DISCUSSION QUESTIONS

Question $1$

a$.$ Briefly explain two of the following and state one strategy that can be used to manage it$.$

i$.$ Interest rate risk

ii$.$ Reinvestment risk

iii. Liquidity risk

b$.$ Banks encounter several risks in their operations. Briefly discuss the following risks and offer

two strategies the banks can adopt to manage each of these risks.

i$.$ Liquidity risks $(3$ marks$)$

ii$.$ Credit risks $(3$ marks$)$

iii. Operational risks $(3$ marks$)$

i$.$ Interest rate risks $(3$ marks$)$

Question $2$

i$.$ Assume the current one year bond rate is $8\%$ and two forward rates are $8\mathrm{.}5$ and $9\mathrm{.}2\%.$ Calculate the rate for a three year bond.

ii$.$ If the return on a two year bond is $44\%$ and a $1$ year treasury note has a yield of $18\%,$ what is the implied rate a $1$ year treasury note holder earns when he wants to roll it over for another year.

Question $3$

Distinguish between two of the following

i$.$ Cash budget and cash forecast

ii$.$ Expectations theory and Liquidity premium theory

iii. Repurchase agreement and reverse repurchase agreement.

Question $4$

i$.$ The total deposits and excess reserves of CTBank are Ghs$29,000,000$ and Ghs$850,000.$

respectively. Determine the reserves of CTBank.

ii$.$ Under what condition will equity multiplier of a bank be equal to $1.$ Is this possible in

a bank?

Question $5$

a$.$ i$.$ State two functions of the treasurer

ii$.$ The minimum cash balance and upper cash balance are $1,000$ and $10,000$ respectively.

Determine the target cash balance.

b$.$ Determine the upper limit for the cash account $($H$)$ if the target cash balance $($Z$)$ is Ghs$4,000,$ and the lower limit cash balance $($L$)$ is Ghs$1,000.$

c$.$ Determine the lower limit for the cash account $($L$)$ if the target cash balance $($Z$)$ is Ghs$6,000,$ and the upper limit cash balance $($H$)$ is Ghs$14,000.$

Question $6$

a$.$ Your company's Board of Directors has set GHS $50,000$ as the company's lower cash control limit$.$ You ascertain that the interest rate on investment is $0\mathrm{.}025\%$ per day. The company's variance of daily cash flows has been measured as GHS $700.$ Switching cost is GHS $50$ per transaction

i$.$ Calculate the spread.

ii$.$ Calculate the upper limit$.$

iii. Determine the target cash balance. Explain your answer.

b$.$ i$.$ Determine the upper limit for the cash account $($H$)$ if the target cash balance $($Z$)$ is

GHS$40,000$ and the lower limit cash balance $($L$)$ is GHS$10,000.$

ii$.$ Determine the lower limit for the cash account $($L$)$ if the target cash balance $($Z$)$ is

GHS$60,000$ and the upper limit cash balance $($H$)$ is GHS$140,000.$

Question $7$

a$.$ State one advantage of the Miller$-$Orr Model over the Baumol Model.

b$.$ A company generates GHS$400,000$ per month excess cash, which it intends to invest in short term securities$.$ The interest rate it can expect to earn on investment is $20\%$ per annum. The transaction cost associated with each separate investment of funds is GHS$400.$

i$.$ Calculate the cost of making transactions per annum.

ii$.$ Determine the opportunity cost of holding cash per annum.

iii. Calculate the optimum amount of cash to be invested in each transaction?

Question $8$

a$.$ State two merits of the Miller$-$Orr model over the Baumol model

b$.$ Suppose Mataheko Company falls to zero it generates $100,000$ at the beginning of every month either by borrowing or selling. It costs Mataheko $200$ each time it borrows or sells to raise cash. The opportunity cost of holding cash is $20\%.$

Calculate the following:

i$.$ Total cost

iii. Optimal Cash balance

iv$.$ Minimum Total Cost

Question $9$

The minimum cash balance of Miotso Enterprise is $15,000$ and standard deviation of cash flows is $21,$ interest rate per annum $25\%$ and the cost for each transaction is $30.$

i$.$ Calculate the spread

ii$.$ Calculate the upper limit

iii. Calculate the target cash balance

iv$.$ Discuss the decision that Miotso is expected to take with regards to its cash balances.

Question $10$

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