FINANCIAL INSTITUITION MANAGEMENT

MIDTERM SPRING 2020

SUBMITTED BY
NEHA ASIF
01-229192-010

SUBMITTED TO
SIR TANVEER ILLAHI

BAHRIA UNIVERSITY ISLAMABAD

ANSWER 1

Money supply transmission: depository institutions affect the level of money supply growth in
the economy. When the SBP increases money availability to banks, the money supply increases
but the extent of money supply growth is affected by bank's decisions to lend the increased
supply of funds. If the banks are not lending the increased money, the given increase in funds by
SBP can result in a change in the money supply of the economy.

Credit risk: the financial intermediaries generally price risk & allocate capital only to those
whom they believe can generate a high rate of return to the lender for the risk that lender bears in
loaning the money. The borrower's condition is also monitored after providing the loan. A good
economy must have the sound mechanisms for allocating the capital. In capitalist countries,
financial intermediaries & markets allocate capital only to those users of high value thereby
maximizing the economic growth. The role of government is to ensure risk disclosure & fair
practices of all involved. In communist & socialist countries capital is allocated according to
current political agenda & strong economic growth is rarely seen in these countries. The
government cal also allocates credit to other areas like housing, farms & for development of
small business etc.

Intergenerational wealth transfers and risk shifting: Pension funds and insurance firms allow
investors to transfer wealth through time, while avoiding taxation, and/or allow investors the
ability to choose which risks in their life they will bear and which they will insure.

Payment services: the ability of market participants to store & quickly move large sums of
money at low cost & risk can encourage greater investment & also lower the overall cost of
funds in the economy.
ANSWER 2

Open market operations involve the buying and selling of government securities. The term “open
market” means that the SBP doesn’t decide on its own which securities dealers it will do
business with on a particular day. Rather, the choice emerges from an “open market” in which
the various securities dealers that the SBP does business with – the primary dealers – compete on
the basis of price. Open market operations are flexible, and thus, the most frequently used tool of
monetary policy.

The discount rate is the interest rate charged by Banks to depository institutions on short-term
loans.

Reserve requirements are the portions of deposits that banks must maintain either in their vaults
or on deposit at a SBP.

If the SBP changes bank reserves then interest rates on all types of loans are affected. For
instance, if interest on loan is lower than corporate sectors have more projects with positive net
present values which lead to more diversification and more jobs. A university graduate is more
likely to get job opportunities and hired by corporations. Lower interest rates on new cars, homes
are also on lower side which tends to go up stock holdings.

ANSWER 3

Such scenario is known as stagflation. The effectiveness of any monetary policy action to
provide sustained relief to economy’s problem is reduced by this combination of the
unemployment an high inflation. If SBP tries to increase banks excess reserves and lowers the
interest rates, it may be able to reduce the unemployment temporarily but it will likely o worsen
the inflation, drive up the inflation with a high labor supply cost lead back to unemployment in
the end. The higher prices will be faced by all. As a chair of SBP, actions such as fiscal
spending, removing the factors causing a problem like a supply constraint or stimulating greater
global growth to get Pakistan’s domestic demand growing, can be adopted.
When there is no risk of inflation, the SBP makes credit cheap by lowering interest rates. This
increases liquidity and spurs business growth. That ultimately reduces unemployment. The SBP
monitors inflation through the core inflation rate, as measured by the Personal Consumption
Expenditures Price Index. It strips out volatile food and gas prices from the regular inflation rate.
(Food and gas prices rise in the summer and fall in the winter, and that's too.

Expansionary policy makes the economy grow faster and create jobs. If the economy grows too
much, though, it triggers inflation. When that happens, the SBP Reserve raises interest rates as
part of contractionary monetary policy. High interest rates make borrowing expensive. Increased
loan costs slow growth and lower the likelihood of businesses raising prices.

The SBP has many powerful tools at its disposal. It sets the reserve requirement for the nation's
banks, telling them what percentage of their deposits they must actually have on hand each night.
The rest can be loaned out.
ANSWER 4
ANSWER5

First, we determine each year of college’s cost and then PV of all college cost.

FV=PV*(1+i)n

Total savings amount= FV of initial amount + FV of 1st payment + FV of2nd payment+ FV of 3rd
payment + FV of 4th payment.

Then we determine the FV of this total savings account.

Then, Taking the difference of total cost of college and total savings.

At last, we will take FV annuity on this amount to find the annual payment for college.