Mention the Importance of Time Value of Money

Posted by Ripon Abu Hasnat on Thursday, November 26, 2015 | 0 comments | Leave a comment...

In business inflow and outflow is related almost with every decision. For the purpose of taking right decision, present value and future Value of inflow and outflow are needed to be calculated on term basis. So, considering the importance of the “Time Value of Money” it can be said that –

(a) Opportunity Cost: 
If money is invested in any project then opportunity of investment in other project has to be missed. In finance, it is called “Opportunity Cost.”
 
This opportunity cost can be calculated by the application of equations of “Time Value of Money”. As an example: In your locality land value becomes double in 10 years. On the contrary, let assume, interest rate is 8% in sonali bank Saving Account. If land is purchased then money cannot be deposited in the Bank. So, in that case, opportunity cost of land purchase is 8%.

(b) Project Evaluation:
To evaluate the long term project, comparison has to make between the present cost of project and expected income or inflow of money from investment. From this chapter we have known that, present value of money and future value of money is not same. So without returning back expected income of the project into a present value, we cannot take long term decision.

(c) Lending decision:
Before taking loan from Bank or Financial Institution installment ability should measure at first. On the basis of the loan repayment schedule amount of installment differs. As an example, Loan Installment of 5 years Term loan and 8 years term loan will not be same. Again term may be yearly, monthly etc. In this situation installment amount will be different too. We can find out term of different installment of different amount of loan and by this we can take decision that, how long of the term of the loan, which way of installment repayment, receiving of how much loan will be suitable for business. Due to the lack of this planning most of the company is declared bankrupt. It should be remember that, loan repayment is obligation for any business and failure of this causes bankruptcy.

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Whats are the Non-Institutional Source of Short Term Loan

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a) Commercial Papers
A business organization sells Commercial Paper through promising to pay back the principal amount with interest after expiry of the certain period. At that time the company’s goodwill acts as a security to the purchaser. Usually, those persons who have some excess money left as unutilized for the time being purchase commercial papers as an alternative of investment in shares. Generally, well known person, commercial bank, insurance company, pension fund etc. can arrange finance for a short time by selling commercial papers.

b) Advance from Purchaser
Many times, trustful and permanent customers pay as advance to the producing or selling firm the full amount or part of their total purchase, and as a result, this act as a source of finance to the seller for the time being.

c) Inventory Financing
For the purpose of short term financing, warehouse asset can be used. If any business firm uses its inventory as security of loan received from a well known person or organization, it is called the inventory financing.

d) Village Moneylenders
From long days ago, rich people of the villages have been providing short term loans to the poor people. In this case, if the period of loan repayment is expired, the debtor has to pay high rate of interest. If the person fails to pay back the loan with interest within specified period, the moneylenders took the possession of his (debtor’s) tangible and intangible property. Village moneylenders count to impose interest on this loan on day basis, weekly basis and monthly basis.

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Popularity/ Advantages of Savings Accounts

Posted by Ripon Abu Hasnat on Monday, November 16, 2015 | 0 comments | Leave a comment...

Savings bank accounts are very popular among the general public because of the following advantages:
(a) A savings account can be opened with as little as Rs. 500 only. It helps the people of small means to save for their future.
(b) The balance lying in the savings bank earns some interest. The customer is benefited as his money grows with the bank.
(c) The money lying with the bank is quite safe. There is no fear of theft.
(d) The money can be withdrawn conveniently from the savings account.
(e) The customer gets the cheque book facility if his account is duly introduced by another account-holder and he keeps a minimum balance of $. 1000. It is quite easy to make payment to third parties by issuing cheques.

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Meaning of Unit banking

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The banking system in different countries varies substantially from one another. Broadly speaking, however, there are two important types of banking systems, viz., unit banking and branch banking.
‘Unit banking’ means a system of banking under which banking services are provided by a single banking organization. Such a bank has a single office or place of work. It has its own governing body or board of directors. 

‘Unit banking’ functions independently and is not controlled by any other individual, firm or body corporate. It also does not control any other bank. Such banks can become member of the clearing house and also of the Banker’s Association. Unit banking system originated and grew in the U.S.A. Different unit banks in the U.S.A. are linked with each other and with other financial centers in the country through “correspondent banks.”

