Sainik Awasiya Mahavidyalaya, Sallaghari Bhaktapur
Pre-board Examination, 2074
Seventh Semester
BNK 201 Financial Institutions and Market
Group A (1*10=10)
- Banks and financial institutions play a vital role in reducing the transaction cost.
- The future interest rate is always higher than spot interest rate.
- Closed end fund shares often trade at a discount or premium relative to NAV.
- The treasury bills issued by Nepal Rastra Bank is one of the examples of Open Market Operation.
- Margin requirement on collateral pledged against loan is one of the selective monetary tools used by central bank to control money supply in the nation.
- Firm commitment underwriting exerts more risk to underwriter or investment bank than best effort underwriting.
- Equipment trust certificates are the stock issued by reputed organization in the economy.
- Burden is high if non-interest income is greater remaining other things constant.
- Pension funds administered by life insurance companies are termed uninsured pension funds.
- Noncumulativepreferred stock is a type of preferred stock that does not pay the stockholder any unpaid or omitted dividends.
Group B (5*6=30)
- The pension fund pays a flat amount of Rs. 2000 per year for every year of employment. An employee works 20 years for a firm. His average salary over his entire career with the firm was Rs. 65000. His average salary over the last five years was Rs. 75000. Annual retirement payout is 4%. Calculate the employee’s annual benefit payment under the following methods:
- Career Average Formula Flat Benefit Formula c. Final Pay Formula
- The spot rate of US Treasury bill at second, third, fourth, fifth, sixth, and seventh year is 2.1 %, 2.34 %, 2.78 %, 3.21 %, 3.68 %, and 3.97 % respectively.
According to the unbiased expectations theory,
- What are the expected one year rates for years 4, 5, and 6?
- What is the forecasted rate on three year bond issued in three years?
- What is the expected three year rate during year 7?
13. NABIL currently has $ 650 million in current deposits. The current reserve requirement is 13.5 percent, but the NRB is decreasing this requirement to 10 percent. Show the balance sheet of the NRB and NABIL, if NABIL loans out 85 percent its excess reserves, and the borrower returns 95 percent of funds to NABIL as current deposit.
- NMB Bank has two different bonds currently outstanding. Bond X has a face value of Rs. 20000 and matures in 20 years. The bond makes no payment for the first six years, then pays Rs. 1000 every six months over the subsequent eight years, and finally pays Rs. 1750 every six months over the last six years. Bond Y also has face value of Rs. 20000 and a maturity of 20 years; it makes coupon payment of 8 percent. If the required rate of return on both bonds is 12 percent compounding semiannually, what is the current price of the bond X and Bond Y?
- Par Value of Treasury bill is Rs. 10000 and its auction price is Rs. 9700. This bill will mature after 150 days of purchase.
- Calculate discount yield on this bill
- Calculate bond equivalent yield
- Ninety days after purchases, you need funds and forced to sell at a discount rate of six percent, how much price you expect to receive in selling?
- Compute effective holding period yield.
- What is Asset Backed Securities? Discuss the risks associated with Asset Backed Securities.
Group C
17.
a. Suppose that you purchase a 10 year annuity, which will pay you Rs. 25000 per year starting 30 years from now. The policy states that you will pay nine equal annual premiums, the first one due immediately. The insurance company’s annual cost of money is 12%. Find the premium to pay to the insurance company.
b. On December 12th, NMB Sambridhi Fund has the following assets and prices at 4:00 pm
| Stock | Shares owned by mutual funds | Price |
| 1 | 100 | 20.30 |
| 2 | 500 | 513.70 |
| 3 | 280 | 290.80 |
| 4 | 1000 | 671.90 |
| 5 | 300 | 44.20 |
| Cash | - | 2408.00 |
- Calculate the net asset value (NAV) of the fund. Assume 8420 shares are outstanding.
- Assume that one investor originally invested Rs. 50000 sells 420 shares to the fund. What is his or her profit? Also calculate the annualized return. Assuming 250 working days in a year.
- The fund sells 80 shares of stock 4 to raise the required funds for 420 redemption. What will be the NAV after the redemption of 420 shares?
OR
17. (1*10=10)
JP Morgan & Chase issued a 20 year Bond that pays 10 percent semi-annual coupon. The cost of bond is 8 percent compounded quarterly. Find the realized rate of return for 5 years holding period assuming that the bond sells after 5 years, the bond yield will be 6 percent compounded monthly thereafter. Coupons are reinvested, while the investor spends coupon of Year 2 and Year 3. The reinvestment rates are: Year 1 = 6 percent, Year 2 = 7 percent, Year 3 = 9 percent, Year 4 = 5 percent, and Year 5 = 10 percent. Also, find Capital Gain and Interest Income for 5 years. Also find the realized rate of return. The reinvestment rates are compounded semi-annually.
18. Nepal Investment Bank has the following balance sheet in million with risk weight to parenthesis: (1*10=10)
| Assets | Rs. | Liabilities and Equity | Rs. |
| Cash (0) | 1080 | Paid Up Capital | 535 |
| Investment (0) | 3050 | Proposed Bonus Share | 655 |
| Balance in Local Banks (20) | 107 | Retained Earning | 45 |
| Money at call (20) | 670 | Exchange Fluctuation reserve | 550 |
| Loans against A+ rated bank (20) | 2920 | Capital Redemption Reserve | 590 |
| Shares and bond investment (100) | 25 | General Reserve | 100 |
| Loans and Advance (100) | 7077 | Dividend Equalization Reserve | 75 |
| Fixed Assets (100) | 252 | Borrowing | 980 |
| Goodwill | 560 | Subordinated debt | 760 |
| Fictitious Assets | 289 | Deposits | 12760 |
| Patients | 400 | Revaluation Reserves | 34 |
| Others (100) | 709 | Bills payable | 55 |
| Total | 17139 | Total | 17139 |
In addition the bank has Rs. 138 million general loan loss provision, Rs. 2194 million advance payment guarantees (100), performance bond of Rs. 1582 (50), deferred tax reserve of Rs. 50 million, Investment Equalization Reserve of Rs. 30 million and perpetual debt of Rs. 590 million. Further, the bank had issued 500000 perpetual non-cumulative preferential shares at Rs 100 per share out of which only 60% were qualified
- Determine the core capital, supplementary capital, and total capital as per NRB rules. [3]
- What is the risk weighted exposure for NIB considering on off balance sheet items only? What is the total risk weighted exposure for NIB? [2]
- Determine Tier I ratio, Capital Adequacy Ratio, and Leverage ratio. Is the ratios satisfy the minimum requirement set by NRB? [3]
- Why Nepal Rastra Bank maintains highly tight monitoring on Capital Adequacy Ratio? [2]
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