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FINS2618-Capital Markets & Institution - T2 2025

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Preston Bank, an Australian bank, currently has a CET1

ratio significantly below APRA’s required 10.25%. The bank anticipates

$305 billion in risk-weighted assets in the coming years. Considering the

challenges under Basel III, which of the following would be the most effective

action to help Preston Bank meet its capital adequacy requirement?

Increase deposit rates to attract more depositors

33%

Increase dividends to attract investors and boost

share price

Move resources to higher return and higher risk assets

to raise income

Offer a dividend reinvestment plan to encourage

shareholders to purchase new shares

67%

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The following assets were

recorded on the balance sheet for HarperBank at the end of this financial year:

Asset Type	Asset Value ($million)	Risk Weighting (%)
Cash and Reserve Bank deposits	6,000	0%
Loans to Australian government entities	9,000	20%
Residential mortgages	18,000	50%
Corporate loans and commercial property loans	22,000	100%

If the required Common

Equity Tier 1 (CET1) capital ratio is

10.25%

, how much CET1 capital (in

$ million) does HarperBank need to hold?

(Instructions:

Enter numbers only (no $ sign). Round your answers to two decimal places.)

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Read the following scenarios and identify which involve

systematic risk (market-wide risk) and which involve unsystematic risk

(company- or industry-specific risk):

I. A sharp rise in interest rates by the Reserve Bank causes a

broad decline in the stock market.

II. A fire damages a major manufacturing facility owned by a listed electronics

company.

III. Global oil prices surge due to geopolitical tensions in the Middle East,

impacting energy and transport stocks.

IV. Tesla is boycotted, resulting in an 81% year-on-year drop in sales and a

sharp selloff in its stock.

V. A trade war between the US and other countries causes widespread disruption

in global supply chains.

I, II, IV, and V are systematic risks; only III is

unsystematic

I and II are systematic risks; III, IV, and V are

unsystematic

I, III, and V are systematic risks; II and IV are

unsystematic

I and III are systematic risks; II, IV, and V are

unsystematic

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Match each statement below to the most appropriate concept:

Each price movement is unpredictable and independent

from past movements.

Uses trends and historical price movements to forecast

future stock prices

Assumes stock prices respond quickly and accurately to

all newly released public news.

Begins with analysis of macroeconomic trends,

then narrows down to industries and specific firms

Involves evaluating a firm’s cash flows, risks, and

growth to estimate stock value.

Starts with analysis at the company’s fundamental level, then expands to consider the broader industry and economy

The global outbreak of COVID-19 in early 2020

caused widespread panic and sharp declines across all major stock markets

Public information about a new project of company

PINKMINK allows investors to earn abnormal returns.

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Why might a fund manager employ both a technical

analyst and a fundamental analyst, even though the two approaches are often

viewed as conflicting?

Fundamental analysts offer better insights during

volatile markets, while technical analysts are more useful during stable

economic periods.

Using both methods ensures that the manager complies

with industry best practices and increases the fund’s diversification.

Technical analysis helps identify undervalued

companies based on financial statements, while fundamental analysis detects

repeated trading patterns for timing entry.

50%

Technical analysis can help with timing while

fundamental analysis focuses on valuation, making their combination useful in

different market conditions.

50%

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Rose Co announced a renounceable rights issue to existing shareholders. The pro-rata offer is made on a 2-for-9 basis at an offer price of $32.75 per share. The current market price of Rose Co’s ordinary shares is $34.86.

What are the correct answers to the following?

(i) Cum-rights share price

(ii) Value of one right

(iii) Theoretical ex-rights price

(i) 34.86 (ii) 1.73 (iii) 34.48

(i) 34.86 (ii) 2.11 (iii) 34.48

(i) 32.75 (ii) 2.11 (iii) 31.69

(i) 33.81 (ii) 1.06 (iii) 26.77

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In the first half of 2025, HarperBank reported total 30-day net cash outflows of $15,000 million under stressed conditions and a Liquidity Coverage Ratio (LCR) of 120%.

For the upcoming quarter, the bank expects these net cash outflows to increase by 20% and aims to raise its LCR to 130% to strengthen its liquidity buffer.

How much additional High-Quality Liquid Assets (HQLA) does HarperBank need to hold to meet this new target?

Instructions:

Enter numbers only (no $ sign). Round your answers to two decimal places.

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Please match the following bank activities to their

respective Pillar according to the Basel II capital accord framework:

Encourages additional good risk management policies and

practices in identifying, measuring and managing risk exposure.

Incorporates components of credit risk, operational

risk and market risk within the Basel III framework.

Sets capital adequacy requirements to ensure banks can absorb unexpected losses.

Requires market disclosures to allow external stakeholders to assess the institution’s risk profile.

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Why is it generally inappropriate to compare

debt-to-equity or interest coverage of companies from different industry

classifications?

Companies in different industries are required to use

different accounting standards.

Different industries typically follow different

capital structures and debt-servicing practices, making ratio comparisons

misleading without context.

100%

Companies in different industries often use different

currencies, which distorts ratios.

All companies use similar debt levels, so comparing

ratios does not provide additional insights.

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Which of the following

statements is correct?

On the cum dividend day, theoretical

share price should decrease by the amount of the next dividend to reflect that

buyers will receive it

On the announcement date of the next dividend payment,

the theoretical share price decreases by the amount of the announced dividend

To consider dividend received for personal

taxation purpose, one should begin by grossing up the franked dividend received

by the franking credit and then deduct the total from the assessable income

In Australia, a capital

gain realized from the sale of shares held for less than 12 months is taxed in

full

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