COLLEGE OF BUSINESS MANAGEMENT AND ACCOUNTING

SULTAN HAJI AHMAD SHAH CAMPUS

MID-TERM EXAMINATION
SEMESTER 1 2012/2013
________________________________________________________________________
PROGRAMME

BACHELOR OF FINANCE (HONS)

SUBJECT

ASSET LIABILITY MANAGEMENT

CODE

FICB 263

DATE

17 JULY 2012 (TUESDAY)

TIME

2.00 PM 4.00 PM (2 HOURS)

INSTRUCTIONS TO CANDIDATES
1.

This question paper consists of THREE (3) questions:

2.

Answer ALL questions.

3.

All answers must be written using the answer sheet provided.

4.

Each answer for every question must start on a new page.

5.

The PVIF and PVIFA schedules are attached at the end of the question paper.

THIS EXAMINATION BOOKLET CONTAINS 6 PAGES INCLUDING THE COVER

PAGE
Page 1 of 4

FICB263 Semester 1 2012/2013

QUESTION 1 [14 marks]

(a)

MasterBank Malaysia has an average duration for its asset portfolio of 8 years. It
also has an average duration for its liability portfolio of 2.5 years. This bank has
RM 800 million in total assets and RM 400 million in liabilities. MasterBank
Malaysia is thinking about hedging their risk by using a Treasury bond futures
contract with duration of 6 years and a price of RM 6 million.

Calculate the number of futures contracts needed for MasterBank Malaysia.

[7 marks]

(b)

MasterBank Malaysia plans to borrow RM 111 million in the money market at a

current interest rate of 4.5 percent for three months. However, the borrowing rate
will float with market conditions. To protect itself the firm has purchased an
interest-rate cap of 5.4 percent to cover this borrowing. Suppose that, money
market interest rates on these funds suddenly climb to 6.4 percent as the
borrowing begins.

Required:

(i)

Calculate the total interest owed by MasterBank Malaysia.

[3 marks]

(ii)

Calculate an interest rebates for MasterBank Malaysia.

[4 marks]

Page 2 of 4

FICB263 Semester 1 2012/2013

QUESTION 2 [11 marks]

(a)

National Bank placed a group of 5,000 consumer loans bearing an average

expected gross annual yield of 14.5 percent in a package to be securitized. The
investment bank advising National Bank estimates that the securities will sell at a
slight discount from par that result in a net interest cost to the issuer of 7 percent.
Based on recent experience with similar types of loans, the bank expects 3.5
percent of the packaged loans to default without any recovery for the lender and
has agreed to set aside a cash reserve to cover this anticipated loss. Underwriting
and advisory services provided by the investment banking firm will cost 0.5
percent. National Bank will also seek a liquidity facility, costing 0.5 percent and a
credit guarantee if actual loans defaults should exceed the expected loan default
rate, costing 0.7 percent.

Calculate the residual income for National Bank.

(b)

[6 marks]

The coupon rate promised investors on securities issued against a pool of loans is
6.5 percent. The default rate on the pool of loans is expected to be 3.5 percent.
The fee to compensate a servicing institution for collecting payments on the loan
is 2 percent. Fees to set up credit and liquidity enhancements are 5 percent. The
residual income on this pool of loans is 7 percent.

Calculate the expected yield on this pool of loans.

Page 3 of 4

[5 marks]

FICB263 Semester 1 2012/2013

QUESTION 3 [18 marks]

(a)

Suppose a corporate bond an investment officer would like to purchase for her
bank has a before-tax yield of 5.67 percent and the bank is in the 26 percent
federal income tax bracket.
Calculate the bonds after-tax gross yield.

(b)

[3 marks]

A bond currently sells for RM 950 based on a par value of RM 1,000 and
promises RM 150 in interest for three years before being retired. Yields to
maturity on comparable-quality securities are currently at 13 percent.
Calculate the bonds duration.

[15 marks]

END OF QUESTION PAPER

NOI
Page 4 of 4