What form of deposit pricing is this?

1.   What is First Gulf trying to accomplish with its pricing schedule?                 (2 marks)

2.   Can you foresee any problems with this pricing plan?                                     (1 mark)

Answer:

1) In accordance with the shared information and conditions about the fees and charges, First Gulf Bank has the following schedule for fees and charges for their customers.

In accordance with this table, all customers with the amount over 1500 dollar are not required to pay additional maintenance fees and charges per check. In other words, the bank is providing special relief to their premium customers with more than $1500 average monthly account balance. Considering this it can be said that First Gulf Bank is following a conditional deposit pricing design.

2) The First Gulf Bank is using this policy to earn several benefits related to deposit monthly amounts. The First Gulf Bank want to get more premium customers with higher deposit amount than the regular household customers with small deposit amounts. The benefits given to the customers with more than $1500 monthly amount show that bank will have larger denomination accounts and stability. Moreover, they will provide more money and stability of funding to the bank that will reduce liquidity issues.

3) With this conditional deposit pricing plan bank will have some issues and challenges. For instance, a bank will have very limited small accounts of household customers. The small depositor and household customers who usually use the bank for saving rather than business transactions will drive away from the bank because of the higher monthly maintenance fee and per check charges by the First Gulf Bank.

Question (2):                                                                                                       (6 Marks)

Ø   Suppose that a customer holds a savings deposit in a savings bank for a year. The balance in the account stood at $2,000 for 180 days and $100 for the remaining days in the year. If the Savings bank paid this depositor $8.50 in interest earnings for the year, calculate the annual percentage yield (APY) did this customer receive?

Answer:

The annual percentage yield (APY) represent the actual amount of return obtained by the investor on the investment product or deposit. The annual percentage of yield is calculated by considering the amount of compounding interest for that particular investment product or deposit. In this above scenario the annual percentage of yield for the customer can be calculated by the use of the following formula:

In the above stated formula, we do not have the value of average balance in account therefore we will state their “x”. Then the following formula will be used to calculate the value of average balance in account represented by “x”.

Now add the value of "x" in the formula:

Simplifying this formula:

Question (3):                                                                                                                             (3 Marks)                             

Ø  Explain the impact that budget deficits have on deposits, bank loans and interest rates.

Answer:

The budget deficit draws impact on the economic condition of a country or an organization by changing the values of interest rate and inflation rate. The budget deficit also directly influence the values of deposit, bank loans, and interest rates in the financial and banking sectors. The impact of budget deficit on bank loans, interest rates, and deposit is presented below:

1.      Impact on Deposit

Budget deficit increase demand for the money therefore bank announces favourable policies for investment and saving of money in the bank accounts. Moreover, such a situation indicate the financial health of a country as the spending of household increases in the country than the total amount earned as revenue. Although, it encourages government spending by lowering taxes, therefore, government withdrawal money rather than depositing in the bank accounts.

2.      Impact on Bank Loans

The bank loans get a negative impact on the budget deficit if the interest rate in the country is increased. Investors will have to pay more amount as interest on their bank loans which is a discouraging factor for small business owners and entrepreneurs. However, an increase in the sales of securities benefits a bank or financial institute.

3.      Impact on Interest Rate

Budget deficits increase the interest rate in the country. However, in some case interest rate remain the same after the budget deficit because of the financial strength of the country. Although, in majority cases, the government increase their interest rate on government bonds to encourage households for investment in the government bonds. By selling these government bonds government of a country can cover its expenses and increase its revenue amount with the support of private investors.

Question (4):                                                                                                                           (4 Marks)

Ø  In Bacone National Bank has structured its investment portfolio, which extends out to four-year maturities, so that it holds about $11 million each in one-year, two-year, three-year, and four-year securities. In contrast, Dunham National Bank and Trust holds $36 million in one- and two-year securities and about $30 million in 8- to 10-year maturities. What maturity strategy is each bank following?

Answer:

The structured investment portfolio is based on equal intervals. In each of the 4 one-year maturity intervals, Bacone National bank would have equal 11 million amount. Such a situation indicates, the Bacone Batione Bank is following a spaced maturity strategy for its investment operations. Somehow, it can be also said that Bacone National Bank is the follower of ladder policy for its investment portfolio maturity.

While on the other hand, the Dunham national bank is holding only $36 million amount in the securities with a 1 and 2-year date of maturity. While for the investment of $30 million they are following the 8 and 10-year maturity plans. Such situation supports the idea that Dunham National bank is following the barbell maturity strategy. A critical analysis shows that Dunham National bank maturity strategy is better than the maturity strategy of Bacone National Bank as it also includes long term investment products or securities without ignoring the importance of liquidity.

Q5):  Answer the following question                                                                                      (3 Marks)

Suppose a bank has found bank-qualified municipal bonds which have a nominal gross rate of return of 8 percent and that it can borrow funds needed for this purchase at a rate of 6.25 percent. The bank is in the 35 percent tax bracket. What is the net after-tax return on this bond?                                                                                                                    (1×3=3 Marks)

            Answer:

The formula for the is stated below. In this formula “N.R. after-tax bond” represents the value of the nominal gross rate of return on a qualified municipal bond. While the value of total interest expense to acquire this municipal bond is presented as “Int. Exp. Acquiring bond”.

Thus the calculated value for net after-tax return on bond under the tax bracket of 35% is:

The net after tax return on municipal bond under tax bracket 35% is 3.5%.