Sample/practice exam 2017, questions PDF

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BFF2401 Commercial Banking and Finance

PRACTICE QUESTIONS Please note these are sample questions only. Examinable topics may vary. Question 1. Bank performance analysis

(6 + 8 + 6 = 20 marks)

Consider the following information for Caulfield Bank and Clayton Bank in 2015.

Return on Assets

Leverage Multiplier

Caulfield Bank

1.05% p.a.

15x

Clayton Bank

1.2% p.a.

17.5x

(a) Calculate the Return on Equity (ROE) for each bank. (b) Provide detailed reasons as to why ROE is higher for one bank than the other. Your answer should clearly explain any potential risks associated with a higher ROE. (c) Explain three (3) shortcomings in the use of financial ratios. In addition to financial ratio analysis, what other indicators of bank performance can also be used?

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BFF2401 Commercial Banking and Finance

Question 2.

Bank Performance / Capital Management

(6 + 3 + (3 + 8) = 20 marks)

(a) Monash Bank would like to increase its profitability. Based on the Dupont model, suggest two ways they can increase profitability and any risk implications. (b) Use the Asset Growth Model and the data below to project Bank ABC's simple capital ratio in one year's time. Capital at start of year Assets at start of year Asset growth rate Return on assets Dividend payout ratio

$1,170 million $14,128 million 12% per annum 1% per annum 70%

(c) Based on your answer in (b), if the projected capital ratio is less than the target capital ratio: (i) Would reducing the dividend ratio be an appropriate response? Explain your answer. (ii) What other actions might the bank consider in order to achieve the target? Consider advantages and disadvantages of each alternative.

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Question 3.

Liquidity Management

(8 + 6 + 6 = 20 marks)

(a) What is bank liquidity risk? How does liquidity risk arising from the liability side of the balance sheet differ from the asset side of the balance sheet? (b) What are the three major sources of bank liquidity? What are the two major uses? (c) Discuss the risk-return trade-off in the context of liquidity risk.

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Question 4.

Liability Management and Credit Risk

(6 + 6 + 8 = 20 marks)

(a) List 3 reasons why it is important that a bank diversifies its liability sources. (b) Monash Bank has a large exposure to home loans. Explain the specific types of credit risk Monash Bank will be exposed to as a result of this. (c) Monash Bank currently uses only statistical modelling to determine if they should approve a loan. Explain if there are any disadvantages of that methodology and suggest an alternative together with its disadvantages.

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BFF2401 Commercial Banking and Finance

Question 5: Bank liability management

(8 + 8 = 16 marks)

(a) What is the relationship between funding cost and funding (withdrawal) risk? Explain and illustrate your answer with a diagram. (b) Use the examples of current accounts and wholesale certificates of deposits to verify the relationship mentioned in part (a).

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BFF2401 Commercial Banking and Finance

Question 6: Interest rate risk and the repricing gap model (4 + 3 + 3 + (2 + 2) + 6 = 20 marks) Monash Bank has the following balance sheet. Assets

Rate sensitive assets Non-rate sensitive assets Non-earning Total

Rate earned p.a. 9%

Amount ($million)

Liabilities and Equity

550

7.5%

350

Rate sensitive liabilities Non-rate sensitive liabilities

100 1000

Equity Total

Rate paid p.a. 7%

Amount ($million)

5%

50

800

150 1000

(a) Calculate Monash Bank’s net interest income and repricing gap. (4 marks) (b) If interest rates increase by 100 basis points (assuming a parallel shift of the yield curve), what will be the expected change in Monash Bank's net interest income? (3 marks) (c) What will be the expected change in net interest income if interest rates on Rate Sensitive Assets increase by 150 basis points but interest rates on Rate Sensitive Liabilities increase by 100 basis points? (3 marks) (d) Based on the repricing gap calculated in part (a) and an anticipation of rising interest rates, discuss what specific balance sheet adjustments are appropriate if: i.

bank management adopts a defensive strategy; (2 marks)

ii.

bank management adopts an aggressive strategy. (2 marks)

(e) Name and explain three (3) weaknesses of the repricing gap model. (6 marks) (Total 20 marks)

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Question 7.

Capital Adequacy

(5 + 10 = 15 marks)

(a) Why are the regulators concerned with the levels of capital held by a financial institution compared to a non-financial institution? (b) What is the leverage ratio of a financial institution? What are the disadvantages of using leverage ratio as a measure of capital adequacy?

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Question 8.

OBS Business

(7 + 5 + 4 = 16 marks)

(a) Monash Bank has an underlying physical exposure, and buys a $500,000, 90 day FRA from ABC Bank with a FRA rate of 7%. At settlement the reference rate has risen to 7.5%. (i) How is this FRA settled? Calculate the payment. (ii) Has Monash Bank fully hedged its interest rate risk? Explain fully. (b) Explain how a bank could run an FRA book without taking on interest rate risk. Illustrate your answer with a diagram.

(c) Interpret the overall cost of borrowing for Counterparty A and Counterparty B if the current bank bill swap rate is 5%. BBR Counterparty A

7%

Capital market

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Counterparty B

6%

BBR+1.5

Money market

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