Salaries7500Interest on Investment15000

Printing & stationery3500Commission, Exchange & brokerage20000

Postage & Telegram2000Profit on sale of investment2000

Repair & Maintenance 2500Other revenue receipts

8000

Transfer of Reserve Fund25000

Net profit transferred to Balance sheet65000

Total125000Total125000

One Bank Ltd. Balance Sheet, For the year ended December 31, 2010

Equity & LiabilitiesTakaAssets Taka

Share Capital200000Cash in hand & central Bank30000

Reserve Fund & other reserves115000Cash with other banks40000

Deposit with other accounts72500Investments40000

Borrowings40000Advances295000

Bills Payable2500Bills receivables being bills for collection as per contra50000

Bills for collection being bills receivables as per contra50000Acceptance and endorsement as per contra 65000

Provision for Loan Loss 7500Premises137500

Acceptance and endorsement as per contra 65000Furniture & Fixture25000

Profit & Loss Account130000

Total682500total682500

Calculate the followings and make comments about the performance of the bank:-1. Net interest income2. Net non- interest income3. Net non-interest Margin4. Operating efficiency ratio5. Provision for loan loss6. (PLL) (%)7. Burden %8. ROA9. ROE10. EM and11. Equity to asset ratio.01. Here, Interest income = Interest on advances + Interest on Investment

= Tk. (80,000/- + 15,000/-)

= Tk. 95,000/-Interest Paid =Tk.95, 000/-Net Interest Income = (Interest income/ earned) (Interest Paid) =Tk. (95,000/- - 19,500/-) =Tk. 75,500/-Comments: - Net interest income is satisfactory because banks earn profit.02) Total non-interest incomeCommission, exchange & brokerage Tk.20,000/-Profit on sale of investment Tk. 2,000/-Other revenue receipts Tk. 8,000/------------------------------------------------------------------

Total= Tk.30, 000/- Total non-interest expenses are:-

Salaries Tk. 7,500/-Printing & Stationery Tk. 3,500/-Postage & Telegrams Tk. 2,000/-Repair & Maintenance Tk. 2,500/-----------------------------------------------------------------Total =Tk. 15,500/-Net non-interest income = Total non-interest income total non- interest expenses

=Tk. (30,000/- - 15,500/-) = Tk. 14,500/-Comments: - Net non- interest income is satisfactory because banks lend lower rate & invest higher rate.

03) Here, Net interest income

= Interest income-Interest paid

= Tk. (95,000/- 19,500/-)

= Tk. 75,500/- Total Investment = Investment + Advance

= Tk. (4, 0000/- + 29, 5000/-)

= Tk. 3, 35,000/- Net interest incomeNet interest Margin =---------------------------- 100 Total interest income 75,500/- = -------------- 100 =22.54% 3, 35,000/-Comments: - Net interest margin is satisfactory because banks earn profit.

Non interest expenses04) Operating efficiency ratio: = ---------------------------------

Net revenueHere, Non- interest expenses =Tk. 15,500/- Net Revenue = Tk. 65,000/-

Tk. 15,500/-Operating efficiency Ratio = -------------------- = .24: 1 Tk. 65,000/-Comments: - Banks operating efficiency ratio is satisfactory. Provision

05) Provision for loan loss (PLL) % = ------------------- 100

Advance

7,500/- ------------ 100 = 0.0254 100 = 2.54%

2,95,000/-Comments: - Banks provision capacity is not up to mark because provision for bad & loss is to be 100% by the rules of BRPD Circular.

Net Profit06) Burden % = --------------------- 100 Earnings before Tax 65,000/- = ------------------------------------------------------------------------ 100 Transfer to reserve Fund + Profit & Loss A/c (Net profit) 65,000/- 65,000/- = ------------------------- 100 = --------------- 100 = 0.7222 100 = 72.22% (25,000/- + 65,000/-) 90,000/-Comments: - Bank can meet obligation by its own net profit. So Banks earnings capacity is satisfactory.

