FINA706 Financial Institutions and Markets- Bank Invests
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Task
1. Consider a 30-year fixed-rate mortgage for $800,000 at an annual rate of 5%. If the borrower adds $500 on top of the scheduled monthly payment, assuming the annual mortgage rate stays the same during the loan period, in how many years will this mortgage loan be paid off? You must show your calculations or your inputs to Excel or financial calculator or marks will be deducted.
2. ABC Bank has total checkable deposits of $100 million in its account. Its capital, including common stocks, retained earnings, preferred stocks and subordinated debt is $10 million. The reserves required by the central bank is 8% of total deposits. The bank invests in commercial loans with total loans value of $70 million. Assume ABC does not invest in any other assets and has no other liabilities.
a) Show the bank’s balance sheet.
b) Calculate the total risk-based capital ratio of the bank. You must show your calculations or marks will be deducted.
c) Explain whether ABC’s total capital complies with Basel III’s total capital requirements.
3. Omega Bank has total checkable deposits of $100 million in its account. The reserves required by the central bank is 8% of total deposits. The amount of the bank’s excess reserves is $32 million. There are unexpected deposit withdrawals of $35 million due to recession. To meet any shortfall in required reserves, Omega Bank decides to borrow from the Fed funds market for the remainder of the month, which is 28 days. The required yield of this loan on discount basis is 2.5%. How much will the bank owe when this debt matures? (You must show your calculations, or marks will be deducted).
4. Explain two main actions that the RBNZ undertook to lower the interest rate to prevent an economic and financial crisis in New Zealand in response to the COVID-19 pandemic?
5. Below is the balance sheet of XYZ bank.
|
ASSETS |
Amount ($M) |
Duration (Years) |
Weighted Duration |
Liabilities |
Amount ($M) |
Duration (Years) |
Weighted Duration |
|
Reserves |
10 |
0 |
0 |
Checkable Deposits |
10 |
2 |
0.27 |
|
Securities |
|
|
|
Money Market Deposits |
5 |
0.1 |
0.01 |
|
|
15 |
0.4 |
0.08 |
Savings Account |
10 |
1.5 |
0.2 |
|
>1 Year |
2 |
5 |
0.13 |
Certificates of Deposits |
|
|
|
|
Mortgages |
|
|
|
Variable Rate |
10 |
0.5 |
0.07 |
|
Variable Rate |
10 |
0.5 |
0.06 |
|
18 |
0.4 |
0.1 |
|
Fixed Rate |
10 |
6 |
0.75 |
>1 Year |
5 |
4 |
0.27 |
|
Commercial Loans |
|
|
|
Interbank Loans |
5 |
0 |
0 |
|
|
8 |
0.7 |
0.07 |
Borrowings |
|
|
|
|
>1 Year |
15 |
4 |
0.75 |
|
10 |
0.3 |
0.04 |
|
Building etc. |
10 |
0 |
0 |
>1 Year |
2 |
3 |
0.08 |
|
|
|
|
|
Capital |
5 |
|
|
|
Total Assets |
80 |
|
|
Total Liabilities and capital |
80 |
|
|
If interest rates decrease from 10% to 9%, then:
a) Calculate the duration gap of the bank’s assets and liabilities. You must show your calculations, or marks will be deducted.
b) What will be the dollar change in the bank’s net worth? You must show your calculations, or marks will be deducted.
c) What will be the amount of Capital of the bank after the change in interest rates? You must show your calculations, or marks will be deducted.
6. Given the balance sheet of XYZ bank as in question 5 above, explain two strategies: one strategy related to the bank’s assets and the other one related to the bank’s liabilities, to manage the bank’s interest rate risk.
7. Smith is 19 years old. He wants to retire at 65. The pension plan Smith has chosen has an average annual return of 6%. How much would he need to contribute to the pension plan every month so that he has $10,000,000 when he retires at 65? You must show your calculations or your inputs to Excel or financial calculator, or marks will be deducted.
8. Given a flat yield curve, explain the expectation about the future of the economy. (Not more than 30 words, or marks will be deducted)
9. Research indicates that 1,600,000 cars in your city experience unrecoverable total losses of $400,000,000 per year from theft, collisions, etc. If 30% of premiums are used to cover operating expenses, what is the minimum amount of premium that must be charged to car owners? (You must show your calculations, or marks will be deducted).
10. Use the information in Kiwibank’s Disclosure Statement at the end of June 2021 to evaluate the bank’s compliance with the capital requirements. The link to Kiwibank’s Disclosure statement is provided below. You need to copy the link and paste it into your browser to open it.
https://media.kiwibank.co.nz/media/documents/kiwibank_full_year_result_presentation_2021.pdf
a) What are Kiwibank’s CET Tier 1 capital ratio, Tier 1 capital ratio, and Total capital ratio at the end of June 2021?
b) Compare the ratios above to the NZ regulatory minimum required ratios (which include the Capital Buffer Ratio). Did Kiwibank meet the current minimum capital requirements?
(You must show your working, or marks will be deducted).
(You must show your working, or marks will be deducted).
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