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Semester “Fall 2010”“Money and Banking (MGT411)”Assignment No. 02 Marks: 20Important Tips1. This Assignment can be best attempted from the knowledge acquired afterwatching video lecture no. 1 to lecture no 36 and reading handouts as well asrecommended text book).2. Video lectures can be downloaded for free from www.youtube.com/vu .ScheduleOpening Date and Time January 20 , 2011 At 12:01 A.M. (Mid-Night)Due Date and Time January 26 , 2011 At 11:59 P.M. (Mid-Night)Note: Only in the case of Assignment, 24 Hrs extra / grace period after the above mentioneddue date is usually available to overcome uploading difficulties which may be faced by thestudents on last date. This extra time should only be used to meet the emergencies and abovementioned due dates should always be treated as final to avoid any inconvenience.AssignmentQuestion No 01Part (A)Calculate the impact of an increase in desired currency holdings on the money multiplier from10% to 15% of deposits when the reserve requirement is 10 percent of deposits, and banks’desired excess reserves are 04 % of deposits.Assumption:If the general public held currency Rs. 109 millions and deposit are Rs. 99 millions.Part (B)What will be difference in deposits by following a Rs. 3 billion Open Market Purchaseassuming a 5% reserve requirementAssumptions:1 No excess reserves are held.2 There are no changes in the amount of currency held by the publicQuestion No 02A commercial bank has following data:Total assets valued Rs. 1,000,000Item Assets LiabilitiesInterest rate sensitive 35% 45%Interest rate non‐sensitive 65% 55%Initial interest rate 08 % 05%Interest rate increase 3% both in assets and liabilityRequired:What will be the increase / decrease in the amount of net‐profit(interest) due to the interest ratechange? Your answer should be in absolute figures.Important Instructions:Please read the following instructions carefully before attempting the assignment solution.Deadline:· Make sure that you upload the solution file before the due date. Noassignment will be accepted through e-mail once the solution has beenuploaded by the instructor.Formatting guidelines:· Use the font style “Times New Roman” and font size “12”.· It is advised t compose your document in MS-Word 2003.· Use black and blue font colors only.Solution guidelines:· Every student will work individually and has to write in the form of ananalytical assignment.· Give the answer according to question, there will be negative markingfor irrelevant material.· For acquiring the relevant knowledge don’t rely only on handouts butwatch the video lectures and use other reference books also.· provide all calculation only answer will not be appreciatedRules for MarkingPlease note that your assignment will not be graded or graded as Zero (0) if:· It has been submitted after due date· The file you uploaded does not open or is corrupt· It is in any format other than .doc (MS. Word)· It is cheated or copied from other students, internet, books, journals etc…· Please install adobe reader to view the assignment

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Replies to This Discussion

Anbody Share the Solution idea..!!!
See the attached file please
See the attached file for another idea solution
thanks tariq bhai..!!;)
can anyone tell in part 1 of q1 which formula is used???



See this


A commercial bank has following data: Total assets valued Rs. 1,000,000




Interest rate sensitive

35% = 350000

45% = 450000

Interest rate non-sensitive

65% = 650000

55% = 550000

Initial interest rate



New Interest rate

8% + 3% = 11%

5% + 3% = 8%


Revenue from Assets

Cost of Liabilities

At initial interest rate

0.08* 350000 + 0.08*650000=80000

0.05*450000 + 0.05 * 55000=50000

After increase in interest rate

0.11*350000+0.08*650000= 90500

0.08*450000 + 0.05*55000=63500

Profit @ initial interest rate

80000 – 50000 = 30000


Profit @ new interest rate

90500 – 63500 = 27000


The Difference is

= - 3000 = 3000 LOSS by increasing 3% rate.



Interest rate increase 3% both in assets and liability

The Solution of Q. 1 (a) is as under:-
GAP =Interest sensitive assets ‐ interest sensitive liabilities
GAP = 350,000 ‐ 450,000
GAP = – 100,000

Difference in profit/Loss = GAP x % change in rate
Difference in profit/Loss = –100,000*0.03
Difference in profit/Loss = – 3,000
The Answer is in "negative" So loss prevails here.
this iz not Q1..plz can u tell which formula is used in q1 part 1??for M=?
u can see the formula at lecture num 35, but one thing I want to ask for, that the formula shown in hand outs it includes MB but in this solution there is no MB calculated. plz reply this Question who have upload the solution

Dear Tariq


The solution given for answer # 1 is wrong and i can assure it to you... The mistake is C/D ratio has been taken as 1.1 and 1.15 which is incorrect. Replace this by 0.1 and 0.15 and rest goes fine...


with 10% you should get value to be 4.5833 and with 15% it should be 3.965


Answer # 2 has solution to be Rs 60 billion difference.


Answer # 3 by you is correct. should be Rs 3,000 as loss.


Best Regards

i agree , and also i need to know that the formulae in book includes MB . and this solution does'nt . what we shud do now
U shud not be concerned with MB...Your question asks for multiplier only so use only multiplier's equation and calculate it..


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