Net profit

07) ROA (Return on assets) = ----------------- 100 Total asset 65,000/- = -------------- 100 = 0.09523 100 = 9.52% 6,82,500/-Comments: - Banks ROA is satisfactory because return its profit.

Net profit

08) ROE (Return on equity) = -------------------------- 100 Total Equity 65,000

= -------------------------------------------------------------------------------------------- 100 Share capital +Reserve Fund & Others Reserve + profit & Loss Account 65000/-

=----------------------------------------------- x 1000 200000/- + 115000/- + 130000/- 65000/-

=------------------------------- x 100

445000/-

= 14.60%

Comments: Banks ROE is satisfactory. Total Asset09) EM (Equity Multiplier) = --------------------

Total Equity 6,82,500/- =------------------------------------ = 1.53 (200000+115000+130000)

Comments: Banks Equity Multiplier is satisfactory.

Total equity 4,45,000/-10) Equity to asset ratio = ---------------- 100 = ----------------- 100 Total Asset 6,82,500/- = 0.6530 100 = 65.20% Here, Reserve Fund 2,00,000/- Other reserve

1,15,000/- (Profit & Loss A/c) 1,30,000/- ----------------------------------------------- Total equity= 4,45,000/-Comments: Banks financial asset is higher than its equity. So equity or liability payment capacity is strong.

BANKING DIPLOMA EXAMINATION ,NOVEMBER-11QuestionNon -interest income is Tk.10,000, non- interest expenses is Tk.15,000, Liabilities is Tk.2,00,000 and equity is Tk. 1,50,000, interest income is Tk.60,000, interest expense is Tk.25,000 and tax expense is Tk.5,000.

Calculate:

i) Return on equity;ii) Return on asset;iii) Net interest Margin;iv) Net non- interest Margin and

v) Burden percentage.

Net profit

i) ROE (Return on equity) = -------------------------------- 100

Share holders equity

Net income/ profit = (Interest income + non interest income) (interest expenses + Non- interest expenses + tax expense)

= Tk. ( 60,000/- + 10,000/-) Tk. (25,000/- + 15,000/- + 5,000/-)

= Tk. (70,000/-45,000/-)

= Tk. 25,000/- 25,000/- ROE = ---------- 100 = 0.1666 100 = 16.66% =16.67% 1,50,000/-ii) Here,

Total asset = Liability + equity

= Tk. (,200,000/- + 1,50,000/)

= Tk. 3,50,000/- Net Profit /income

ROA (Return on asset) = ------------------------- 100

Total Asset

25,000/- = -------------- 100 = .0714 100 = 7.14%

3,50,000/- Interest income Interest expenses

iii) Net interest Margin = ------------------------------------------------------ 100

Total investment or Total Asset (60,000/- 25,000/-) = --------------------------------- 100 200000/- + 150000/- 35,000/-

=---------------- 100 = 10% 3,50,000 /-

Comments: - The banks net interest earning capacity is satisfactory. Non - interest income Non Interest Expenses

iv) Net Non - interest Margin =------------------------------------------------------------------ 100

Total investment

Tk. 10,000/- Tk. 15,000/- Tk. -5,000/- = ----------------------------------- 100 = -------------------- 100 = () 1.43% Tk. (200000/- +1, 50,000/-) Tk. 3, 50,000/-Comments: - The investment of this bank is very bad. Because it borrows / lends in higher interest and invest in lower interest.v)

Here, Earning before tax = Net profit + Tax expenses

= Tk. (25,000/- + 5,000/-)

= Tk. 30,000/-

Net Profit

Burden Percentage = ------------------- 100

Earnings before Tax

25,000/-

= -------- 100 = 0.8333 100 = 83.33 %

30,000/-

Comments: - The Banks earnings profit capacity is satisfactory. Because Banks can meet maximum obligation by its own net profit.

