Calculate interest expenses

Exercise 1. A commercial bank announces the deposit rates as following:

1. Current account (0.75% annually)
2. Savings account (2.75 % annually)
3. CDs (3.7% annually)
a/ A customer would like to deposit $15,000 to this bank for 12 months. Calculate
the interest payments this customer would receive the three types of deposits.
Give a short comment on the results.
The interest payment this customer would receive in three types of deposits:
Current account = $15,000*0.75% = $112.5
Savings account = $15,000*2.75% = $412.5
CDs = $15,000*3.7% = 555
Comment:
+ Current account has the lowest interest rate because people who keep money in
current accounts often do not have a profitable purpose, but the main purpose is to use
the bank's payment services -> this interest rate is only for encouraging customers to
use the payment services of the bank
+ Savings accounts have lower interest rates than CDs. For a savings account,
customers can withdraw money at any time, but if they withdraw before maturity, they
will only receive the same interest rate as the current account. Customers buying CDs
are not allowed to withdraw before maturity. Before that time, if you want to get your
money back from your CD investment, you have to sell it on the secondary market ->
the liquidity of the CD is lower than the savings account -> the interest rate on the CD
is higher than that of the saving account to offset the risk for customers
b/ The client decides to open a savings account for 9 months, but after 6 months,
he withdraws the money to spend on a decent vacation. How much money would
he receive at the withdrawal? Comment on the results.
Because the client withdraws the money before the due, so that he will receive the
interest as current account.
=> The money he will receive at the withdrawal = 15,000 * (1+0.75%/2) = 15,056.25
The money he will receive if withdraw on time = 15,000*(1+2.75%*9/12) =
$15,309.38
He lost a lot of money ($253.13) because of early withdrawal. This is a feature of a
saving account. You will receive a much higher interest rate than your current account
with a commitment that you must deposit money in the bank on time with the term
you have agreed with the bank. If you withdraw early, you will only receive the same
interest rate as the current account.
c/ Suppose that the client would like to buy a car that’s worth $25,000 in 3 years
time. He decides to save for the purchase using 3-year CD. How much would CD
he have to buy to have enough money at withdrawal to buy the car?
CD tính lãi đơn
Let's call the initial amount (principle) to be spent is x
=> x + x*3.7%*3 = 25,000
=> x = 25,000/(1+3.7%*3) = 22,502.25
The customer has to buy a CD worth $22,502.25 to have enough money at withdrawal
to buy the car

