Questions True/False Questions: 1. 2. 3. False appear as liabilities and equity 4. False that is called asset management 5. True 6.

6. False they are stable 7. True 8. True 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Essay Questions: 1. The practice of asset management refers to where a bank is restricted by their loan activity to match the available amount of deposits they received from customers deposits. This was adopted during times of a highly regulated banking sector. On the other hand, liability management refers to where commercial banks now actively manage their sources of fund in order to ensure that they have sufficient funds available to meet loan demand and other commitments. This practice was developed with the removal of restrictive regulation and now has become the normal practice of today. 2.

3. Call deposits are held in accounts other than a cheque account where the funds are available on demand. Referred to as savings accounts, holders of these accounts will usually receive interest but because of the accounts highly liquid nature and low risk attached, the rates of returns are generally low. Term deposits refer to funds lodged in an account with a bank for a pre-specified period of time. A fixed rate of interest is offered on these, but nevertheless is a higher rate than what is available for current accounts or call deposits. This is to compensate for the loss of

liquidity. There is not much risk associated with these accounts, and is usually a safe and stable investment for conservative investors. Known in the market as CD, negotiable certificate of deposits are a source of short term funding. The CD is a certificate issued by a bank undertaking to pay to the bearer the face value of the CD at the specified maturity date. No interest payments are offered with these, rather they are sold at a discount to the face value. 4. Once acquired, banks then create loans from savers deposits. Bank lending is categorised in three main categories: personal and housing lending, commercial lending and lending to the government. Personal finance is provided to individuals and includes housing loans, investment property loans, fixed term loans, personal overdrafts and credit card finance. Banks invest in the business sector by granting commercial loans. Commercial loan assets include overdraft facilities, commercial bills held, term loans and lease finance. While banks may lend some funds directly to government, their main claim is through the purchase of government securities such as Treasury notes and Treasury bonds. The fourth main use of funds is the acquirement of assets, other than lending, which include receivables, shares in and loans to controlled entities, goodwill, property, plant and equipment and unrealised gains from their trading activities in derivative products. 5. Housing finance refers to where the banks registers a mortgage over the property as security for the loan, is an attractive form of lending as the risk of default by the borrower is normally low. Investment property finance is another significant form of housing finance. Here, the bank provides funds to an individual investor who purchases a property for rental or leasing purposes. The bank will also take a registered mortgage over the property as security for the loan. The fixed term loan is a loan provided with a predetermined period, used to purchase specified goods or services. As with housing finance, the interest rates may be fixed or variable. This type of loan will also require some form of security to support the loan. Personal overdrafts are also provided to individuals, which allow them to put a nominated account into debit from time to time up an agreed limit. This is to allow for the management of the mismatch in the timing of their cash flows in enabling them to pay expenses when they are due into debit. It is expected that the overdraft will be brought back into credit once income is received. A more flexible alternative to a personal overdraft is a credit card facility. Card users are able to draw against a predetermined credit limit, and credit cards will usually have high interest rates, and a range of transaction fees and other might also apply. 6.

7. a) The off balance sheet business conducted by banks refers business conducted which is not recorded as assets or liabilities on their balance sheets. b) The four main types are: Direct Credit Substitutes provided by a commercial bank to support a clients financial obligation. For example, letters of comfort and guarantees Trade and Performance Related Items guarantees made by a bank on behalf of its client, but in this case they are made to support a clients non-financial contractual obligations. For example, performance guarantees where are a bank agrees to compensate a third party should a client fail to complete the terms and conditions of a contract Commitments involve a bank in an undertaking to advance funds to a client, to underwrite debt and equity issues or to purchase assets at some future date. For example, repurchase agreements Foreign Exchange Contracts, Interest Rate Contracts and other Mark Rate Related Contracts principally involve the use of derivative products futures, options, swaps and forward contracts, and thus are used to facilitate hedging against risk. For example, foreign exchange contracts 8.

9. a)