FINM3404 FINAL EXAM
FINM3404 FINAL EXAM
Question 1
A. Assume that you are the HR manager in an investment bank. You have an orientation session with
interns. One of the interns ask you how the investment banking operations are organised. Please
respond to this intern by explaining three organisational departments of an investment bank. Another
intern asks, “I heard that the ‘middle office’ is a less glamorous part of an investment bank but serves
some of the most important functions.” Discuss this statement. [4 marks]
FINM3404 FINAL EXAM
B. Tulip Bank uses the Moody’s Analytics Portfolio Manager model to evaluate the risk–return
characteristics of the loans in its portfolio. Tulip has two loans with the following characteristics:
Loan given to Marvel Corporation (with an amount of $6 million) earns 1 percent per year in fees, and
the loan is priced at a 3 percent spread over the cost of funds for the bank. For collateral
considerations, the loss to the bank if the borrower defaults will be 25 percent of the loan’s face value.
The expected probability of default is 2 percent.
Loan given to Capcom Corporation (with an amount of $5 million) earns 1 percent per year in fees,
and the loan is priced at a 4 percent spread over the cost of funds for the bank. For collateral
considerations, the loss to the bank if the borrower defaults will be 20 percent of the loan’s face value.
The expected probability of default is 3 percent.
The default risk correlation between Marvel and Capcom is 0.12.
Requirements:
i. Calculate the percentage return on the loan portfolio [2 marks]
ii. Calculate the percentage risk of the loan portfolio [2 marks]
iii. Discuss why Moody’s Analytics Portfolio Manager model might be a good choice over using
MPT based regular loan portfolio diversification model for ADIs and insurance companies.
[2 marks]
FINM3404 FINAL EXAM
Question 2
A. The duration of an 11-year, $1000 Treasury Bond paying a 10 per cent semi-annual coupon and
selling at par has been estimated at 6.763 years.
i. What is the modified duration of the bond? What is the dollar duration of the bond? [1 mark]
ii. What will be the estimated price change on the bond if interest rates increase 15 basis points?
If rates decrease 25 basis points? [2 marks]
iii. What would the actual price of the bond be under each rate change situation in part (b) using
the traditional present value bond pricing techniques? What is the amount of error (difference
between estimated and actual price) in each case? [3 marks]
B. ‘Even years after the commencement of deregulation in the financial markets, the international capital
markets still remain a relatively important source of funds for commercial banks.’ Give your opinion on
this statement with a detailed discussion. [4 marks]
DETAILED ASSIGNMENT