Exercise 2. A commercial bank announces the annual returns on its three types of
deposits as following:
1. Current account (0.75% annually)
2. Savings account (3.75 % annually, plus 0.5% via online savings accounts)
3. CDs (4.7% annual return)
a/ A customer would like to deposit $15,000 to this bank for 12 months. Calculate
the interest payments this customer would receive the three types of deposits.
Give a short comment on the results.
The interest payment this customer would receive in three types of deposits:
Current account = $15,000*0.75% = $112.5
Savings account = $15,000*3.75% = $562.5
Online savings account = $15,000*(3.75%+0.5%) = $637.5
CDs = $15,000*4.7% = $705
Comment:
+ Current account has the lowest interest rate because people who keep money in
current accounts often do not have a profitable purpose, but the main purpose is to use
the bank's payment services -> this interest rate is only for encouraging customers to
use the payment services of the bank
+ Savings accounts have lower interest rates than CDs. For a savings account,
customers can withdraw money at any time, but if they withdraw before maturity, they
will only receive the same interest rate as the current account. Customers buying CDs
are not allowed to withdraw before maturity. Before that time, if you want to get your
money back from your CD investment, you have to sell it on the secondary market ->
the liquidity of the CD is lower than the savings account -> the interest rate on the CD
is higher than that of the saving account to offset the risk for customers
+ The interest customers receive when depositing online will be higher than at the
counter because when sending online, the bank will save operating costs (employee
costs, electricity and water, ...). The cost the bank has to pay for receiving customers
at the counter is greater than the cost if the customer sends online
b/The client decides to open an online saving account for 9 months. How much
money would he get in terms of interests? Comment on the results
The interest customer will receive if open an online saving account for 9 months =
$15,000*(3.75+0.5)%*9/12 = $478.125
The interest customer will receive if he opens a saving account with the same term =
$15,000*3.75%*9/12 = $421.875
Comment:
Customer has got a lot more money ($56.25) by sending money online because when
he sends money online, the bank saves costs such as staff, electricity and water
costs, ... Therefore, the interest rate that bank pays to customer when sending money
online is higher than when sending money offline
c/ Propose that the client would like to save for 3 year and then use the money to
buy a car. The expected price of that car is $25,000, how much does he need to
have today in order to buy a 3-year CD with 3.7% annual returns (he prefers
paying all in one)?
Exercise 3: The X joint-stock commercial bank is currently offering the following
deposit rates to their customers:
- Interest rate for demand deposit: 0.2 % per year.
- Interest rate for term deposit: 6-month term (unit: % per year)
  Monthly At maturity Pre-paid interest
At the counter 6.5% 6.6% 6.4%
Online 6.5% 6.65% 6.42%
A customer has a deposit at the X joint-stock commercial bank with following
information:
- Deposit amount: 100 million dong.
- Deposit maturity: from 10/3/2021 to 10/9/2021
1. Calculate the interest payment to the customer in two cases, making deposit at the
counter and via an online channel:
a. Interest paid at the end of the period (at the maturity)
b. Interest paid monthly
c. Pre-paid interest
d. The customer withdraws all her deposit on 20/5/2020 to buy a car
Nếu cho số ngày thì phải tính theo ngày
Theo thông tư, ngày bắt đầu được tính lãi là từ ngày 11/3
=> Số ngày tính lãi = 184 ngày
a. If interest paid at the end of the period (at the maturity), the interest payment
customer will receive when depositing money at the counter:
= Deposit amount * (6.6%*184/365) = 100m*(6.6%*184/365) = 3.33m
+ The interest payment customer will receive when depositing money via an online
channel = 100m*(6.65%*184/365) = 3.35m
b. Interest paid monthly
+ The interest when depositing money at the counter = 100m*(6.5%*184/365) =
3.28m
+ The interest payment when depositing money via an online channel =
100*(6.5%*184/365) = 3.28m
c. Pre-paid interest
+ The interest when depositing money at the counter = 100m*(6.4%*184/365) =
3.23%
+ The interest payment when depositing money via an online channel =
100m*(6.42%*184/365) = 3.24m
d. In both cases, when the client withdraws the money before the due, she will receive
the interest as demand deposit (0.2%/year).
=> The interest payment customer will receive when she withdraws all her deposit on
20/5/2020 to buy a car = 100m*(0.2%*71/365) = 0.04m

2. Comment on the amount of interest customer receives in the different cases.

Explain the difference?
- The interest customers receive when depositing online will be higher than at the
counter because when sending online, the bank will save operating costs (employee,
printing, electricity and water costs, ...). The cost the bank has to pay for receiving
customers at the counter is greater than the cost if the customer sends online
- In 3 cases of receiving interest, Pre-paid interest will receive the lowest interest rate,
then monthly and receiving interest at maturity will have the highest interest rate for 4
reasons:
+ The bank uses the customer's capital and interest until the end of the period. During
that period, the bank can use that money to make loans, invest and generate profits
+ Customer's opportunity cost (because if the customer receives money at the
beginning of the period, the customer can use the money to invest to generate a larger
amount)
+ Time value of money (future cash flows are worth less than present cash flows)

Evaluate bank performance

Exercise 1. The following table presents a simplified balance sheet of the ABC bank:

Bank ABC BALANCE SHEET (Unit: mil VND)

ASSET LIABILITIES
Cash 27,500 Deposits and borrowings from other
Securities 86,000 credit institutions 100,100
Loans Customer's deposits 250,500
Loan loss provision (1,500) Issuance of valuable papers
Fixed assets and other properties 34,200
19,100 Equity 19,300

