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Commercal Banking
Commercal Banking
Monash University
Faculty of Business and Economics
Department of Accounting and Finance
EXAM CODES:
TITLE OF PAPER:
EXAM DURATION:
3 hours
READING TIME:
10 minutes
THIS PAPER IS FOR STUDENTS STUDYING AT: (office use only - tick where applicable)
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Clayton
Peninsula
Distance Education
Caulfield
Gippsland
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During an exam, you must not have in your possession, a book, notes, paper, calculator, pencil case,
mobile phone or any other material/item which has not been authorised for the exam or specifically
permitted as noted below. Any material or item on your desk, chair or person will be deemed to be in
your possession. You are reminded that possession of unauthorised materials in an exam is a
disciplinable offence under Monash Statute 4.1.
AUTHORISED MATERIALS
CALCULATORS
YES
NO
(If YES, only calculators with an 'approved for use' Faculty label are permitted)
OPEN BOOK
YES
NO
YES
NO
This paper consists of seven (7) questions and one (1) formula sheet
printed on a total of twenty three (23) pages.
Students must attempt to answer ALL questions.
Paper adds to 70 marks
STUDENT ID: ...
DESK NUMBER: .
PLEASE CHECK THE PAPER BEFORE COMMENCING. THIS IS A FINAL PAPER. THIS EXAMINATION
PAPER MUST BE INSERTED INTO THE ANSWER BOOK AT THE COMPLETION OF THE PAPER. NO
EXAMINATION PAPERS SHOULD BE REMOVED FROM THE EXAMINATION ROOM
Question Two
Bank performance
(a) Monash banks financial statements for 2012 and 2013 are provided below:
Assets
Cash/liquidity
Loans etc
Premises etc
Total
Balance Sheet
2013
Liabilities
21,600,000 Current debt
Long term
264,000,000 289,200,000 debt
2,400,000
2,400,000 Equity
283,200,000 313,200,000 Total
2012
16,800,000
2012
148,800,000
2013
153,600,000
112,800,000 136,800,000
21,600,000
22,800,000
283,200,000 313,200,000
Income Statement
2012
2013
Interest revenue
12,000,000 12,480,000
Interest expense
-3,600,000 -4,032,000
Net interest
income
8,400,000 8,448,000
Non-interest
income
2,160,000 2,400,000
Non-interest
expense
-3,600,000 -3,600,000
Net non-interest
cost
1,440,000 1,200,000
Net operating
income
6,960,000 7,248,000
Tax (30%)
-2,088,000 -2,174,400
Net income
4,872,000 5,073,600
Using the data provided above, compute the 5 ratios in the Du Pont Model for 2012 and
2013. You may tabulate the ratios.
(b) Given the ratios you have calculated in Question Two (a), comment on the
performance of Monash Bank.
(c) What further information would help you make a more complete assessment?
(d) Distinguish between return on equity (ROE) and shareholder's rate of return.
(2.5 + 2.5 + 3 + 3 = 11 marks)
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Question Three
Banking Book
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Question Four
Capital Management
(a) In December 2013 XYZ Bank announced a decline in profit by 15% compared to its
previous years performance. At the same time, XYZ Bank also declared that it would
maintain its dividend payments like previous year. Suggest why XYZ Bank still maintains
its dividend payment despite a decline of 15% in its performance.
(b) Use the data below
(i) Calculate the internal capital generation rate for Bank XYZ.
(ii) Project Bank XYZ'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
Target capital ratio
$3,780 million
$54,100 million
15% per annum
1.2% per annum
55%
7%;
(c) Explain the meaning of the two numbers calculated in Question 4(b).
(d) Based on the calculation in Question 4 (b), should the bank increase or decrease external
capital and by how much?
(4+ 3+ 2+ 2 = 11 marks)
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Question Five
(a) Explain three reasons why banks may become involved in market related derivative
transactions activities.
(b) Monash Bank has provided a letter of credit in support of an issue of mortgage backed
securities, but, due to a liquidity crisis in financial markets, the issuer finds it cannot sell
the securities. How will this affect Monash Bank?
(c) What payment (in dollars) would be made, and by whom, to settle an FRA (Forwardrate agreement) with the following conditions?
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15
(b)
Assume a bank with 10 million outstanding shares pays perpetual annual dividends
of $2/share. If investors require 8% rate of return, what is the total shareholders
value of this bank.
(7 + 2 = 9 marks)
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Question Seven
19
Answer ALL questions (10 x 1 = 10 marks). For each question, select the BEST answer of
the choices provided. All answers must be written on the space provided on page 22.
7.1
A bank with a positive interest-sensitive gap will have a decrease in net interest
income when interest rates in the market:
a.
b.
c.
d.
7.2
Which of the following factor(s) can affect banks' debt-equity mix decision from the
viewpoint of shareholders?
a.
b.
c.
d.
7.3
7.6
From the viewpoint of bank shareholders, what is (are) the advantage(s) of using debt
to finance assets?
a.
b.
c.
d.
e.
7.5
dividend policy
ownership control
financial risk
all of the above
7.4
rise
fall
stay the same
a bank with a positive interest-sensitive gap will never have a decrease in net
interest income
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a.
b.
c.
d.
7.7
If a trader buys a put option, he (she) will make a profit if the price of the underlying
asset:
a.
b.
c.
d.
7.8
Monash Bank is forecasting that interest rates are likely to be raised by the central
bank. How the bank could play the yield curve (use the cyclical approach) to cover
its position in its security investment.
a.
b.
c.
d.
7.10
increases
decreases
increases and then decreases
decreases and then increases
7.9
Forward contracts differ from futures contracts in which of the following ways:
a.
b.
c.
d.
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22
Formulae
Compound Interest
PV S 1i
Effective Interest
m
j
i e 1 1
m
S FV
A PV
FV A 1 i
Bill Price
36500 Face Value
Price
36500 IR days
Annualised return
Sale Price Purchase Price
36500
R
Purchase Price
days held
Ordinary Annuity
n
PV R i 1 1i
FV R i 1 i 1
n
Perpetual Annuity
p Dividends/ R
Bond Price
P PV coupons PV face value
Asset Growth Model
C A1 AGR ROA1 D
CR1
A1 AGR
Internal capital generation rate
ICGR = [1/capital ratio] x ROA x (1-D)
Customer Profitability Analysis
net income before tax
Re turn on allocated capital
allocated capital
Interest rate risk
Gap$ = RSA - RSL
NII Gap$i
END OF EXAMINATION
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