UNIT 5: Banking and Financial Institutions

Numerical Questions
1. Consider the following balance sheets:
Assets Rs Duration Liabilities Rs Duration
(Years) (Years)
Cash 100 0.00 CD, 1 year 600 1.00
Business loan 400 1.25 CD, 5 years 300 5.00
Mortgage loans 500 7.00 Equity 100
Total 1000 Total 1000
The interest rate on the loans is assumed to be 13 percent, on deposits 11 percent and the cash
assets are assumed to earn no interest. Compute the average duration of assets, average duration
of liabilities, and duration gap based on the above information.
(Ans: 4 years; 2.33 years; 1.90 years)
2. Fill in correctly the missing items from the balance sheets and the statement of earnings and
expenses of the bank whose financial accountants are listed below:
Balance Sheet
Items Rs in million
Cash and inter-bank deposits 11
Investment securities ?
Federal funds sold 8
Loans, gross 81
Allowance for loan losses -6
Unearned discount on loans -1
Net loans ?
Premises and fixed assets 2
Miscellaneous assets 5
Total assets 110
Demand deposits ?
Savings deposits 20
Time depos its 65
Non-deposit borrowings 12
Total liabilities ?
Stockholder's equity capital 4
Statement of Earnings and Expenses
Revenue sources: Rs in million
Domestic loans interest on fees ?
Foreign loan interest and fees 6
Income from security investments 4
Miscellaneous revenues 1
Total revenues ?
Expenses:
Interest on deposits ?

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 Interest on non-deposit borrowings 1
Salaries and wages 2
Occupancy costs 1
Provision for loan losses 1
Miscellaneous expenses 2
Total expenses 15
Net operating income 3
Income taxes ?
Net income (or loss) after taxes 1
(Ans: Investment securities: Rs. 10 m; Net loan: Rs. 74 m; Demand deposit: Rs 9 m; Total
liabilities: Rs. 106 m; Total revenue: Rs. 18 m; Domestic loans interest on fees: Rs 7 m;
Income taxes: Rs. 2 m)
3. Suppose a bank offers loan at an annual interest rate of ten percent and pays four percent on
its deposits. The amounts of each loan and deposits in 2061 are Rs. 2,000 million and Rs.
1,800 million respectively, and they are the bank’s interest earning assets and interest paying
liabilities. What is the net interest income? What is the bank's interest spread?
(Ans: Rs 128 m; 6%)

4. Suppose a bank has earnings assets of Rs 200 million. The bank's projection cell estimated a
net interest n1argin (NIM) of 6 percent over the next year. Since the bank believes that the
interest rates may fluctuate by 200 points, the bank's n1anagen1ent is willing to accept
variation of 50 basis points in net interest n1argin as a result of expected change in interest
rate. Find out the maximum range of the Funding Gap.
(Ans: Rs 50 m)

5. Given the following information:

Assets Rs Million Rate Liabilities and Rs Million Rate
Equity
Rate-sensitive Rs 3,000 10 .0% Rate-sensitive Rs 2,000 8.0%
Non-rate-sensitive 1, 500 9.0% Non-rate-sensitive 2,000 7.0%
Non-earning assets 500 Equity 1,000
Rs 5,000 Rs 5,000

a. Calculate the expected net interest income at current interest rates, assuming no change in the
composition of the portfolio. What is the net interest margin?
b. Assuming that all interest rates rise by 1 percent, calculate the new expected net interest income
and net interest margin.
(Ans: Rs 135 m; 3% b. Rs 140 m; 3.11%)

6. Given the following information:

Assets Rs Million Rate Liabilities and Rs Million Rate
Equity
Rate-sensitive Rs 200 12 .0% Rate-sensitive Rs 300 6.0%

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 Non-rate-sensitive 400 11.0% Non-rate-sensitive 300 5.0%
Non-earning assets 100 Equity 100
Rs 700 Rs 700

a. What is the gap? Net interest income? Net interest margin? How much will net interest income
change if interest rates fall by 200 basis points?
b. What changes in portfolio composition would you recommend to management if you expected
interest rates to increase? Be specific.
(Ans: -Rs 100 m; Rs 35 m; 5.83%; Rs 0 b. The management should change the portfolio
composition rate sensitive assets should decrease and non-rate sensitive assets should
increase in the above situation.)

7. The following information is for Saraswati National Bank:

(Rs in million)
Interest income Rs 1,875 Non-interest income Rs 501
Interest expenses 1,210 Non-interest expenses 685
Total assets 15,765 Provision for loan losses 381
Securities gains (or losses) 21 Shares of common stock
Earnings assets 12,612 Outstanding 145,000
Total liabilities 15,440 Taxes 16
You are required to calculate:
a. ROE
b. ROA
c. Net interest margin
d. Earnings per share
e. Net non-interest margin
f. Net operating margin
(Ans: a. 32.32% b. 0.67% c. 5.27% d. Rs. 724.14 f. -1.46% g. 0.634%)

8. Suppose an investor invests Rs 10, 000 in open end mutual fund. The NAV is Rs.48 and the
offering price of the share is Rs. 50. At end of one year, the investor receives Rs.1 per share
of as dividends and sells the shares at a NAV of Rs. 51.
a. Calculate the HPR.
b. Assuming no load fee, calculate the HPR.
(Ans: 4% b. 8.33%)

9. The composition of the NB group closed end fund portfolio is as follows:

Stock Shares Price
A 200,000 Rs35
B 300,000 Rs40
C 400,000 Rs20
D 600,000 Rs25

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The fund has not borrowed any funds, but its accrued management fee with the portfolio
manager currently totals Rs 30,000. There are 4 million shares outstanding.
a. What is the net asset value of the fund?
b. Would you buy or sell shares of the fund if they are trading at Rs 10 per share?
c. Explain why the shares of a closed end fund usually have a price different from the NAV.
(Ans: a. Rs 10.4925 per share b. Buy c. Closed end funds have a fixed number of shares
outstanding. The share price is a function of supply and demand. Since close end funds issue a
fixed number of shares at a time, which thereafter trade freely on the market among investors,
depending on investors’ demand, a fund’s price may fall below or above its NAV.)

10. A closed end fund starts the year with a net asset value of Rs 24. By year end, its NAV
equals Rs 25. At the beginning of the year, the fund was selling at a 2 % premium to NAV.
By the end of the year, the fund is selling at 7% discount to NAV. The fund paid year end
distribution of income and capital gains of Rs 2.50.
a. What is the rate of return to an investor in the fund during the year?
b. What would have been the rate of return to an investor who held the same securities as
the fund manager during the year?
(Ans: a. 5.19% b. 14.58%)

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