BANKING DIPLOMA EXAMINATION, MAY-12

QuestionFrom the following information calculate required core capital and supplementary capital and comment about the soundness of the bank:-InstrumentsAmount(Tk)

Treasury Securities1,00,000/-

Municipal Revenue Bond1,50,000/-

Residential Mortgage2,00,000/-

Commercial Loan4,50,000/-

Cash & Bank balance1,20,000/-

Money at call & short Notice1,80,000/-

Commercial Mortgages2,10,000/-

Corporate bonds.1,90,000/-

Total=16,00,000/-

ItemsAmount Tk.ItemsAmount Tk.

General Provision maintained against unclassified loans1,40,500/-Share Capital3,50,000/-

Asset revaluation reserves1,47,500/-Statutory Reserve1,10,000/-

All other Preference shares1,65,500/-Share Premium1,05,000/-

Perpetual sub-ordinate debt1,25,000/-Retained Earnings1,10,000/-

Exchange equalization A/C1,17,500/-Redeemable Preference Share1,00,000/-

Dividend equalization fund2,80,000/-Sub-ordinate Debenture1,22,500/-

General Reserve1,25,000/-Perpetual Preferred Stock1,07,500/-

Minority Interest1,20,500/-

Solution:Core capitalamountSupplementaryamount

Dividend equalization fund

General Reserve

Share Capital

Statutory Reserve

Share Premium

Retained Earnings

Minority Interest

2,80,000/-

1,25,000/-

3,50,000/-

1,10,000/-

1,05,000/-

1,10,000/-1,20,000/-General Provision maintained against unclassified loans-Asset revaluation reserves (50% Of 147500= 73750/-)All other Preference shares

Perpetual sub-ordinate debt

Exchange equalization A/C

Redeemable Preference Share

Sub-ordinate Debenture

Perpetual Preferred Stock1,40,500/- 7,37,50/-

1,65,500/-

1,25,000/-

1,17,500/-

1,00,000/-

1,22,500/-

1,07,500/-

Total12,00,000/-Total9,52,250/-

BANKING DIPLOMA EXAMINATION, MAY-12

Question:

The risk free rate of return is 8%, market rate of return is 12%. Based on the following beta factors determine expected rate of return for the concerned assets: Asset X with beta 1.55 Asset Y with beta - 0.75 and Asset Z with beta 1.25. Which asset is the most risky and which is the most preferable for investment?Solution: We know, Expected Rate of Return = (1-) X Risk Free Rate + X Market Rate of Return Asset X = (1-1.55) x 8% + 1.55 x 12% = -.55 x 8% + 1.55 x 12%

= - 4.4% + 18.6%

= 14.20%

Asset Y = {1- (- .75)} x 8% + ( -.75) x 12%

= 1.75 x 8% - .75 x 12%

= 14% - 9%

= 5 %

Asset Z = ( 1-1.25) x 8% + 1.25 x 12% = - .25 x 8% + 1.25 x 12%

= - 2% + 15

= 13%Ans: Expected Rate of Return of X Asset is 14.20%

Expected Rate of Return of Y Asset is 5%

Expected Rate of Return of Z Asset is 13%

Therefore, Asset X beta is risk free and preferable for investment. Asset Y beta is risky project.

BANKING DIPLOMA EXAMINATION, MAY-12

Question:

Mr. X has taken mortgage loan of Tk. 10, 00,000 @ interest rate of 12% for 4 years under quarterly repayment system. Calculate the amount of semi-annually payment and prepare loan amortization schedule for the first year.It is given that,Loan Amount (P) = Tk 10,00,000, Interest Rate (R) = 12% = .012,

Time ( N) = 4 Yrs Semi annually = N = 2Quarterly = N = 4

Terminal Value after 4 years:-

R

P (1 + ------)

4

0.12 = 10,00,000 ( 1+ --------- )

4

= 10,00,000 ( 1 + 0.03)

= 16,04,706/-Let the amount of installment (A) to repay the loan of terminal value of tk/- 1604706 in semiannually- A[ ( 1+ R) 1 ]

Terminal Value = ---------------------------

R R

=> A= Tr Value [ ---------------------- ]

(1+R) - 1 0.12/2

= 1604706 [ ------------------------------------- ]