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Sources of a bank’s Income

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A bank is a business organization engaged in the business of borrowing and lending money. A bank can earn income only if it borrows at a lower rate and lends at a higher rate. The difference between the two rates will represent the costs incurred by the bank and the profit. Bank also provides a number of services to its customers for which it charges commission. This is also an important source of income.
The followings are the various sources of a bank’s profit:
1. Interest on Loans: The main function of a commercial bank is to borrow money for the purpose of lending at a higher rate of interest. Bank grants various types of loans to the industrialists and traders. The yields from loans constitute the major portion of the income of a bank. The banks grant loans generally for short periods. But now the banks also advance call loans which can be called at a very short notice. Such loans are granted to share brokers and other banks. These assets are highly liquid because they can be called at any time. Moreover, they are source of income to the bank.
2. Interest on Investments: Banks also invest an important portion of their resources in government and other first class industrial securities. The interest and dividend received from time to time on these investments is a source of income for the banks. Bank also earns some income when the market prices of these securities rise.
3. Discounts: Commercial banks invest a part of their funds in bills of exchange by discounting them. Banks discount both foreign and inland bills of exchange, or in other words, they purchase the bills at discount and receive the full amount at the date of maturity. For instance, if a bill of Rs. 1000 is discounted for Rs. 975, the bank earns a discount of Rs. 25 because bank pays Rs. 975 today, but will get Rs. 1000 on the due date. Discount, as a matter of fact, is the interest on the amount paid for the remaining period of the bill. The rate of discount on bills of exchange is slightly lower than the interest rate charged on loans and advances because bills are considered to be highly liquid assets.
4. Commission, Brokerage, etc.: Banks perform numerous services to their customers and charge commission, etc., for such services. Banks collect cheques, rents, dividends, accept bills of exchange, issue drafts and letters of credit and collect pensions and salaries on behalf of their customers. They pay insurance premiums, rents, taxes etc., on behalf of their customers. For all these services banks charge their commission. They also earn locker rents for providing safety vaults to their customers. Recently the banks have also started underwriting the shares and debentures issued by the joint stock companies for which they receive underwriting commission.

Commercial banks also deal in foreign exchange. They sell demand drafts, issue letters of credit and help remittance of funds in foreign countries. They also act as brokers in foreign exchange. Banks earn income out of these operations.

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Management of Financial Institution Math Question Solve, June-2014

Posted by Ripon Abu Hasnat on Wednesday, November 11, 2015 | 0 comments | Leave a comment...

6. (A)   Given the following information for bank XYZ Ltd.
Particulars
(In million) Tk.
Interest income
Interest Expense
Total Assets
Securities gain (loss)
Earning Assets
Total liabilities
Taxes
Number of common shares
Non-interest income
Non-interest expanse
Provision for loan loss
2250
1452
18918
25
15145
18528
20
145000
600
820
455
You are required to calculate: ROE, ROA, NIM, EPS, Net Non-interest Margin and Net Operating Margin

SOLUITION:
Income & Expenditure
Tk. in Million
Tk. in Million
Income:
Interest Income
Securities gain (loss)
Non-interest income
Expenses:
Interest expenses
Tax
Non-interest expense
Profit before tax (2875-2292)
(-) Provision for loan loss
Net profit
2250
25
600
2875









2292
1452
20
820

583
455
128

We know,
                   Total Equity   = Total Assets – Total Liabilities
                                      = 18918 – 18528
                                      = 390
Calculation of Return on Equity (ROE)
We know,
                   Return on Equity (ROE)   = Net Income/Total Equity [Net Income=Net Profit]
                                                          = 128/390
                                                          = .32821
Calculation of Return on Assets (ROA)
We know,
                   Return on Assets (ROA)  = Net Income/Total Assets
                                                          = 128/18918
                                                          = 0.00677
Calculation of Net Interest Margin (NIM)
We know,
Net Interest Margin (NIM)    = (Interest Income-Interest Expenses)/Total Assets of Earning Assets
                                      = (2250-1452)/18918                                      [Considers Total Assets]
                                      = 798/18918 
                                      = 0.04218
Or,
Net Interest Margin (NIM)    = (Interest Income-Interest Expenses)/Total Assets of Earning Assets
                                      = (2250-1452)/15145                                       [Considers Earning Assets]
                                      = 798/15145 
                                      = 0.0529
Calculation of Earnings per Share (EPS)
We know,
Earnings per Share (EPS)          = Net Profit/Number of Shares
                                      = 128000000/145000                    [As 1 million = 1000000]
                                      = 882.75862
Calculation of Net Non-interest Margin
We know,
Net Non-interest Margin  = Non-interest income–Non-interest expenses–Provision for loan loss/Total Assets or Earning Assets
                             = (600-820-455)/18918                                    [Considers Total Assets]
                             = - 675/18918
                             = - 0.035680
Or,
Net Non-interest Margin  = Non-interest income–Non-interest expenses–Provision for loan loss/Total Assets or Earning Assets
                             = (600-820-455)/14145                                    [Considers Earning Assets]
                             = - 675/15145
                             = - 0.04457
Calculation of Net Operating Margin
We know,
Net Operating Margin      = (Total Operating Revenues-Total Operating Expenses)/ Total Assets of Earning Assets
                                   
Here,
Total Operating Revenues    = Interest Income + Non-interest Income
                                      = 2250+600
                                      = 2850
Total Operating Expenses    = Interest Expense + Non-interest Expense
                                      = 1452+820
                                      = 2272
So,
Net Operating Margin      = (Total Operating Revenues-Total Operating Expenses)/ Total Assets of Earning Assets
                             = (2850-2272)/18918                                                [Considers Total Assets]
                             = 578/18918
                             = 0.03055
Or,    
Net Operating Margin      = (Total Operating Revenues-Total Operating Expenses)/ Total Assets of Earning Assets
                             = (2850-2272)/15145                                                [Considers Earning Assets]                                = 578/15145
                             = 0.03816

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