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BFC3170 Financial Intermediation
Final Take-Home Assessment
Instructions
1. The assessment has 10 questions in total. You are required to attempt all questions. Be sure to allocate your time effectively to ensure comprehensive and thoughtful responsesto each question.
2. The purpose of this assessment extends beyond knowledge evaluation – it is designed to foster critical thinking, problem-solving, and effective communication.
3. In this assessment, you must not use generative artificial intelligence (AI) to generate any materials or content in relation to the assessment task. This whole assessment taskrequires students to demonstrate human knowledge and skill acquisition without the assistance of AI.
4. All submitted work must be your own. Plagiarism, or the act of presenting someoneelse’s work as your own, is strictly prohibited and will result in severe penalties, whichmay include failing this course.
5. We will be using software such as Turnitin to uphold academic integrity and detectplagiarism. This includes paraphrasing content from another source without proper citation. Ensure that you acknowledge all sources used in your responses. For additional information, the University’s Student Academic Integrity Policy can be found at the
URL: https://www.monash.edu/learnhq/resources/maintain-academic-integrity
6. Using external resources to support your answers is allowed, but all sources must be cited correctly. If some specific ideas, facts, or figures have come from an external source, they should be included (with author and year and then complete details) in a reference list. Please note the data source for your graphs underneath them (if you have any graphs). Work submitted for assessment must be consistent with the guidelines in the referencing requirements, which are the faculty’s student guide for producing quality work on time. The referencing requirements can be found here: https://www.monash.edu/library/help/citing-and-referencing/citing-and-referencing tutorial
7. Use a precision of four decimal points within numerical calculations.
8. For any calculation, provide information on which steps you have followed to reach the result (show your step-by-step calculation).
9. Word limits given in parentheses apply to the explanation/discussion part of the questions.
10. All assessments should have a front page with the student’s ID. Page numbering is expected. Please submit your assessment as one PDF file.
11. Complete and submit your assessment on Moodle before 11.55 p.m. on May 30, 2025.
XYZ Bank Balance Sheet (in AUD millions) (as of May 23, 2024)
• Maturity within 6 months: $120 (Duration: 0.2 years)• Maturity within 6-12 months: $60 (Duration: 0.8 years)
• Maturity within 1-5 years (Rating: A): $40 (Duration: 1.2 years)• Maturity beyond 5 years (Rating: AA): $20 (Duration: 2.5 years)
• Maturity within 1-5 years (Rating: BB): $55 (Duration: 1.5 years)• Maturity beyond 5 years (Rating: A): $35 (Duration: 2.8 years)
• Floating-rate Mortgages (mortgage rate adjusted every 9 months): $300 (LTV: 92%)(Duration: 6 years)• Fixed-rate Mortgages: $200 (LTV: 85%) (Duration: 3.5 years)
• Maturity within 1-2 years (Rating: BBB+): $270 (Duration: 1.1 years)• Maturity beyond 2 years (Rating: BB+): $105 (Duration: 2.8 years)
• Six-month Certificates of Deposit: $115 (Duration: 0.3 years)• Two-year Certificates of Deposit: $120 (Duration: 1.2 years)
Shareholders’ Equity:
1. Common Equity: $60
2. Retained Earnings: $35
3. Additional Tier 1 Capital: $25
4. Tier 2 Capital: $20
Total Liabilities and Shareholders’ Equity: $1,580
Questions:
Interest rates on assetst = 1.7 x Cash ratet + 1.225%
Interest rates on liabilitiest = 1.2 x Cash ratet + 0.75%, where t is the day-month-year.
Calculate the impact of the decrease in cash rates from May 23, 2024, to May 23, 2025, on the interest rates on assets and the interest rates on liabilities, and then calculate the impact of this decrease on the bank’s net interest income using the repricing model. (7.5 marks)
(Hint: You can find the information on the cash rate on the RBA’s website: https://www.rba.gov.au/statistics/cash-rate/)
3) Discuss the change in the bank’s net interest income with decreasing interest rates (calculated in question 2). Which effect dominates the change in the net interest income: CGAP versus spread effect? Explain your answer. (7.5 marks) (105 – 115 words)
4) Calculate the duration of the assets, the duration of the liabilities, and the leverage adjusted duration gap. (7.5 marks)
6) Calculate the total risk-weighted assets. (5 marks)(Hint: For the assets with no risk weights, you can use the ratings and the LTV ratios to determine the risk weights following the lecture slides. Residential mortgage repayments depend on cash flows generated by the property.)
7) Calculate the bank’s common equity Tier 1 (CET1) risk-based capital ratio, Tier 1 risk based capital ratio, and total risk-based capital ratio. Does the bank comply with the capital adequacy requirements? Explain your answer. (12.5 marks) (70 – 75 words)
(Hint: Ignore the capital conservation buffer, the countercyclical capital buffer, and the Tier 1 leverage ratio in your answer.)
8) Assume that depositors unexpectedly withdraw $181 million from their six-month term deposit accounts. The bank receives no deposits to replace them. Assume that the bank cannot borrow any more funds in the market, and it cannot issue new equity. As it needs the cash now to meet immediate deposit withdrawals, the bank cannot wait to get better prices for its assets. It can sell its Treasury bonds at 90 cents on the dollar and/or sell its AA-rated municipal bonds at 80 cents on the dollar and/or sell its A-rated municipal bonds at 70 cents on the dollar and/or sell its A-rated corporate bonds at 60 cents on the dollar and/or sell its BB-rated corporate bonds at 50 cents on the dollar. Given that the bank has to hold at least $120 million of liquid assets and at least $30 million of it should be cash, what is the most optimal way of payment for the deposit withdrawal?
Explain your answer with the calculations. (15 marks) (280 – 300 words) (Hint: Liquid assets are the assets that have zero risk weights.)
9) How would the bank’s balance sheet look after the adjustments are made for the $181 million deposit withdrawal? Explain the change in each item. (15 marks) (280 – 300
10)Calculate the impact of the deposit withdrawal on the bank’s total risk-weighted assets and its regulatory capital ratios (CET1 risk-based capital ratio, Tier 1 risk-based capital ratio, and total risk-based capital ratio). Does the bank comply with the capital adequacy requirements after the adjustments? Explain your answer. (12.5 marks) (40 – 50 words)
(Hint: Ignore the capital conservation buffer, the countercyclical capital buffer, and the Tier 1 leverage ratio in your answer.)