(1+ 0.12/2 ) -1 = 162091/-

Amortization Schedule:-

x 2

Principal Money with interest after six month = 10,00,000 ( 1 + 0.12/2)

= 1029563/-

Interest = (1029563-10,00,000) = 29563/-

Installment = 162091/-

Principal Paid= 162091-29563 = 132529/-

Principal Reduced to = 10,00,000 -132529 =8 67,471/- Principal Money with Interest after One Year = 867471 ( 1.06)

EMBED Equation.3 = 8,93,116/-Interest = Tk (893116 8,67,471 ) = 25645/-Installment Size = 1,62,091/-Principal to be adjusted = 162091-25645 = 136446/-

Principal reduced to = tk (867471-136446) = 731025/-

Schedule :- Duration Installment Principal Paid Int. paid Balance 1st Semi 162091 132529 29563 867471 2nd Semi 162091 136446 25645 713025BANKING DIPLOMA EXAMINATION , MAY-12MANAGEMENT OF FINANCIAL INSTITUTIONS (MFI)

Question:

Small regional Bank is preparing a financial plan based on the following data: Target ROE 15%, Tax rate 40%,Total asset is Tk.25 Crore and total liabilities is Tk. 15 Crore.

i) What is the banks current equity multiplier?

ii) Given this EM, what before tax income must the bank earn to reach its target ROE?

iii) What is the Banks NIM, assuming that net non-interest expense is 1.5% and PLL is 0.35% of total assets?i) It is given that, Total Asset = 25 Crore , Total Liabilities = 15 Crore

We know, Equity = Total Asset - Total Liabilities

= 25 Crore 15 crore

= 10 Crore

Total Asset

Equity Multiplier = ---------------------

Equity

25 Crore

= ------------------ = 2.5 10 Crore

Net Income i) ROE (Return On Equity) = --------------------- x 100 Equity Equity = 10, 00, 00,000As ROE = 15% Then Net Income = 15% of 10, 00, 00,000 = 1, 50, 00,000 Tax Rate = 40%

If Earning before Tax = 100 then Net Income = 60 (By deducting Tax 40)

Now Net Income = 60 when Earning before Tax (EBT) = 100

100 x 1, 50, 00,000 ,, = 1,50,00,000 ,, ,, ,, = -------------------------- 60 = 2, 50, 00,000 So Earning Before Tax = 2, 50, 00,000 Interest income Interest Paid

ii) Net Interest Margin ( NIM) = -----------------------------------------------

Advances (Total asset) Net Income = 1, 50, 00,000Net Non-Interest Expenses = 1.5% of Total Asset

= 25, 00, 00,000 x 1.5%

= 37, 50,000

PLL = 0.35% of TA

= 0.35% x 25, 00, 00,000

= 8, 75,000

1, 50, 00,000 (37, 50,000 + 8, 75,000)

NIM = -------------------------------------------------------------- 25,00,00,000 = 4.15%BANKING DIPLOMA EXAMINATION , MANAGEMENT OF FINANCIAL INSTITUTIONS (MFI)

Question:

From the following information, Find out the capital requirement (Taken into consideration 9% of RWA) as the minimum capital has been fixed at Tk. 400 Cr. by regulator, and then what would be the total capital requirement?

AssetsAmount (Tk in Cr.)Risk weight9%)

Claims on Govt10000

Claims on Banks200018

Claims on SME150070

Consumer Finance1800125

Capital market exposure1000125

Solutions:AssetsAmount (Tk in Cr.)Risk weight (%)Risk weight Asset (RWA)

Claims on Govt

Claims on Banks

Claims on SME

Consumer Finance

Capital market exposure1000

2000

1500

1800

1000

0

18

70

125

1250

360

1050

2250

1250

73004910

9% RWA = Tk. 4910 Crore 9 % = Tk. 441.9 crore

= Tk. 442 CroreGiven,Minimum Capital = Tk. 400 Crore

Thus total Capital requirements = Tk. 442 Crore

Ans: According to risk based capital Guideline the total capital requirement is Tk. 442 crore.BANKING DIPLOMA EXAMINATION , MANAGEMENT OF FINANCIAL INSTITUTIONS (MFI)Question:

Suppose a bond of Tk. 1000 with the maturity of 4 years, 10 % coupon, at the effective yield to maturity (YTM) at 8%, calculate the market value and duration of the bond.

