## 10. RANDOM QUESTIONS FOR PRACTICE

__Random Questions for Practice:__

Q. A claim of Rs. 60 lacs has been settled by ECGC in favour of a bank against default of Rs. 80 lacs. Subsequently the bank realizes Rs. 20 lacs with the collaterals available to the loan. What is the loss suffered by the bank on this loan?

a. Rs. 25 lacs b. Rs. 20 lacs c. Rs. 15 lacs d. Rs. 10 lacs

Ans – c

Explanation :

ECGC had settled Rs. 60 lacs on default of 80 Lacs (That is 75% of the default amount)

But Subsequent to that settlement, Rs. 20 lacs was realised through the security held.

So, the claim amount from ECGC should be 60 Lacs only.

And the ECGC had settled only 75 % of the claim amount. So, the settlement amount will be,

75% of Rs. 60 lacs = 6000000 x 75/100 = 45 lacs

So,__ Total Realised Value__ = 4500000 + 2000000

= __6500000 (out of 80 lacs)__

So, the __bank had suffered loss Rs. 15 lacs on this loan__.

__Modified duration__ is McCauley's duration discounted by one period yield to maturity.

Here we are talking McCauley's duration is 8 years.

Modified duration =McCauley's duration / ( 1 + yield )

= 8 /(1 + 10%)

= 8/(1 +0.1)

= 8/(1.1)

= 7.2727

** **% change in price = - Modified duration × yield change

= - 7.2727× (0.60%)

= (-)4.3636 %

= (-) 4.36%

( - )means decrease in price % decrease in price. .

Q. Data relating to balance sheet as on 14 Mar 2015 banks reveals its -

Capital at Rs 1110 cr,

Reserve 2150 cr,

Demand Deposit 6500cr,

SB deposit 20500 cr,

Term Deposits from banks 1300 cr,

Term Deposit from public 30800 cr,

Borrowing from RBI nil,

Borrowing from Other Institutions 200 cr,

Refinance from NABARD 150 cr,

Bills Payable 50 Cr,

Accrued 20 cr,

Subordinated Debt 200 cr and

Credit Balance in suspense a/c 30 cr

(Total Being 63000)

Answer the following based on the data given above.

1. Total amt of liabilities not to be included in computing DTLs in Rs

a. 3250 cr b. 3300 cr c. 4600 cr d. 4700 cr

Ans - d

In Time liabilities,

= Capital and Reserve + Refinance from NABARD + Term Deposit of banks not to be included

= 1100+2150+150+1300

= 4700

2. Total amount of DTL on which CRR is to be maintained

a. Rs. 58100 cr b. Rs. 63000 cr

c. Rs. 58300 cr d. Rs. 67100 cr

Ans – c

6500+20500+30800+200+50+20+200+30=58300

Other than those not included while calculating DTL

3. Bank would required to maintain average CRR amounting to, if the rate of CRR is 5%

a. 2915 b. 2905 c. 1749 d. 3150

Ans – c

= 5% of 58300

= 2915

4. What are the risk weighted assets for market risk?

a. Rs. 1000 crores b. Rs. 1500 crores

c. Rs. 2000 crores d. Rs. 2500 crores

Ans –d

= 200/.08

= 2500

5. What are the risk weighted assets for operational risk?

a. Rs 1000 Cr b. Rs 2000 Cr

c. Rs 1250 Cr d. Rs 2500 Cr

Ans – c

= 100/.08

= 1250 Ans

................................................................................................................................................

1. What is the Tier-I CRAR?

a. 10.29 % b. 11.42 % c. 5.71% d. 14.85 %

Ans - c

TIER-I CRAR= Eligible Tier - 1 Capital / (Total RWAs)

= 500/8750

= 5.71%

................................................................................................................................................

1. What is the total capital adequacy ratio?

a. 0.1486 b. 0.1111 c. 0.1143 d. 0.1282

Ans – c

Total CRAR = Eligible Total capital/(Total RWAs)

= 1000/8750

= 11.42 %

__(Remember here Tier-II Capital does not exceed 100 % of Tier-I capital.__

So, Tier-II of Rs. 500Crore is taken for calculation (500+500=1000).

................................................................................................................................................

1. If there is an assets of Rs. 120 in the doubtful-I cat and the realization value of security is Rs. 100 only, what will be the provision requirement?

a. Rs. 40 b. Rs. 45 c. Rs. 50 d. Rs. 60

Ans – b

Since it a Doubtful-I Category asset,

So 25% of realization value Rs.100 i.e Rs. 25 and 100% of short Fall (120-100=20 )

So Ans will be = 20+25

=45

................................................................................................................................................

1. Balance sheet of a company indicated that its Current Ratio is 1.5:1. Company’s net working capital is Rs.

1 crore. The current assets would amount to ......

a. Rs. 2 crores b. Rs. 2.5 crores

c. Rs. 3 crores d. Rs. 3.5 crores

Ans – c

2. One year T-bill rate is 10% and the rate on one year zero coupon debenture issued by ABC Ltd is 11%.

What is the probability of default?

a. 1% b. 2% c. 3% d. 4%

Ans - a

Explanation :

Formula for probability of default is :

1 - P = 1 – [(1+i)/(1+k)]

= 1 - (1.1/1.11)

= 1 - 0.990

= 0.01

= 1%

3. How capital charge is calculated under basic indicator approach for operational risk?

a. capital charge equals internally generated measure based on internal and external loss data

b. 15% of average gross income over 3 years

c. sum of capital charges across business lines

d. none of these

Ans – b

4. Mr. Raj purchases a call option for 500 shares of A with strike price of Rs. 140 having maturity after 03 Months at a premium of Rs. 40. On maturity, shares of A were priced at Rs. 180. Taking interest cost @ 12% p.a. What is the profit/lost for the individual on the transaction?

a. Profit of Rs. 20000

b. Profit of Rs. 600

c. Loss of Rs. 20600

d. Loss of Rs. 600

Ans - d

Explanation.

