Sunday, 6 January 2013
FALL 2012
MONEY AND BANKING (MGT411)
ASSIGNMENT # 2
DUE DATE: 8
TH
JANUARY, 2013 MARKS: 30
Learning Objectives:
The first question will enable the students to understand liquidity risk and various ways to
mitigate this risk.
The second question will enable the students to understand interest rate risk and the effect of
this risk on the profitability of the banks.
Question No. 1:
a) You are a bank manager and given the responsibility to manage the liquidity risk being faced by the
bank. The Balance Sheet of the bank is given below:
Table: Balance sheet of a bank holding no excess reserves
Asset s (in Million) Liabiliti es (in Million)
Reserves Rs.15
million
Deposits Rs.90
million
Rs.100millio
n
Loans Rs.95
million
Borrowed funds Rs.35
million Securities Rs.35
million
Bank capital Rs.20
million
A customer demands Rs.5 million cash withdrawals from the bank; what changes in the above
Balance Sheet will occur if you decide to manage the liquidity risk through:
1. Adjusting assets by:
a. Selling the securities
b. Reducing the loans
2. Adjusting liabilities by:
a. Borrowings
b. Attracting deposits
Note: You are required to prepare four different Balance Sheets for each of the above mentioned
strategies. (10 marks)
b) Discuss why bankers prefer liability management over asset management in order to mitigate
liquidity risk? (5 marks)
Question No. 2:
a) You, as a bank manager, are managing the bank’s assets and liabilities in such a way that interest
rate the bank has to pay on its liabilities is 4% while interest rate the bank charges on its various
assets is 6%. Suppose 30% of the bank’s assets fall into the category of interest-sensitive while
others are not sensitive to the changes in interest rate. Similarly, half of the bank’s liabilities are
interest-sensitive while rests of the half are not. What will be the impact on the profitability of the
bank if the interest rate rises by 1% on all assets and liabilities of the bank? (10 marks)
b) What will be the impact of increase in interest rate on the profitability of the bank if the bank has
more interest-sensitive liabilities than interest-sensitive assets? (5 marks)
IMPORTANT:
24 hours extra / grace period after the due date is usually available to overcome uploading
difficulties. This extra time should only be used to meet the emergencies and above mentioned due
dates should always be treated as final to avoid any inconvenience.
MONEY AND BANKING (MGT411)
ASSIGNMENT # 2
DUE DATE: 8
TH
JANUARY, 2013 MARKS: 30
Learning Objectives:
The first question will enable the students to understand liquidity risk and various ways to
mitigate this risk.
The second question will enable the students to understand interest rate risk and the effect of
this risk on the profitability of the banks.
Question No. 1:
a) You are a bank manager and given the responsibility to manage the liquidity risk being faced by the
bank. The Balance Sheet of the bank is given below:
Table: Balance sheet of a bank holding no excess reserves
Asset s (in Million) Liabiliti es (in Million)
Reserves Rs.15
million
Deposits Rs.90
million
Rs.100millio
n
Loans Rs.95
million
Borrowed funds Rs.35
million Securities Rs.35
million
Bank capital Rs.20
million
A customer demands Rs.5 million cash withdrawals from the bank; what changes in the above
Balance Sheet will occur if you decide to manage the liquidity risk through:
1. Adjusting assets by:
a. Selling the securities
b. Reducing the loans
2. Adjusting liabilities by:
a. Borrowings
b. Attracting deposits
Note: You are required to prepare four different Balance Sheets for each of the above mentioned
strategies. (10 marks)
b) Discuss why bankers prefer liability management over asset management in order to mitigate
liquidity risk? (5 marks)
Question No. 2:
a) You, as a bank manager, are managing the bank’s assets and liabilities in such a way that interest
rate the bank has to pay on its liabilities is 4% while interest rate the bank charges on its various
assets is 6%. Suppose 30% of the bank’s assets fall into the category of interest-sensitive while
others are not sensitive to the changes in interest rate. Similarly, half of the bank’s liabilities are
interest-sensitive while rests of the half are not. What will be the impact on the profitability of the
bank if the interest rate rises by 1% on all assets and liabilities of the bank? (10 marks)
b) What will be the impact of increase in interest rate on the profitability of the bank if the bank has
more interest-sensitive liabilities than interest-sensitive assets? (5 marks)
IMPORTANT:
24 hours extra / grace period after the due date is usually available to overcome uploading
difficulties. This extra time should only be used to meet the emergencies and above mentioned due
dates should always be treated as final to avoid any inconvenience.
