QUESTION 3a Data sourced from Ifess (Integrated Fasttime Equity System) has given the following swap rates. Think of these swap rates as spot interest rates. Swap maturity 30 June 2019 30 June 2020 1 year 3.250 3.00 2 year 3.150 3.28 3 year 2.750 3.12 4 year 3.150 3.07 5 year 3.550 3.25 Using the …
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QUESTION 3a
Data sourced from Ifess (Integrated Fasttime Equity System) has given the following swap rates. Think of these swap rates as spot interest rates.
| Swap maturity | 30 June 2019 | 30 June 2020 |
| 1 year | 3.250 | 3.00 |
| 2 year | 3.150 | 3.28 |
| 3 year | 2.750 | 3.12 |
| 4 year | 3.150 | 3.07 |
| 5 year | 3.550 | 3.25 |
- Using the data as given on 30 June 2019, calculate the relevant forward rates. State exactly what information each of these forward rates gives.
- Now using the data from the table for 30 June 2020 state the 1-year, 2-year, 3-and 4-year year spot rates that prevailed on that date. What appears to have happened?
- Using the data as given on 30 June 2020, calculate the relevant forward rates.
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QUESTION 3b
A financial institution has the following balance:
Balance Sheet (in million) |
|||
Assets |
Liabilities |
||
| Cash | 18 | Deposits | 140 |
| Government securities | 18 | Borrowed Funds | 20 |
| Other Assets | 164 | Equity | 40 |
| Total | 200 | Total | 200 |
In 2020 COVID-19 increased the liquidity needs of a bank servicing the affected community as depositors withdrew deposits to the value of $40 million.
Withdrawal of Deposits |
|||
Assets |
Liabilities |
||
| Cash | Deposits | ||
| Government securities | Borrowed Funds | ||
| Other Assets | Equity | ||
| Total | Total | ||
Would you recommend this bank rely more on asset liquidity or liability liquidity to meet these additional requirements? Give reasons. Show how you would manage the bank’s liquidity position. What other information that the financial institution would possess would improve your decision. Be specific.
QUESTION 4a
Some members of the accounting profession are advocating market value accounting for banks.
Explain the arguments for and against market-value accounting. In your answer ensure that you clearly explain “real losses” and “paper losses” and the role of moral hazard in the application of market value accounting. Use a simplified bank balance sheet to illustrate your response.
QUESTION 4b
Using the data in the table below, determine the return on asset, sustainable growth rate, and projected capital ratio.
| Sustainable Internal Growth for Banks | |
| Average total assets | $1,000,000,000 |
| Average equity capital | $68,000,000 |
| Expected net profit margin (%) | 8.75 |
| Expected yield on average total assets (%) | 14.00 |
| Cash dividend payout percentage (%) | 30.00 |
| Planned asset growth rate (%) | 12.00 |
Using an appropriate method show which variable has the greatest impact on sustainable growth.
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