This is call option, so it is assumed that,

He will purchase 500 shares of A at a price of 140

Total value of shares is = 70000

Then he will sell the total shares in the market at a price of 180.

500 × 180 = 90000

So profit of 20000 in the transaction. .

But he has to pay the premium for call options.

Which is 40 × 500 = 20000

And the fund interest cost will be, 12% p.a.

So for 03 months 12/4=3%

= 20000 × 3/100 = 600

Total premium + premium cost

= 20000 + 600

= 20600

In total,

= 20000 - 20600

= - 600

5. Basel II defines capital requirement as ......

a. Capital = Min Capital ratio (8%) * (Credit Risk + Market Risk + Operational Risk)

b. Capital = Min Capital ratio (8%) * (Credit Risk + Market Risk)

c. Capital = Min Capital ratio (8%) * Credit Risk + Market Risk * Operational Risk

d. Capital = Min Capital ratio (18%) * (Credit Risk + Market Risk + Operational Risk)

Ans – a

6. A bond with a coupon rate of 9% maturing in 2015 and trading at Rs 180 will have yield of …...

a. 4% b. 5% c. 6% d. 7%

Ans - b

Explanation :

Current yield = Coupon rate/Prevailing market value

= 9/180= 5%

7. A bank borrows US $ for 03 months @ 3.0% and swaps the same in to INR for 03 months for deployment in CPs @ 5%. The 3 months premium on US $ is 0.5%. What is the margin(gain/loss) generated by the bank in the transaction?

a. 2% b. 3% c. 1.5% d. 2.5%

Ans - c

Explanation :

Bank borrows US $ for 3 months @ 3%

Same it will invest in CP for 3 months @ 5%

So, it gains 2% by interest rate margin here.

But when bank repay its borrowing in $, it has pay 0.5% extra because US $ will be costly by 0.5% as US $ is at premium.

So it will reduce bank gain by 0.5%.

= 2.0% - 0.5 %

= 1.5%

8. XYZ Bank’s foreign correspondent maintaining a Nostro Rupee account with XYZ bank, wants to fund his account by purchase of Rs. 10.00 million, against US dollars. Assuming that the USD/INR interbank market is at 56.2380/2420, what rate would be quoted to the correspondent, ignoring exchange margin? Calculate amount of USD XYZ Bank would receive in its USD Nostro account, if the deal is struck.

a. 175438.60 b. 177803.07

c. 177815.71 d. 178571.43

Ans - c

Explanation :

The transaction is to sell Rs 10.00 million, against US dollars.

Hence the XYZ Bank would quote the lower of the two rates, i.e. 56.2380.

If the deal is struck, the foreign bank would pay Rs. 10000000/56.2380 = USD 177815.71 to XYZ Bank

USD Nostro account.

9. __Given the following,__

Probability of occurrence = 4,

Potential financial impact = 4,

Impact of internal controls = 0%.

What is the estimated level of operational risk?

a. 3 b. 2 c. 0 d. 4

Ans – d

Estimate level

= √*probability of occurrence*potential financial impact

( 1-% of impact of internal controls )]

= 4*4(1-0)^0.5 = 4

Volatility over a time horizon 'T' is calculated as follows:

a. Volatility over a time horizon T = Daily Volatility * vT

1. If the volatility per annum is 25% and the number of trading days per annum is 252, find the volatility per day.

a. 1.58% b. 15.8% c. 158% d. 0.10%

Ans - a

2. Daily volatility of a stock is 0.5%. What is its 10-day volatility?

a. 5% b. 0.25% c. 1.58% d. None of these

Ans – c

3. __Given the following__

Probability of occurrence = 4

Potential financial impact = 4

Impact of internal controls =5 0%

What is the estimated level of operational risk?

a. 3 b. 2 c. 0 d. 4

Ans – b

4. Book value of shares of the company as on 31-03-2015

a. Rs. 10 cr b. Rs. 30 cr c. Rs. 40 cr d. Rs. 80 cr

Ans – c

Book value of shares

= (Paid up Capital + Reserve) / No. of Shares

= (20+60)/2

= 40

5. The earning per share would be ......

a. Rs. 40 cr b. Rs. 30 cr c. Rs. 20 cr d. Rs. 10 cr

Ans – d

EPS

=NPAT/paid up capital * face value

= 20/20*10

= 10

6. Market price of the share of the co......

a. Rs. 50 cr b. Rs. 100 cr c. Rs. 200 cr d. Rs. 300 cr

Ans – b

Market price

= PER * EPS

= 10*10

= 100

7.Bond having a McCauley’s duration of 8 Yr is yielding 10% at present. What will be the modified duration?

a) 8.8181 b) 8.2323 c) 7.5353 d) 7.2727

Ans - d

Modified duration is McCauley's duration discounted by one period yield to maturity

Here we are talking McCauley's duration is 8 years.

Modified duration =McCauley's duration / ( 1 + yield )

= 8 /(1 + 10%)

= 8/(1 +0.1)

= 8/(1.1)

= 7.2727

__Random Questions for Practice:__

So, Tier-II of Rs. 500Crore is taken for calculation (500+500=1000).