Question 1 (a) Financial institutions aim to achieve the equivalent of maturity of assets and maturity of liabilities to avoid the interest rate risk. In the real financial market, which scenario is always found between maturity of assets and maturity of liabilities? What kind of interest rate risk will be occurred due to this scenario? Discuss and justify your answer with support. (Word limit = 400) (15 marks) Marking rubric for Question 1(a): 13-15 10-12 7-9 4-6 1-3 Appropriate Appropriate Appropriate Inappropriate Inappropriate scenario and scenario and scenario and scenario and scenario and type of interest type of interest type of interest type of interest type of interest rate risk. rate risk. Clear rate risk. rate risk. rate risk. Poor Detailed linkage with Moderate Ambiguous logical analysis of facts facts and theory linkage with logical discussion, no and theory on on the logical facts and discussion, lack justification and the scenario. explanation on theory on the of justification no support from Relevant and the scenario. scenario. and support from journal article(s) detailed of Relevant and Moderate journal article(s) on the scenario. discussion, sufficient of discussion, on the scenario. justification and discussion, , justification support from justification and and support journal article(s) support from from journal on the scenario. journal article(s) article(s) on on the scenario. the scenario. |(b) Bank VIVA has issued a one-year loan commitment of $15 million for an up-front fee of 12 basis points. The back-end fee on the unused portion of the commitment is 8 basis points. The bank requires a compensating balance of 8 per cent as demand deposits. The interest rate on the loan is 9 per cent, cost of capital is 5% and reserve requirements on demand deposits are 6 per cent. The customer is expected to draw down 60 per cent of the commitment at the beginning of the year. di() What is the expected return on the loan without taking future values into consideration? |(6 marks) (ii) | Discuss the expected annual return on the loan if the draw-down on the commitment does not occur at the end of six months? |(4 marks) (c) Loan commitment enables the borrowers to draw down the loan at any time within the approved loan period. Would this loan commitment lead financial institutions expose to interest rate risk? How can financial institutions overcome the relevant problem if any? Justify your answer with support. (Word limit = 300) (10 marks) Marking rubric for Question 1(c): 9-10 7-8 Appropriate Appropriate answer. answer. Clear Detailed linkage with analysis of facts facts and theory and theory on on the the explanation. explanation. Relevant and Relevant and detailed of sufficient of discussion, discussion, justification and justification and support from support from journal article(s) journal article(s) on the on the explanation. explanation 5-6 3-4 1-2 Appropriate Inappropriate Inappropriate answer. answer. answer. No Moderate Insufficient of explanation, no linkage with discussion, lack justification and facts and of justification no support from theory on the and support from journal article(s). explanation. journal article(s) Moderate on the discussion, explanation. justification and support from journal article(s) on the explanation. [Total: 35 marks] Question 1 (a) Financial institutions aim to achieve the equivalent of maturity of assets and maturity of liabilities to avoid the interest rate risk. In the real financial market, which scenario is always found between maturity of assets and maturity of liabilities? What kind of interest rate risk will be occurred due to this scenario? Discuss and justify your answer with support. (Word limit = 400) (15 marks) Marking rubric for Question 1(a): 13-15 10-12 7-9 4-6 1-3 Appropriate Appropriate Appropriate Inappropriate Inappropriate scenario and scenario and scenario and scenario and scenario and type of interest type of interest type of interest type of interest type of interest rate risk. rate risk. Clear rate risk. rate risk. rate risk. Poor Detailed linkage with Moderate Ambiguous logical analysis of facts facts and theory linkage with logical discussion, no and theory on on the logical facts and discussion, lack justification and the scenario. explanation on theory on the of justification no support from Relevant and the scenario. scenario. and support from journal article(s) detailed of Relevant and Moderate journal article(s) on the scenario. discussion, sufficient of discussion, on the scenario. justification and discussion, , justification support from justification and and support journal article(s) support from from journal on the scenario. journal article(s) article(s) on on the scenario. the scenario. |(b) Bank VIVA has issued a one-year loan commitment of $15 million for an up-front fee of 12 basis points. The back-end fee on the unused portion of the commitment is 8 basis points. The bank requires a compensating balance of 8 per cent as demand deposits. The interest rate on the loan is 9 per cent, cost of capital is 5% and reserve requirements on demand deposits are 6 per cent. The customer is expected to draw down 60 per cent of the commitment at the beginning of the year. di() What is the expected return on the loan without taking future values into consideration? |(6 marks) (ii) | Discuss the expected annual return on the loan if the draw-down on the commitment does not occur at the end of six months? |(4 marks) (c) Loan commitment enables the borrowers to draw down the loan at any time within the approved loan period. Would this loan commitment lead financial institutions expose to interest rate risk? How can financial institutions overcome the relevant problem if any? Justify your answer with support. (Word limit = 300) (10 marks) Marking rubric for Question 1(c): 9-10 7-8 Appropriate Appropriate answer. answer. Clear Detailed linkage with analysis of facts facts and theory and theory on on the the explanation. explanation. Relevant and Relevant and detailed of sufficient of discussion, discussion, justification and justification and support from support from journal article(s) journal article(s) on the on the explanation. explanation 5-6 3-4 1-2 Appropriate Inappropriate Inappropriate answer. answer. answer. No Moderate Insufficient of explanation, no linkage with discussion, lack justification and facts and of justification no support from theory on the and support from journal article(s). explanation. journal article(s) Moderate on the discussion, explanation. justification and support from journal article(s) on the explanation. [Total: 35 marks]