Total Asset 404,100 Total Liabilities

404,100

1. Calculate the total loan volume to customers of this bank. Comment on the
proportion of loans over total assets of the bank.
Total loan volume = 404,100 – 27,500 – 86,000 + 1,500 – 19,100 = 273,000 ~
67.56% total asset
=> Loans account for a large proportion of total asset of the bank with the main
purpose of profitability but still less than its usual proportion (80-85%)
2. Calculate ROE, ROA and bank leverage ratio, given the following
assumptions: Interest revenue: VND 3,850mil, interest expense: VND
1,725mil, non-interest revenue: VND1,500mil, non-interest expense: VND
607.5mil, allowance for loan loss is VND 336mil11; tax rate: 10%
Net income before tax = (Interest revenue – Interest expense) + (Non-interest
revenue – Non-interest expense) – Allowance for loan loss
= (3,850 - 1,725) + (1,500 - 607.5) – 336 = 2681.5
=> Net income after tax = 2681.5*90% = 2,413.35
ROA = Net income after tax/ Total asset = 2,413.35/404,100 = 0.6%
ROE = Net income after tax/ Equity = 2,413.35/ 19,300 = 12.5%
Bank leverage ratio = ROE/ROA = Total asset/Total equity= 12.5/0.6 = 20.83
Comparing the leverage ratio of banks and ordinary enterprises, the leverage ratio of
banks is extremely large compared to the leverage ratio of ordinary enterprises. That's
because banking is a special type of business, where equity accounts for only a very
small part of a bank's total assets. Most of the bank's money is borrowed money, while
ordinary businesses don't have that much borrowed money. For ordinary businesses, if
the leverage ratio is too high, it will show the danger level as well as the pressure to
create money to repay the bank or other businesses. However, for banks, a high
leverage ratio shows that the bank mobilizes good capital, mobilizes a lot of capital
from people to have many assets to create money.
3. Given that last year, the bank’s ROA is 0.55%, the bank leverage ratio is
21.5. What was the bank’s ROE last year? Comment on the bank
performance.
ROE = ROA*Bank leverage ratio = 0.55%*21.5 = 11.825%
=> This year's ROE and ROA both increased compared to last year. This is a good
sign (better performance). Leverage decreases but ROA increases enough for ROE to
increase -> ROE increases due to increased ROA. ROA indicates the bank's ability to
use assets -> increased ROA indicates that this year the bank better use of assets.
ROE shows what shareholders get from their capital, how the bank brings additional
satisfaction to shareholders, how much profit shareholders put in for a dollar. The
ultimate goal of a bank is an increase in ROE, and what one must find a way to
manage to increase ROE is ROA - how efficiently the assets are used so that the
owners have more money -> Increased ROE indicates that for every dollar of capital
invested, shareholders get more money

Exercise 2. The following tables present a balance sheet and an income statement
(which have been simplified) of an example bank:

Bank ABC BALANCE SHEET (Unit: mil VND)

ASSET LIABILITIES
Cash 27,500 Deposits and borrowings from other
Securities 86,000 credit institutions 25,100
Loans Customer's deposits 411,640
Loan loss provision (9,500) Issuance of valuable papers 30,100
Fixed assets and other properties Equity 35,160
19,100

Total Asset 502,000 Total Liabilities

502,000

1. Calculate the total loan volume to customers of this bank. Comment on the
proportion of loans over total assets of the bank.
Total loan volume = 502,000 – 27,500 – 86,000 + 9,500 – 19,100 = 378,900 ~ 75.48%
total asset
=> Loans account for a large proportion of total asset of the bank with the main
purpose of profitability but still less than its usual proportion (80-85%)
2. Calculate net income margin (NIM) and cost income ratio (C/I) given the
following assumptions: Interest revenue: VND 3,850bn, interest expense:
VND 1,725bn, non-interest revenue: VND1,500bn, non-interest expense:
VND 607.5bn, other things in the income statement are not material.
Present your comments NIM and C/I of this bank if these two figures in
the previous period were 0.4% and 17%, respectively.
NIM = (interest income – interest expense)/total assets
= (3,850-1,725)/502,000 = 0.42%
NIM = 0.42% higher than last year => operational efficiency, profitability of the bank
is increasing (with 1 dong of assets generating more dong of interest or profit)
C/I = non-interest expenses/(net interest income + non-interest income)
= 607.5/(3,850-1,725 + 1,500) = 16.76%
C/I show the bank's ability to manage expenses. C/I = 16.76% decrease compared to
the previous year => the bank's ability to manage costs is better, the bank operates
more efficiently, the bank better profitability and better control in cost

Exercise 3. The following tables present a balance sheet and an income statement
(which have been simplified) of an example bank:

Bank ABC BALANCE SHEET (Unit: mil VND)

ASSET LIABILITIES
Cash 27,500 Deposits and borrowings from other
Securities 86,000 credit institutions 25,100
Loans 378,900 Customer's deposits 411,640
Loan loss provision (9,500) Issuance of valuable papers 30,100
Fixed assets and other properties Equity 35,160
19,100

Total Asset 502,000 Total Liabilities

502,000

a) Briefly comment on the structure of the bank balance sheet.

