ASSIGNMNET:

CREDIT AND RISK MANAGEMENT(FIN-603)

NAME:
MUHAMMAD UMAIS (BB.26804)

SUBMITTED TO
MR: KALEEM
Q1:Differentiate between a secured and an unsecured loan. Who bears most of the risk
in a fixed-rate loan?
Answer:
A secured loan is backed by some of the collateral that is pledged to the lender in the
event of default. A lender has rights to the collateral, which can be liquidated to pay all
or part of the loan.
With a fixed-rate loan, the lender bears the risk of interest rate changes. If interest rates
rise, the opportunity cost of lending is higher, while if interest rates fall the lender
benefits.
Q2: Why would Banker prefer to charge floating rates, especially for longer-maturity
loans?
Answer:
Since it is harder to predict longer-term rates, Banker prefer to charge floating rates for
longer-term loans and pass the risks on to the borrower.
Q3:How does a spot loan differ from a loan commitment? What are the advantages and
disadvantages of borrowing through a loan commitment?
Answer:
A spot loan involves the immediate drawdown of the loan amount by the borrower, while
a loan commitment allows a borrower the option to draw down the loan any time during
a fixed period at a predetermined rate.
This can be advantageous during periods of rising rates in that the borrower can borrow
as needed at a predetermined rate. If the rates decline, the borrower can borrow from
other sources. The disadvantage is the cost: an up-front fee is required in addition to a
back-end fee for the unused portion of the commitment.
Q4: Why would a lender's expected return be lower when the risk premium is increased
on a loan?
In addition to the risk premium, how can a lender increase the expected return on a
wholesale loan? A retail loan?
Answer:
Investors need to cope with many types of risks. Risk is defined as the likelihood of an
investment's outcome to differ from the expectations. Risk premium is a compensation
given to investors as an exchange of taking part in high risk investments. Therefore, an
increase in the risk premium of a loan means that investors are taking part in riskier
projects increasing the probability of monetary losses and as consequence the default
of the loan. Lenders can implement different types of strategies in order to increase the
expected return on a loan such as charge a variety of additional fees that can increase
the final return. Lenders can also require borrowers to back up the loan with a collateral
which decreases considerably the monetary losses derived from a possible default.
INCOME STATEMENT
Horizontal Analysis

For the year ended For the year ended Percentage

June 30, 2019 June 30, 2018
  %
       
Net turnover 58,328,849 49,107,580 118.8
Cost of sales -48,877,125 -40,553,323 120.5
Gross profit 9,451,724 8,554,257 110.5
Selling and distribution expenses -3,170,316 -2,949,354 107.5
Administration and general
-1,345,994 -1,207,062 111.5
expenses
Operating result 4,935,414 4,397,841 112.2
Other charges -272,230 -303,732 89.6
Finance costs -1,455,747 -641,692 226.9
Exchange loss -435,699 -428,994 101.6
  -2,163,676 -1,374,418 157.4
Other income 408,768 626,979 65.2
Profit before taxation 3,180,506 3,650,402 87.1
Taxation -875,594 -590,698 148.2
Profit after taxation 2,304,912 3,059,704 75.3
Basic and diluted earnings per
24.96 33.13 75.3
share (PKR)

Vertical Analysis
  For the year ended For the year ended Percentage
June 30, 2019 June 30, 2018
%
       
Net turnover
58,328,849.00 49,107,580.00 100
Cost of sales
(48,877,125.00) (40,553,323.00) -83.80
Gross profit
9,451,724.00 8,554,257.00 16.20
Selling and distribution expenses
(3,170,316.00) (2,949,354.00) -5.44
Administration and general
expenses (1,345,994.00) (1,207,062.00) -2.31
Operating result
4,935,414.00 4,397,841.00 8.46
Other charges
(272,230.00) (303,732.00) -0.47
Finance costs
(1,455,747.00) (641,692.00) -2.50
Exchange loss
(435,699.00) (428,994.00) -0.75
 
(2,163,676.00) (1,374,418.00) -3.71
Other income
408,768.00 626,979.00 0.70
Profit before taxation
3,180,506.00 3,650,402.00 5.45
Taxation
(875,594.00) (590,698.00) -1.50
Profit after taxation
2,304,912.00 3,059,704.00 3.95
Basic and diluted earnings per
share (PKR) 33.13 0.00
24.96