Examination paper semester two

Question 3.
Briefly describe how central banks can inject money (reserves) into a banking system. [10 marks]
Question 4.
Describe the meaning of banking indicators ROE and ROA, and why equity holders care more about ROE than about ROA [10 marks]
Question 5.
Briefly describe a pure flexible exchange rate system. [10 marks]


Part B
Question 6.
The following financial statement is for the current year.

InfinBank
Assets		Liabilities
Reserves	$ 2,000,000	Checkable Deposits	$ 10,000,000
Securities		Money Market Deposits	$ 10,000,000
 1 Year	$ 18,000,000	Savings Accounts	$ 8,000,000
 1 Year	$ 8,000,000	CDs
Residential Mortgages		Variables-rate	$ 20,000,000
Variables-rate	$ 10,000,000	 1 Year	$ 20,000,000
Fixed-rate	$ 10,000,000	 1 Year	$ 5,000,000
Commercial Loans
 1 Year	$ 10,000,000	Borrowings
 1 Year	$ 40,000,000	 1 Year	$ 15,000,000
		 1 Year	$ 2,000,000
Buildings, etc.	$ 2,000,000
		Bank Capital	$ 10,000,000
Total	$100,000,000	Total	$100,000,000

What is the current Income GAP for InfinBank? [15 marks]

What will happen to the bank’s current net interest income if rates increase by 150 basis points? [5 marks]


Question 7.

The following financial statement is for the current year:

InfinBank
Assets		Duration			Liabilities				Duration
Reserves	$ 2,000,000		0.00	Checkable Deposits			$ 10,000,000				3.00
Securities				Money Market Deposits			$ 10,000,000				0.20
 1 Year	$ 18,000,000		0.50	Savings Accounts			$ 8,000,000				1.00
 1 Year	$ 8,000,000		5.50	CDs
Residential Mortgages				Variables-rate			$ 20,000,000				0.30
Variables-rate	$ 10,000,000			 1 Year			$ 20,000,000				0.40
Fixed-rate	$ 10,000,000			 1 Year			$ 5,000,000				4.00
Commercial Loans
 1 Year	$ 10,000,000		0.80	Borrowings
 1 Year	$ 40,000,000			 1 Year			$ 15,000,000				0.20
				 1 Year			$ 2,000,000				2.70
Buildings, etc.	$ 2,000,000		0.00
				Bank Capital			$ 10,000,000
Total	$100,000,000			Total			$100,000,000

Calculate the duration gap for the bank. [20 marks]