BX2133 Management of Financial Institutions Formal Examination SP53, 2021
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BX2133 Management of Financial Institutions
Formal Examination SP53, 2021
Online Final Examination
Question 1 (20 marks)
Financial institutions play an important role in the financial markets as a middleman to channel the liquidity among the investors who have surplus and deficit of funds to supply and demand, respectively. Nowadays, financial technology makes the liquidity transfers
much easier as compared to the past.
Required:
(a) List and discuss three typical problems observed and existed in the financial markets in terms of supply and demand for liquidity, and how the financial institutions can mitigate the respective problems.
(8 marks)
(b) Discuss the specific roles and functions of any four types of financial institutions except for central bank.
(4 marks)
(c) Evaluate the functions of the central bank? How the central bank could protect the benefits and rights of the investors in the financial markets.
(4 marks)
(d) Critically evaluate the risks which the financial instutions expose to, and highlight one risk which you think is important today.
(4 marks)
Question 2 (20 marks)
Element Fund Ltd. has both borrowings and investments shown on its statement of financial position as at 31st December in non-current liabilities and non-current assets, respectively.
Specifically, Element Fund issued a long-term corporate bond with a par value of $1,000, paying 8 percent coupon rate semi-annually and maturity of 10 years, and a mid-term corporate bond with a par value of $1,000, paying 5 percent coupon rate semi-annually and maturity of 5 years.
Element Fund invested in a long-term government bond with a par value of $1,000, paying 6 percent coupon rate semi-annually and maturity of 15 years, and another long-term government with a par value of $1,000, paying 5 percent coupon rate semi-annually and maturity of 10 years.
Assume the market yields for 5-, 10- and 15-year are 6%, 8% and 10%, respectively. No market frictions.
Required:
a) Compute the Durations for assets and liabilities of Element Fund Ltd.
(8 marks)
b) Are assets or liabilities more sensitive to interest rate changes? How could you help Element Fund immunize against its interest rate risk exposes for both assets and liabilities?
(7 marks)
c) In what circumstances of interest rate changes, duration is a good and bad immunization strategies for eliminating interest rate risk in Assets-Liabilities Management (ALM) of Element Fund?
(5 marks)
Question 3 (20 marks)
Consider the following balance sheet items for Evergreen Bank (in US$ billions):
Assets |
US$ |
Liabilities & Equity |
US$ |
Cash |
10 |
1-Year Term Deposits (8.5% p.a.) |
85 |
Floating-rate mortgages (13.5% p.a.) |
65 |
2-year term deposits (9.5% p.a.) |
35 |
20-year fixed-rate loans (8.5% p.a.) |
75 |
Equity |
30 |
Total Assets |
150 |
Total Liabilities & Equity |
150 |
Required:
a) What is the expected annual net interest income for Evergreen Bank?
(5 marks)
b) Using the cumulative repricing gap model, what is the expected net interest income if interest rate increases by 1.5%?
(5 marks)
c) What is the net interest income if interest rates on rate sensitive assets increase by 3%, and interest rates on rate sensitive liabilities increase by 1.75%?
(5 marks)
d) Discuss the factors affecting the sensitivities of assets and liabilities to interest rate changes.
(5 marks)
Question 4 (20 marks)
Janice is the chief financial officer (CFO) of Smart Bank, a Singapare based commercial bank with digital banking license. Smart Bank announced its financial statement recently. On the board meeting, Janice was tasked to address the questions pertaining to the financial statement of Smart Bank.
Balance Sheet of Smart Bank as at 31st December 2021
Assets |
$ ‘000 |
Notes |
|
Current Assets Cash & equivalents |
$15,000,000 |
|
|
Short-term Treasury Securities |
4,000,000 |
Investment grade |
|
Short-term Commercial Papers Non-Current Assets Mortgagges |
2,500,000 100,000,000 |
Investment grade |
|
Long-term Government Bonds |
6,000,000 |
AAA rated including foreign bonds |
|
Long-term Corporate Bonds |
1,000,000 |
AA rated including foreign bonds |
|
Total Assets |
$128,500,000 |
|
|
Liabilities |
|||
Current Liabilities Savings Repos Bank Bills Long-term Liabilities |
Bonds |
10,000,000 1,560,000 12,000,000 10,000,000 |
AA rated corporate bonds |
Long-term Corporate |
|||
Net Assets Value |
|
94,940,000 |
|
Equities |
|
$94,940,000 |
|
Note: Maturity of long-term investments is an average 10 years. Maturity of long-term financing is an average 15 years.
a. If you were one of the directors of Smart Bank, which five potential risks the bank exposes to you would like to ask Janice on the board meeting?
(5 marks)
b. Compute the current ratio and gearing ratio of Smart Bank in 2021. Discuss your answers.
(6 marks)
c. If you were the CFO of Smart Bank, choose three risks to illustrate how you would hedge them based on the information in the balance sheet.
(5 marks)
d. List four factors which you think affecting the long-term corporate bonds which Smart Bank invests and issues.
(4 marks)
2022-10-06