MGT411 GDB 2 Spring 2011 idea Solution June 2011

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S&K Saving Bank is a medium size bank and operating locally. It provides different financial services to individuals and businesses. In January 2011, S&K Saving Bank has issued saving certificate (certificate of deposits) for Rs. 1,000 with one year maturity at 4% interest rate.

In next year bank will reissue the certificate of deposits; on reissuance interest rate on these may vary due to change in inflation rate and monitory policy.

With the borrowed money the bank has purchased treasury bonds for Rs 1000 at 8% fixed interest having two year maturity. Previous trend shows that interest rate may rise by 1-2 percent.

Required: Keeping in view all these information, what type of risk the bank will face while entering into these transactions? Also mention the valid reason for choosing this type of risk.

Hint: Write your answer in the following format.

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Type of risk: (Give only name) ?

Specify the reason for choosing this risk in Bullets/ Numbers form ?

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Question
Money Aggregate or money supply plays a crucial role in any economy, which not only
counts the money supply at specific time period but also useful in taking different
economic decisions. Definitions of different money aggregate are somehow loosely
defined but all the economists differentiate and classify M1, M2 & M3 on the single
Accepted base.
Give answer in keywords only:
Q#1.What is the main characteristic that distinguishes the different money
aggregate definitions?
Solution:
The main characteristic that distinguishes the different money aggregate definitions is
Liquidity.
2. Which money aggregate definition is mostly used in economic decision around the
world?
Solution:
M2 is used in economic decisions.
3. Justify answer given against part-b. (Provide only one reason)
Solution:
Economists use M2 when they want to quantify the amount of money in circulation and
try to explain different economic monetary conditions. M2 is a key economic indicator
used to forecast inflation.