Financial Institutions Management Sample Examination

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FIN3FIM Financial Institutions Management Sample Examination Solutions

FIN3FIM Financial Institutions Management

1

Sample Examination 3

The following information, and Questions 1, 2 and 3 below, relate to Chartwell Banking Corporation for the year ending 31 December 2007.

Profit and Loss Statement for the period 1 January to 31 December 2007 $m 48.0 12.0 60.0 31.0 17.0 48.0 12.0 4.2 7.8

Interest Revenue Non-interest Revenue Total Operating Revenue Interest Expense Non-interest Expense Total Operating Expenses Operating Profit before Tax Income Tax (35%) Operating Profit after Tax

Balance Sheet as at 31 December 2007

Assets Cash Treasury Notes Commercial Paper Certificates of Deposit Treasury Bonds Corporate Bonds Government Loans Commercial Loans High Quality 34 Medium Quality 16 Consumer Loans High Quality 24 Medium Quality 14 Housing Loans Foreign Loans ESA Balances Fixed Assets TOTAL ASSETS

$m 4 14 28 18 24 16 14

Liabilities Current Accounts - Interest - Non-interest Savings Accounts Term Deposits Certificates of Deposit Unsecured Notes Perpetual Subordinated Debt Total Liabilities Shareholders’ Equity Ordinary Shares Preference Shares Retained Earnings Share Premium Reserve Asset Revaluation Reserve Total Shareholders’ Equity TOTAL LIABILITIES & S.H.E.

$m 56 44 44 31 25 32 16 248 $m 22 2 13 6 9 52 300

50

38 56 11 3 24 300

FIN3FIM Financial Institutions Management

2

Sample Examination 3

Off-balance sheet items: • • • • • A line of credit to the value of $160m has been extended to the Martin Manufacturing Company. This line of credit has a residual maturity of 1.5 years. Standby letters of credit (serving as financial guarantees) to the value of $125m have been issued to the Tehran Banking Company (the largest commercial bank in Iran). Forward interest rate agreements with Australian companies totalling $135m, which have 3 years to maturity. Share price options totalling $120m that have been purchased on the Australian Securities Exchange. Sale and repurchase agreements to the value of $210m with U.S. companies. The credit risk associated with these agreements remains with the bank.

In addition to credit risk associated with some or all of the above items, the bank has determined that it requires a capital charge for market risk of $35m.

Other information: • • The Certificates of Deposit included in the bank’s assets have been issued by Australian banks. The commercial loans and consumer loans are unsecured loans to private companies and individuals, respectively. The housing loans are fully secured by registered mortgages over residential property. The government loans are to local governments. The foreign loans are to British Telecom (a non-commercial public sector entity). All loans are denominated in Australian dollars. The government loans, commercial loans, consumer loans and foreign loans are fixed interest loans. The housing loans are variable interest loans. The corporate bonds are recorded on the balance sheet at face value. They have just paid a coupon payment. They mature in 2 years. They pay interest semi-annually at a coupon rate of 8% p.a. The current yield is 7% p.a. The preference shares are non-cumulative, irredeemable preference shares. The weighted average duration of the bank’s assets is 10 years. The weighted average duration of the bank’s liabilities is 15 years.

• • • • •

• •

Gap report for Chartwell Banking Corporation as at 31 December 2007 Less than 6 months 125 55 0 -25 45 45 6 – 12 Months 50 65 0 -33 -48 -3 1–5 Years 50 36 0 -14 0 -3 3

Assets Liabilities Equity OBS items Net Gap Cumulative

Over 5 years 60 50 0 128 138 135

NonInterest 15 42 52 0 -158 -23

Total 300 248 52 56

FIN3FIM Financial Institutions Management

Sample Examination 3

Question 1 (a) Calculate Chartwell’s Capital Adequacy Requirement. (You should use the Original Exposure method when calculating the conversion factor for any market-related...
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