MGT411 - Money & Banking

Please share MGT411 Assignment 1 Solution and Discussion

Re: MGT411 GDB 1 Solution and Discussion Total Marks 5 Starting Date Wednesday, June 03, 2020 Closing Date Monday, June 08, 2020 Status Open Question Title Nominal and Real Interest rate Question Description SEMESTER SPRING 2020 Money and Banking (MGT411) GDB No. 1 Due Date: June 08, 2020 Marks: 5 Learning Objective: The objective of this question is to enable the students to understand the difference in nominal interest rate and real interest rate and its importance for lenders and borrowers. Discussion Question: It is important to understand the difference between nominal interest rate and real interest rate. Nominal interest rate is expressed in terms of current dollars as used in present value calculation where the purpose is to assess the amount of money you would pay today for fixed payments in the future. In case of borrowers and lenders; inflation is another important factor as they are concerned about the purchasing power of money and there is possibility that inflation may change the purchasing power of dollars. So there is a need to use inflation adjusted interest rate that is real interest rate. It equals to nominal interest rate minus inflation and expressed in terms of purchasing power. This phenomenon is best expressed by Irving Fisher in the form of Fisher equation that states that nominal interest rate ‘i’ is equal to real interest rate ‘r’ plus expected inflation ‘πe’. Keeping this in mind; answer the following questions: If there are equal chances of being paid back; whether 8% nominal interest rate is more attractive to a lender or 5% nominal interest rate? Explain your answer. Also explain in the context of Fisher equation; what compensation a borrower is giving to a lender when he pays nominal interest rate? Important Instructions: Your discussion must be based on logical facts. The GDB will remain open for 07 working days. Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course. Obnoxious or ignoble answer should be strictly avoided. Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB is over. For Detailed Instructions please read the GDB Announcement

Total Marks 5 Starting Date Wednesday, January 22, 2020 Closing Date Tuesday, January 28, 2020 Status Open Question Title Liquidity Risk of Banks Question Description SEMESTER Fall 2019 Money and Banking (MGT411) GDB No. 1 Due Date: January 28, 2020 Marks: 5 Learning Objective: The objective of this question is to enable the students to understand the concept of liquidity risk for banks its sources and how banks manage it thorough different strategies. Discussion Question: Liquidity is a term used to describe the ease with which an asset can be converted into cash. Most of the time businesses face a situation where they have to meet sudden demand of cash or liquid funds that creates liquidity risk. Banks face liquidity risk on both sides i.e. asset and liability side of their balance sheet. On liability side, it is due to sudden deposit withdrawals and on asset side it is due to failure of banks to provide loans to their customers when demanded. One way to manage liquidity risk is to hold sufficient excess reserves but it is considered to be expensive one. The other two ways are adjusting assets and adjusting liabilities. Banks can manage it from asset side by selling a portion of its securities, selling some of its loans to other banks or by simply refusing to renew a customer loan that has come due which is absolutely not very appealing. On liability side; banks can manage it by attracting additional deposits or by borrowing either from the Central Bank or any other bank. But banks prefer to find other sources of funds instead of selling existing assets to manage liquidity risk. Keeping this in mind; answer the following questions: Briefly explain why keeping excess reserves in banks is considered to be expensive? Why do banks prefer to manage liquidity risk by adjusting liability side instead of assets? Important Instructions: Your discussion must be based on logical facts. The GDB will remain open for 07 working days. Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course. Obnoxious or ignoble answer should be strictly avoided. Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB is over. For Detailed Instructions please read the GDB Announcement