Quiz Solution

SET I

1. A G-Sec can be bought for INR 9205 and has 46 days to maturity. What is the YTM
equivalent rate on this security? (4)

Ans:
The face value has been assumed to be 10000 INR.

YTM equivalent rate = ((10000-Purchase price)/purchase price) X (365/Days to maturity)

= ((10000-9205)/9205) X (365/46)

= (795/9205) X (7.93)

= (0.0864)X(7.93)

= 68.5% or 67.62% (if 360 days taken in a year)

2. A bank has an average asset maturity of 2 years and average liability maturity of 3 years.
This bank has total liabilities of Rs.1000 million and is converted completely to assets. Bank
pays 5% interest rate on its liabilities and charges 8% interest rate on its assets. If interest rates
rise by 2 percent after 2 years, what is this bank's net interest margin at the end of (1)first year
(2) third year? (6)

Ans:

Asset maturity 2 year and liability maturity of 3 years

total liability of Rs. 1000 million
5% on liability and 8% on assets
Interest rate rises by 2% after 2 year

1. At the end of first year

Asset = 1000 and liability= 1000
interest asset = 80 M
interest liabilities = 50 M
NIM= (interest earned- interest expenditure)/earning asset
=(80-50)/1000
=0.03
=3%

2. At the end of third year

Asset = 1000 and liability= 1000
interest asset = 100 M
Interest liability here will be 50 M
NIM= (interest earned- interest expenditure)/earning asset
=(100-50)/1000
=0.05
=5%
 SET II

3. A G-Sec can be bought for INR 9245 and has 46 days to maturity. What is the Bank
Discount rate on this security? (4)

Ans:

BDR=(10000-9245)/10000*360/46
Rupee discount/Face Value * 360/Time to Maturity
=0.0755*7.826
=0.5908(59.08%) or If 365 days taken 59.87%

4. A bank has an average liability maturity of 2 years and average asset maturity of 3 years.
This bank has total liabilities of Rs.1000 million and is converted completely to assets. Bank
pays 5% interest rate on its liabilities and charges 8% interest rate on its assets. If interest rates
rise by 2 percent after 3 years, what is this bank's net interest margin at the end of (1)second
year (2) third year? (6)

Ans:

Asset = 1000 M Liability = 1000 M

1) At the end of Second year
interest asset = 80 M
interest liabilities = 50 M
NIM= (interest earned- interest expenditure)/earning asset
=(80-50)/1000
=0.03
=3%

2. At the end of third year

Asset = 1000 and liability= 1000
interest asset = 80 M
Interest liability here will be 70 M
NIM= (interest earned- interest expenditure)/earning asset
=(80-70)/1000
=0.01
=1%
 SET III

5. A G-Sec can be bought for INR 9045 and has 64 days to maturity. What is the YTM
equivalent rate on this security? (4)

Ans
The face value has been assumed to be 10000 INR.

YTM equivalent rate = ((10000-Purchase price)/purchase price)X(365/Days to maturity)

= ((10000-9045)/9045) X (360/64)

= (955/9045)X(5.625)

= (0.1056)X(5.625)

= 0.594 or 59.4% or 60.22% (If 365 days taken for a year)

6. A bank has an average asset maturity of 1 years and average liability maturity of 4 years.
This bank has total liabilities of Rs.1000 million and is converted completely to assets. Bank
pays 8% interest rate on its liabilities and charges 10% interest rate on its assets. If interest
rates rise by 2 percent after 1 year, what is this bank's net interest margin at the end of (1)first
year (2) third year? (6)

Ans:
1. At the end of first year
Asset = 1000 and liability= 1000
interest asset = 100 M
Interest liability here will be 80 M

Net Interest Margin in 1st Year = (Interest Received - Interest Paid)/ Average Assets

= (100-80)/1000

= 20/1000

= 2%

2. At the end of third year

interest asset = 120 M
Interest liability here will be 80 M

Net interest margin in 3rd year = (120 - 80)/1000

= 40/1000

=4%