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MGT411 GDB Solution & Discussion Last Date: 13-06-2011

Semester “Spring 2011”
“Money & Banking (MGT411)”
This is to inform that Graded Discussion Board (GDB)
Has been opened according to the following schedule
Schedule
Date opening and Time
June 09, 2011 At 12:01 A.M. (Mid-Night)
Date closing and Time
June 13, 2011 At 11:59 P.M. (Mid-Night)
Note: No extra or bonus/grace period is available for attempting GBD.
Discussion Question

S&K Saving Bank is a medium size bank and operating locally. It provides different financial services to individuals and businesses. In January 2011, S&K Saving Bank has issued saving certificate (certificate of deposits) for Rs. 1,000 with one year maturity at 4% interest rate. In next year bank will reissue the certificate of deposits; on reissuance interest rate on these may vary due to change in inflation rate and monitory policy. With the borrowed money the bank has purchased treasury bonds for Rs 1000 at 8% fixed interest having two year maturity. Previous trend shows that interest rate may rise by 1-2 percent. Required: Keeping in view all these information, what type of risk the bank will face while entering into these transactions? Also mention the valid reason for choosing this type of risk. Hint: Write your answer in the following format.Question Comments Type of risk: (Give only name) ? Specify the reason for choosing this risk in Bullets/ Numbers form ?

Ø Write down only keywords. Your answer should not exceed 25 words (negative impact will be logical if the student violate the words restriction).
No need to mentions the question. Only specific answer is required.

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Replies to This Discussion

Question
Money Aggregate or money supply plays a crucial role in any economy, which not only
counts the money supply at specific time period but also useful in taking different
economic decisions. Definitions of different money aggregate are somehow loosely
defined but all the economists differentiate and classify M1, M2 & M3 on the single
Accepted base.
Q#1.What is the main characteristic that distinguishes the different money
aggregate definitions?
Solution:
The main characteristic that distinguishes the different money aggregate definitions is
Liquidity.
2. Which money aggregate definition is mostly used in economic decision around the
world?
Solution:
M2 is used in economic decisions.
3. Justify answer given against part-b. (Provide only one reason)
Solution:
Economists use M2 when they want to quantify the amount of money in circulation and
try to explain different economic monetary conditions. M2 is a key economic indicator
used to forecast inflation.

Type of risk:                             (Interest rate risk)

Specify the reason for choosing this risk in Bullets/ Numbers   form      ?

• The bank has invested the in treasury bonds for two years maturity at fix interest rate so return will be certain.
• The bank will reissue the certificate of deposits by which it will be able to pay for the certificates of deposits issued in first year. in this way it will reduce the liquidity risk.

You all may write some few reasons but also explain these ones in your own words

thank you,

then snd de ture solution reason

Type of risk: (Interest rate risk)

Specify the reason for choosing this risk in Bullets/ Numbers form ?
• The bank has invested the in treasury bonds for two years maturity at fix interest rate so return will be certain.
• The bank will reissue the certificate of deposits by which it will be able to pay for the certificates of deposits issued in first year. in this way it will reduce the liquidity risk.
You all may write some few reasons but also explain these ones in your own words
Type of risk: Interest-Rate Risk
Specify the reason for choosing this risk:
• Interest rate on reissuance of certificates can be changed dramatically due to change in inflation and monitory policy that can cause an important source of risk.
• Bank borrowed by issuing certificates for one year (short term) and invest it in treasury bills for long term.
Type of risk: (Interest rate risk)

Specify the reason for choosing this risk in Bullets/ Numbers form ?
• The bank has invested the in treasury bonds for two years maturity at fix interest rate so return will be certain.
• The bank must determine how sensitive its balance sheet ( assets and liabilities ) is to a change in interest rates.
• The bank reissue the certificates of deposit which it will be able to pay for the certificates of deposit issued in first year. in this way it will reduce the liquidity risk.
Type of risk: Interest rate risk

Reasons:
• The bank has invested the in treasury bonds for two years maturity at fix interest rate so return will be certain and there will be no profit or loss situation.
• The bank will reissue the certificate of deposits by which it will be able to pay for the certificates of deposits issued in first year reducing the liquidity issue. Inflation will also play some role and next year the interest rate will also rise

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