Questions a) Savers of funds often seek to transfer risks of holding the funds to financial institutions who take these funds as deposits. Financial institutions in tend charge a percentage on these deposits for the assumption of risks. Again, financial institutions are considered as managers who seek to create wealth with collected funds from savers. As a manager of a financial institution, outline some of the inherent risks of financial institution in their conduct as intermediaries. AN (5) b) The following table depicts a series of assets and liabilities of a financial institution from a One-day bucket to a 5-year investment maturity. As a financial analyst, find the effect of a one percentage interest rate change on the net interest income of the bank for the three months bucket alone. Again, find the change in net interest income on the six months' cumulative gap of the bank Assets Assets Liabilities Gaps Cumulative Gap S-10 S20 S30 S-10 30 40 -10 -20 70 85 -15 -35 1. One day 2. More than one day-three months 3. More than three months - six months 4. More than six months- 12 months 5. More than one year - five years 6. Over five years 90 70 +20 -15 40 30 +10 -3 10 5 +5 0 $260 $260 0 AP (10) C) Assume that the risk sensitive assets (RSAs) of a bank is equal to its rate sensitive liabilities (RSLs) equal $155 million. Suppose that rates rise by 1.2 percent on RSAS and by 1 percent on RSLs (ie. the spread between the rates on RSAs and RSLS increases by 1.2 percent - 1 percent=0.2 percent). To what extent will these changes in interest rates affects the bank's net interest income. CR (5) TOTAL 120 MARKS