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MGT411 Assignment No 02 Solutoin & Discussion DUE DATE: 8TH JANUARY, 2013

Question No. 1:
a) You are a bank manager and given the responsibility to manage the liquidity risk being faced by the bank. The Balance Sheet of the bank is given below:
Table: Balance sheet of a bank holding no excess reserves
Assets (in Million)
Liabilities (in Million)
Reserves Rs.15 million
Deposits Rs.90 million Rs.100million
Loans Rs.95 million
Borrowed funds Rs.35 million
Securities Rs.35 million
Bank capital Rs.20 million
A customer demands Rs.5 million cash withdrawals from the bank; what changes in the above Balance Sheet will occur if you decide to manage the liquidity risk through:
1. Adjusting assets by:
a. Selling the securities
b. Reducing the loans
2. Adjusting liabilities by:
a. Borrowings
b. Attracting deposits
Note: You are required to prepare four different Balance Sheets for each of the above mentioned strategies. (10 marks)
b) Discuss why bankers prefer liability management over asset management in order to mitigate liquidity risk? (5 marks)
Question No. 2:
a) You, as a bank manager, are managing the bank’s assets and liabilities in such a way that interest rate the bank has to pay on its liabilities is 4% while interest rate the bank charges on its various assets is 6%. Suppose 30% of the bank’s assets fall into the category of interest-sensitive while others are not sensitive to the changes in interest rate. Similarly, half of the bank’s liabilities are interest-sensitive while rests of the half are not. What will be the impact on the profitability of the bank if the interest rate rises by 1% on all assets and liabilities of the bank? (10 marks)
b) What will be the impact of increase in interest rate on the profitability of the bank if the bank has more interest-sensitive liabilities than interest-sensitive assets? (5 marks)

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Replies to This Discussion

yes customer demand 5 Rs, million hi change krna hain ,,,just one he two to nahi hain amounts dear

sparrow what is the solution of q2 part a & b reply fast please

goldensparrow Q2 part a & b ka bhi idea sol share kijiye ga plzzz

any one please send the solution

Assets

Liabilities

$ 30

$ 50

$ 70

$ 50

6%

4%

7%

5%

Revenue from Assets

Cost of Liabilities

(0.06 x 30) + (0. 06 x 70) = 6

(0.04 x 50) + (0.04 x 50) = 4

(0.07 x 30) + (0. 06 x 70) = 6.3

(0.05 x 50) + (0.04 x 50) = 4.5

6 – 4 = 2 ($2 per $100 in assets)

6.3 – 4.5 = 1.8 ($1.8 per $100 in assets)   ----- this is 100 % correct answer

but requirement main to 4 different balance sheets bnani hain wo kya story hai.

Faisal 4 Balance sheets are already described !! See first page of this discussion !! And the answer provided above by Naveed Iqbal is accurate for question # 2 

Just add 1 line that "Profitability of the bank will decrease by 0.2 % 

The impact result on profitability would be 4.76

ye kaise nikala ap ne GHULAM ABBAS??

I think this is wrong >> Solution provided by Naveed Iqbal Tahir for question # 2 (a) is accurate

sir kya yh qs esi trha s krna jase ap ny kaha h

is it the  solution of q2 part a

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