04133832

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Monash University
Semester One Examination 2008
Faculty of Business and Economics Department of Accounting and Finance
EXAM CODES: TITLE OF PAPER: EXAM DURATION: READING TIME: AFF/W2401 COMMERCIAL BANKING AND FINANCE 3 hours 10 minutes

THIS PAPER IS FOR STUDENTS STUDYING AT: (office use only - tick where applicable) Berwick Caulfield Clayton Gippsland Peninsula Sunway Distance Education Hong Kong Open Learning Other (specify)

During an exam, you must not have in your possession, a book, notes, paper, calculator, pencil case, mobile phone or any other material/item which has not been authorised for the exam or specifically permitted as noted below. Any material or item on your desk, chair or person will be deemed to be in your possession. You are reminded that possession of unauthorised materials in an exam is a disciplinable offence under Monash Statute 4.1. AUTHORISED MATERIALS CALCULATORS YES NO

(Permitted calculators: Citizen SRT-135, Casio FX82MS scientific calculator, the Casio FX82AU scientific calculator, and Sharp EL-735 financial calculator, or calculators with an approved for use Faculty label) OPEN BOOK SPECIFICALLY PERMITTED ITEMS YES YES NO NO

This paper consists of seven (7) questions and one (1) formula sheet printed on a total of nineteen (19) pages. Answer Question 1 in the scriptbook provided. Answer all other questions in the space provided on the question paper. Students must answer ALL questions. This exam is worth a total of 70 marks. PLEASE CHECK THE PAPER BEFORE COMMENCING. THIS IS A FINAL PAPER.

STUDENT ID: ...

DESK NUMBER: .

THIS EXAMINATION PAPER MUST BE INSERTED INTO THE ANSWER BOOK AT THE COMPLETION OF THE PAPER. NO EXAMINATION PAPERS SHOULD BE REMOVED FROM THE EXAMINATION ROOM.

AFF2401 Ms Kathy Avram

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Answer all questions Answer Question 1 in the script book provided Answer all other questions in the spaces on the question paper.

Question One Bank capital is important for both regulators and shareholders. Distinguish between equity capital and regulatory bank capital. From the shareholders perspective outline the bank capital planning process in relation to selecting and achieving a target equity capital position for a bank. (20 marks)

THIS SPACE HAS BEEN LEFT BLANK

AFF2401 Ms Kathy Avram

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Question Two (a) Name two non-market related examples of off balance sheet business typically undertaken by banks. For each of your examples outline the main features and explain how they can affect bank profitability and bank risk. (6 marks)

AFF2401 Ms Kathy Avram

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Question Two (contd) (b) Outline the main features of a forward rate agreement (FRA) and explain how an FRA is settled. (3 marks)

AFF2401 Ms Kathy Avram

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Question Two (contd) (c) What payment (in dollars) would be made, and by whom, to settle an FRA with the following conditions? (i) (ii) Nominal value $2,000,000. Term 90 days.

(iii) FRA rate 9% per annum. (iv) Reference rate on the settlement date 10% per annum. (3 marks)

(Total = 6 + 3 +3 = 12)

AFF2401 Ms Kathy Avram

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Question Three What are PAIRS and SOARS? Explain how APRA uses these two systems in its regulatory role. (7 marks)

AFF2401 Ms Kathy Avram

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Question Three (contd)

(Total = 7 marks)

AFF2401 Ms Kathy Avram

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Question Four (a) Distinguish between current account deposits, certificates of deposit and fixed deposits. (3 marks)

AFF2401 Ms Kathy Avram

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Question Four (contd) (b) Define liquidity risk and explain how the different types of bank funding might affect its liquidity risk. (3 marks)

(Total = 3 + 3 = 6 marks)

AFF2401 Ms Kathy Avram

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Question Five Monash Bank has a loan portfolio which has : (i) a high level of expected losses, (ii) a low level of volatility of losses (iii) a high degree of loan concentration. (a) Explain what is measured by each of these features, and explain what each indicates about Monash Banks credit risk. (6 marks)

AFF2401 Ms Kathy Avram

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Question Five (contd)

AFF2401 Ms Kathy Avram

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Question Five (contd) (b) (i) (ii) (iii) Sketch a typical probability distribution of bank loan losses, and suggest how this distribution may be used to determine the banks General Reserve for Credit Losses illustrate the value at risk at the 1% level, interpret this value (5 marks)

AFF2401 Ms Kathy Avram

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Question Five (contd)

(Total = 6 + 5 = 11 marks)

AFF2401 Ms Kathy Avram

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Question Six (a) Distinguish between judgmental and statistical (credit scoring) loan evaluation. (6 marks)

AFF2401 Ms Kathy Avram

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Question Six (contd)

AFF2401 Ms Kathy Avram

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Question Six (contd) (b) Why are credit card applications normally assessed using statistical rather than judgmental methods? (2 marks)

(Total = 6 + 2 = 8 marks)

AFF2401 Ms Kathy Avram

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Question Seven Bank A charges fees for making a withdrawal via an ATM but no fees for making an over-thecounter withdrawal. (a) Define cross subsidisation and suggest which customers at Bank A are benefiting from cross subsidisation. (3 marks)

AFF2401 Ms Kathy Avram

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Question Seven (contd) (b) A customer of Bank A then discovers another bank, Bank B, which charges fees for making an over-the-counter withdrawal but no fees for withdrawals via an ATM. Explain how this customer could cherrypick between the services of the two banks. (3 marks)

(3 + 3 = 6 marks)

AFF2401 Ms Kathy Avram

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Formulae
Compound Interest
PV = S (1+ i )
FV = A (1+ i )
n
n

( S = FV ) ( A = PV )

Effective Interest m j i e = 1+ 1 m

Bill Price 36500 Face Value Price = 36500 + IR days Annualised return Sale Price Purchase Price 36500 R= Purchase Price days held Ordinary Annuity n PV = R i 1 (1+ i )
n

[ ] FV = R i [(1+ i ) 1]

Bond Price P = PV coupons + PV face value Asset Growth Model C + A(1 + AGR )ROA(1 D ) CR1 = A(1 + AGR ) Internal capital generation rate

ICGR = [1/capital ratio] x ROA x (1-D)

Customer Profitability Analysis net income before tax Re turn on allocated capital = allocated capital Interest rate risk

Gap$ = RSA - RSL NII = Gap$(i )

END OF EXAMINATION

AFF2401 Ms Kathy Avram

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