- The proportion of cash in total asset of this bank = 5.48%. This is an unusual
rate when compared to the normal cash rate (1-2%) at other banks. Cash in the
bank is a non-yielding asset, but the bank still has to pay a fee for it. Therefore,
banks usually only keep a small amount of cash to meet spending and payment
needs, provision for liquidity risk.
- Loans account for a large proportion of total asset (75.48%) of the bank with
the main purpose of profitability but still less than its usual proportion (80-
85%)
- - Customer's deposits account for the largest proportion of total liabilities
(82%), equivalent to the usual rate at banks (80%).
- Equity only accounts for a small percentage (7%) of total liabilities. This figure
is equivalent to the usual rate at banks (8%).
b. Calculate ROE, ROA and bank leverage ratio, given the following
assumptions: Interest revenue: VND 3,850mil, interest expense: VND
1,725mil, non-interest revenue: VND1,500mil, non-interest expense: VND
607.5mil, allowance for loan loss is VND 336mil11; tax rate: 10%
Net income before tax = (Interest revenue – Interest expense) + (Non-interest revenue
– Non-interest expense) – Allowance for loan loss
= (3,850 - 1,725) + (1,500 - 607.5) – 336 = 2681.5
=> Net income after tax = 2681.5*90% = 2,413.35
ROA = Net income after tax/ Total asset = 2,413.35/502,000 = 0.48%
ROE = Net income after tax/ Equity = 2,413.35/ 35,160 = 6.86%
Bank leverage ratio = ROE/ROA = Total asset/Total equity= 6.86/0.48 = 14.29
c. Given that last year, the bank’s ROA is 0.55%, the bank leverage ratio is
21.5. What was the bank’s ROE last year? Comment on the bank
performance.
ROE = ROA*Bank leverage ratio = 0.55%*21.5 = 11.825%
Compared to the previous year, both ROA, ROE and leverage ratio of the bank
decreased. The bank is inefficient, specifically, the use of the bank's assets is
inefficient, a dollar of capital spent by shareholders brings them less profit

Consumer loan repayment

Exercise 1.
Customer Minh Tung applies for a bank loan to buy a car that’s worth 2 billion dong.
The bank agrees to finance 75% of the value of the car, with the following terms:
- Loan maturity: 3 years
- Lending rate: 16%/year
- Repayment schedule: semi-annually.
- The customer will have to pay back the principal loan amount in equal installments
and interest payment for each repayment is calculated based on the actual outstanding
balance at the beginning of the repayment period.
Require: 
1. Make a spreadsheet of the principal and interest repayments for the loan.
 2. In order to finance the above loan, how much deposit must the bank has to
raise, given that the required reserve ratio and the solvency reserve ratio
are 5% and 3% respectively for a deposit of 3-year term. Interest expense
is 3.5%/year and non-interest expense is 1%/year. How much is the total
profit the bank earned when making the above loan.
The amount of deposit which the bank must raise to finance the above loan = The
amount of bank loan/(1-Required reserve ratio-Solvency reserve ratio) = 1.5b/(1-5%-
3%) =
Interest expense = The amount of deposit which the bank must raise*Interest rate
=
Non-interest expense = The amount of deposit which the bank must raise*Non-
interest rate =
=> Total expenses of the bank = Interest expense + Non-interest expense =
Revenue of the bank = Total interest paid =
=> Total profit the bank earned when making the aboved loan = Revenue – Expenses

Exercise 2:
Commercial Bank A provides a loan to a customer to buy a car with the following
terms:
- Loan amount: 1000 million VND
- Loan maturity: 2 years
 - Lending rate: 12%/year
- Repayment period: Quarterly
- Repayment: Equal installments for the principal amount and interest payment is
calculated based on the loan balance at the beginning of the repayment period.
Require:
1, Make a spreadsheet of the principal and interest repayments for the loan. How
much is the total interest income of the bank from the loan.
2, Suppose that the customer requests to repay the loan early at the end of the first
year. Given that the prepayment fee is 2% of the prepayment amount, how much does
the customer have to pay to terminate the loan upon his request.

