Question No 1: Part a: Financial assets: Financial assets of Bank: Cash Balances with other banks Lending to financial institutions

tions Investment Advances

Financial assets of Business: Cash Accounts receivable Notes receivable Marketable securities

Mix of Financial Assets differs from firm to firm: Financial assets differ from firm to firm because of Financial structure Growth and Development of firm Policies and regulations Experienced and expertise of management Characteristics of market area

Part b: Functions of Money Supply: Medium of exchange Store of value Unit of account Provide Purchasing power Low transaction costs Settlement of debts

Measures of Money Supply: Money supply is controlled through government policies of interest rates. If Government need money, money supply is reduced through selling of securities. And if she have surplus, money supply increases and securities are purchased.

Part c: Cash and due from other banks Question No 2: Part a: Credit risk: Banks need to manage the credit risk inherent in the entire portfolio as well as the risk in individual credits or transactions. Bank manage credit risk by providing loans to high net worth individuals and corporations by checking their past records. Interest rate risk: When banks see slacking loan demand, management will lower their interest rate outlook. This implies that the nature of the business cycle is changing and that liquidity will be increasing and borrowers will want to extend their loan maturities to take advantage of lower rates. Conversely, when rates rise it means loan demand is rising and more customers need to be accommodated with more money at higher rates. Liquidity Liquidity, or the ability to fund increases in assets and meet obligations as they come due, is crucial to the ongoing viability of any banking organization. Therefore, managing liquidity is among the most important activities conducted by banks. Bank lending finances investments in relatively illiquid assets, but it funds its loans with mostly short term liabilities. Thus one of the main challenges to a bank is ensuring its own liquidity under all reasonable conditions. Banks manage their liquidity risk by carefully monitoring the relationship between their short-term liabilities as opposed to their shortterm assets. Excess funds are typically invested in assets that will provide it with liquidity such as Fed funds loaned and government securities. Banks must maintain a Liquidity Ratio of at least 15%. Capital adequacy The standardized requirements in place for banks and other depository institutions, which determines how much capital is required to be held for a certain level of assets through

regulatory agencies. These requirements are put into place to ensure that these institutions are not participating or holding investments that increase the risk of default and that they have enough capital to sustain operating losses. Banks have to calculate capital ratio which is the percentage of a bank's capital to its risk-weighted assets. Assets and Liabilities A bank with mismatched assets and liabilities can be badly hurt by unexpected interest rate changes. Intense competition for business involving both the assets and liabilities, together with increasing volatility in the domestic interest rates as well as foreign exchange rates, has brought pressure on the management of banks to maintain a good balance among spreads, profitability and long-term viability. Banks manage the risks of asset liability mismatch by matching the assets and liabilities according to the maturity pattern or the matching the duration, by hedging and by securitization. Part b: Sources of funds: 1. Deposit accounts Transaction deposits Savings deposits Time deposits Money market deposits Borrowed funds Fed funds Federal reserve borrowing Repos Eurodollar borrowing Long-term capital Bonds Bank capital

2.

3.

Uses of funds: 1. 2. Cash Loans - main use Working capital loans Term loans Line of credit Revolving credit loan Consumer loans Highly leveraged transact. Real estate loans Direct lease loans

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4. 5. 6. 7.

Loan participations Securities investments Treasuries Agencies Tax exempts Corporate bonds Fed funds sold Repos Eurodollar loans Fixed assets

Question No 3: a. Net interest income and Net non interest income Net interest income = Total interest income Total interest expense = 390 235 = 155 Net non interest income = Total non-interest income Total non-interest expense = 127 69 = 58 b. Net income before and after taxes Net interest income + Net non-interest income -Provision for loan losses = Net income before taxes -Income taxes = Net income after taxes 155 58 (27) 186 (14) 172

c. Total operating revenues and expenses Total operating revenue = Total interest income + Total non-interest income = 390 + 127 = 517 Total operating expenses = Total interest expense + Total non-interest expense = 235 + 69 = 304

d. Undivided profits Undivided profit = Net income after taxes Dividend = 172 23 = 149