Solutions: At first we need to calculate market value/ present value n CFt Here, n = No. of cash flow, CFt= Coupon/ cash flow at time t. Market value = -------------------------

EMBED Equation.3 i = 1 (1 + YTM ) YTM= Yield to maturity, t= remaining period of Time to maturity. 100 100 100 100+1000 = ----------- + ------------ + ----------- + -------------------- (1+.08) (1+.08) (1+.08) (1+.08)

EMBED Equation.3 100 100 100 1100

= --------- + ------------ + ------------ + -------------

1.08 1.1664 1.2597 1.3604

= 92.59 + 85.73 + 79.38 + 808.58 = 1066.28 Now we calculate the duration of bond. n t CFt -------------------

i=1 (1+YTM) Duration of bond = -----------------------------------------

Market value/ Present value 1 100 2 100 3 100 4 (100+1000)

------------ + -------------- + ------------- + ------------------------

(1+.08) (1+.08) (1+.08) (1+.08)

EMBED Equation.3

= ------------------------------------------------------------------------------------------------ 1066.28 100 200 300 4400

------ + --------- + -------- + ---------

1.08 1.1664 1.2597 1.3604

= -------------------------------------------------------------- 1066.28[ 92.59+171.46+238.15+3234.34

= ----------------------------------------------- 1066.28 3736.54 = --------------- 1066.28 = 3.50 yearsAnns: i) Market value of the bond is Tk. 1066.28 ii) Duration of the bond is 3.50 Years.

BANKING DIPLOMA EXAMINATION , MANAGEMENT OF FINANCIAL INSTITUTIONS (MFI)

Question:

Following is the information provided by Aroma Ltd.

Market Value of liabilitiesTk.1800 Cr.

Market value of assetsTk. 2000 Cr.

Duration of assets5 Years

Duration of liabilities4 Years

Interest rate10 Percent

Change in interest rate+ 02 Percent

Calculate the change in equity, due to the interest rate change.

First,. we calculate market value of equity.It is given that,

Market value of assets = Tk. 2000 Cr

Market value of liabilities = Tk. 1800 Cr.

------------------------------------------------------Market value of equity = Tk. 200 Cr.Now, we need to calculate the change in equity due to interest rate change. Here change in interest rate = +02 %.Change in market value equity MVL D Gap = DA ---------- DL Here, DA = Duration of Asset MVA MVL= Market Value of Liability MVA= Market Value of Asset DL = Duration of Liabilities 1800 D Gap = 5 ------ X 4 = 5 .94 = 5 3.6 = 1.4 = 1.4 Years. 2000 i

MVE= (D Gap) --------- TA Here, D Gap= Duration Gap

(1+Y) i = Change in interest rate

TA = Total Asset

Y = Interest rate (YTM) 2% .02 MVE = 1.4 -------- X 2000 = 1.4 ------- 2000 = 1.4 36.36 = 50.90 = 51 1+.10 1.10

Change in equity = 51 Crore Current equity Value = (200 51) = 149 Crore

Ans: Change in equity is 51 Crore I.E. equity is decline due to interest rate rise & current equity value = 149 Crore.

BANKING DIPLOMA EXAMINATION , MANAGEMENT OF FINANCIAL INSTITUTIONS (MFI)

Question:

Following is the balance sheet of BE Bank Ltd as on December 31, 2010:-

LiabilitiesTk.in cr.AssetsTk.in cr.