Calculate fee income

Exercise 1
The ABC Bank makes a loan commitment to company Y, which specializes in
importing electronic components, with a credit line of USD 20,000 for 6 months with
the following fees:
- Commitment fee: expressed as a percentage of the total commitment: 2%
- Usage fee: levied on the unused portion of the credit line: 2.5%.
- Servicing fee: as a percentage of the on the borrowed amount: 0.75%
- The borrower must opens a current account and the deposit balance at the bank equal
10% of credit line during the commitment period.
During the commitment period, the firm withdrew 5,000 USD with a term of 6
months, the interest rate is 8%/year. Calculate the net profit of the commercial bank
knowing that the average business interest rate of the bank is 5% and the deposit rate
on current account is 0.5% and the average cost related to loan commitment is 3% of
the credit line.
The incomes of the bank include:
Commitment fee = The amount of loan commitment * 2% = 20000*2% = 400
Usage fee = The unused amount * 2.5% = 15000*2.5% = 375
Servicing fee = The borrowed amount * 0.75% = 5000*0.75% = 37.5
The interest income on customer use = 5000*8%/2 = 200
The amount the customer has to deposit at the bank = 20000*10% = 2000
=> Average business interest income = 2000*5%/2 = 50
=> Total incomes of the bank = 400+375+37.5+200+50 = 1062.5
The expenses of the bank include:
Interest expense on payment deposits of customer = Customer deposit * 0.5%/2 = 5
Average cost related to loan commitment = 20000*3% = 600
=> Total expenses of the bank = 5+600 = 605
=> Profit = Total incomes – Total expenses = 1062.5 – 605 = 457.5

Exercise 2
ABC Bank signs an irrevocable L/C contract with customer Y with the following
terms:
- L/C value is 100,000 USD
- Customer deposits 80% of L/C value on the current account at the time of signing:
- Foreign currency swap fee 0.05% of the total value of L/C- L/C issuance fee is 2%
of the total value of L/C:
At the time the Bank makes the payment to the counterparty, customer Y commits to
allow the Bank to automatically debits the checking account and takes a loan with the
residual amount at the interest rate specified by the Bank.
1 month after the L/C was signed, the counterparty of Y presented the required
documents and the bank processes with the payment
Bank's current interest rate on demand-deposit is 0.06%/year. Calculate the income for
the bank for the L/C in the following 2 cases:
a. Customer Y pays immediately to the bank when their counterparty
presented the shipping documents
Foreign currency swap fee = L/C value * 0.05% = 100000*0.05% = 50
L/C issuance fee = L/C fee * 2% = 100000*2% = 2000
Customer deposit = L/C value * 80% = 100000*80% = 80000
Because 1 month after the L/C was signed, the counterparty of Y presented the
required documents and the bank processes with the payment -> customer deposits at
the bank for 1 month
=> Customer deposit interest expense = Customer deposit*0.06%/12 =
80000*0.06%/12 = 4
=> Profit of the bank = Foreign currency swap fee + L/C issuance fee - Customer
deposit interest expense
= 50 + 2000 – 4 = 2046
b. Customer Y pays after 2 months from the date the Bank made the
payment. Knowing that the lending rate for the deferred payment is
6%/year
The amount of deferred payment = L/C value – Customer deposit = 100000 – 80000 =
20000
Because customer Y pays after 2 months from the date the Bank made the payment
=> Deferred interest income = 20000 * 6%*2/12 = 200
=> Profit of the bank = 2046+200 = 2246
Thu nhập của 1 L/C thông thường đến từ phí
+ Nếu trong trường hợp khách hàng trả tất cả tiền tại thời điểm phải trả hoặc ký quỹ
100% => ngân hàng chỉ thực hiện một chức năng thông qua L/C – đó là chức năng
trung gian thanh toán => ngân hàng cung cấp L/C thuần túy là dịch vụ
+ Khi khách hàng không ký quỹ hoặc không trả được hết tiền tại thời điểm ngân hàng
thanh toán tiền cho đối tác của khách hàng thì ngân hàng cho khách hàng vay khoản
đó. Khi đó, ngoài việc là một trung gian thanh toán, ngân hàng còn đóng vai trò là một
trung gian tài chính (tín dụng). Trong trường hợp này L/C ngoài mang lại nguồn thu
về phí cho ngân hàng thì nó còn mang lại nguồn thu về lãi.

Sự khác nhau giữa khoản vay bình thường và loan commitment

For a normal loan, the customer will certainly use the full amount of the loan. For loan
commitment, customers can only use the proportion of the value of the loan
commitment.

Một số biện pháp để gia tăng khả năng huy động vốn:
Expanding the nationwide network of branches and transaction offices, ensuring
convenience for customers
+ Modernize banking technology and payment system; constantly improving and
upgrading to truly become an effective support tool for customers.
+ Must create a high level of trust with customers: Trust is created by creating the
inner image of a commercial bank, that is: quantity, quality of products and services
provided, qualifications and communication ability of the staff, technical equipment
and technology, own capital and financial ability, especially the efficiency and safety
of deposits, loans, etc.