Investments:

Net owned funds500Bond of X Ltd1000

1 year deposit @ 6%10000Bond of Y Ltd3000

Government Bond2000

1 year loans @ 8% 4500

Total1050010500

Details of Bond as under:

Details of BondTime to MaturityCouponYTM

Bond of X Ltd3 years10%10%

Bond of Y Ltd2 years10%10%

Government Bond3years8%10%

Assume expected return of 10% (I.E.YTM).

a) Find out duration of bond portfolio, loan assets and deposit, also find out duration of total assets.

b) For a given change of 100 basis points in interest rate, find out its impact on value of equity of BE Bank Ltd.

Solutions: a) YTM = 10 % At first we calculate the duration of X bond. n t CFt

------------------ Here, n= No. of cash flow

i=1 (1+YTM)

EMBED Equation.3 CFt = Coupon / cash flow at time t Duration of X Bond = ----------------------------------- YTM = Yield to maturity MV or PV t = Time to maturity MV or PV = Market value / Present value 1 100 2 100 3 (100+1000)

----------- + ------------- + ------------------------

(1+.10) (1+.10) (1+.10)

= ---------------------------------------------------------------------- [1000 10% =100]

100 100 100+ 1000

--------- + ------------ + ----------------

(1+.10) (1+.10)

EMBED Equation.3 (1+.10)

100 200 3300

----- + --------- + ---------

1.10 1.21 1.331 90.90+ 165.28 + 2479.33 2735.51 = ---------------------------------------- = --------------------------------- = ------------- 100 100 1100 90.90 + 82.64 + 826.44 999.98 ----- + --------- + --------

1.10 1.21 1.331 = 2.73 YearsThus the duration of X bond is 2.73 Years. Then we calculate the duration of Y bond.

n t CFt

-------------------- Here, n= No. of cash flow

i=1 (1+YTM) CFt = Coupon / cash flow at time t Duration of Y Bond = ----------------------------------- YTM = Yield to maturity

MV or PV t = Time to maturity

MV or PV = Market value / Present value

1 300 2 (300+3000)

------------ + ------ ------- ---------

(1+.10)

EMBED Equation.3

EMBED Equation.3

EMBED Equation.3 (1+.10)

= -------- --------------------------------------------- [3000 10% =300]

300 (300+3300)

----------- + ---------------------

(1+.10) (1+.10)

300 6600

----- + ---------

1.10 1.21 272.72 + 5454.54 5727.26 = ---------------------------- = ------------------------ = ------------- = 1.9090 years = 1.91 Years

300 3300 272.72 + 2727.27 2999.99 ----- + ---------

1.10 1.21

Thus the duration of Y bond is 1.91 Years. Now we calculate the duration of G bond. n t CFt -- ------------- Here, n= No. of cash flow

i=1 (1+YTM) CFt = Coupon / cash flow at time t

Duration of G Bond = ----------------------------- YTM = Yield to maturity

MV or PV t = Time to maturity

MV or PV = Market value / Present value

1 160 2 160 3 (160 + 2000) -------------- + ------ --------- + ------------------------

(1+.10) (1+.10) (1+.10)

= ------------------------------------------------------------------------------- [2000 8% =160]

160 160 160 + 2000 ---------- + ----------- + ----------------

(1+.10) (1+.10) (1+.10) 160 320 6480 ------- + --- --------- + --------------

(1.10)

(1.10) (1.10) 145.45 +264.46 + 4868.51 5278.42 = --------------------------------------- = ------------------------- = -------------- = 2.777 =

300 3300 2160 145.45 + 132.23 + 1622.83 1950.51 -------- + ------------ + ------------------

(1.10) (1.21) (1.10) = 2.78 Years

Thus the duration of G bond is 2.78 Years.

n t CFt

--------------- Here, n= No. of cash flow

i=1 (1+YTM) CFt = Coupon / cash flow at time t

1 Year loan Duratioon (D) = -------------------------------- YTM = Yield to maturity

MV or PV t = Time to maturity

MV or PV = Market value / Present value

1 360 + 4500 360+4500

---- ----------------- -----------------

(1+.10) 1.10

--------------------------- = --------------------- =1 Year

360 + 4500 360+4500

------------- -------------------

(1+.10) 1.10

1 Year loan Duration (D) is 1 year.28

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