AIBB Quick (Page-1) Review Note

Paper-05
Treasury Management in Financial Institutions
(English Version)

৫/১০০তম ব্যাংক াং কিপ্লযমযর সযপ্েশন কিকি

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• IBB ব্যাংক াং প্রপ্েশনযি পরীিযর-২০২৫ এর AIBB পপ্বির Treasury Management in
Financial Institutions (TMFI) সযবপ্েক্টর েন্য শতিযগ মপ্নর কনশ্চেতয।

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MBA (Dept of Accounting & Information Systems) University of Rajshahi.

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৫/১০০তম ব্যাংক াং কিপ্লযময সাংক্রযন্ত কবষেকিকি সযপ্েশন ও সমযধযন পপপ্ত

প যগযপ্ যগ রুন ০১৮৮৫৬০২০২২,০১৮৫০২৯২২১৪

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Suggestion Based Solution Index

Module A: Introduction to Treasury .............................................................................................. 5
**Q-1). What is Treasury Management? Objectives of Treasury Management? [IBB Manual M-A,
Q.N-2] ............................................................................................................................................ 5
***Q-2). What does a bank's treasury do? Or Functions July/ 2019, [IBB Manual M-A,Q.N-2]...... 6
**Q-7. Describe about the nature and the benefits of integrated treasury. [IBB Manual M-A, Q.N-3]
Or What is the meaning of Integrated Treasury?99th BPE What are the benefits of it? 98th
BPE,96th BPE,or Describe the integrated treasury management system in terms of meaning,
functions and structure. July,2019. ................................................................................................ 6
***Q-8). Briefly describes functions of integrated treasury 96th BPE ............................................... 7
**Q-10). What are the major objectives of macroeconomics? Write a brief definition of each of these
objectives. Explain carefully why each objective is important. , [IBB Manual M-A, Q.N-7] ...... 8
***Q-12). What is balance of payment account? Write a brief note on BOP account. [IBB Manual
M-A, Q.N-9] .................................................................................................................................. 9
**Q-13). Describe the types of government transactions. [IBB Manual M-A, Q.N-10].................... 9
Module B: Money Market.............................................................................................................. 10
**Q-1) What is money? (99th BPE) What are the Characteristics of Money? 96th BPE ................. 10
***Q-3) Define payment system. What are motives behind the demand for money? [IBB Manual M-
B, Q.N-1] Or Briefly describe the 'Demand for Money' with example.98th BPE........................ 10
***Q-8). Describe the components of Demand and Time Liabilities. Or What are the components of
demand and time liabilities of a bank? 96th BPE ......................................................................... 12
**Q-9) What is CRR and What are the components of cash reserve. Or What is Cash Reserve Ratio
(CRR)? How commercial banks maintain CRR?98th BPE, [IBB Manual M-B, Q.N-4] ............ 13
***Q-12). Briefly describe CRR and SLR in the contest of Bangladesh. Why are they maintained?
Or What are current CRR and SLR for conventional banks and Islamic Banks? 97th BPE ........ 14
**Q-13). Define Money Market. Briefly describe the products of money market. [IBB Manual M-B,
Q.N-6]Or Briefly describe money market instruments available in Bangladesh.96th BPE, July-
2019; Nov/17. .............................................................................................................................. 14
**Q-15). How do you calculate the liquidity in the money market for a particular month in
Bangladesh? What is the money market liquidity condition in Bangladesh.96th BPE ................ 15
**Q-17) Describe Government security with example Or describe the varieties of government
securities in the context of Bangladesh.? 98th BPE ..................................................................... 16
Module C: Foreign Exchange Management ................................................................................. 16
**Q-2). Describe the types of foreign exchange rates with examples. Describe various foreign
exchange rates according to the nature of transaction. July/2017, [IBB Manual M-C, Q.N-3] .. 16
**Q-3). Describe the conversions for quoting foreign exchange rates with example Nov/2016 or How
exchange rates are quoted in the market? Give examples of direct quotation and indirect quotation
methods.97th BPE ........................................................................................................................ 17
***Q-7). Define foreign Exchange Market. What are the factors influencing foreign exchange rates.
97th BPE ....................................................................................................................................... 18
**Q-8) Define foreign Exchange Market. What are the factors influencing foreign exchange rates.
97th BPE ....................................................................................................................................... 18
**Q-11) Why banks fix limit to their treasury/forex operation? Give some examples of dealing limits
for forex dealers.97th BPE ........................................................................................................... 20

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**Q-12). What are the steps involved in forex trading? Describe briefly. [IBB Manual M-C, Q.N-5]
..................................................................................................................................................... 20
***Q-15). What are the major foreign exchange risks? Explain with examples. or Briefly explain the
three types of foreign exchange risk.96th BPE, [IBB Manual M-C, Q.N-7]................................ 21
**Q-17). Describe forward and futures market with examples. [IBB Manual M-C, Q.N-8] ........... 21
Module D: Asset Liability Management ....................................................................................... 22
**Q-1). Define liquidity management?96th BPE Why it is important to manage the liquidity
efficiently? [IBB Manual M-D, Q.N-2]....................................................................................... 22
***Q-3). Since most of the money market instruments are interest based, how Islamic banks manage
their liquidity? Discuss briefly.97th BPE ..................................................................................... 23
**Q-04) What is AD Ratio and how it is being calculated? ............................................................. 23
***Q-11). What is contingency funding plan? Describe use and scope of contingency funding
plan.97th BPE, [IBB Manual M-D, Q.N-3].................................................................................. 24
**Q-15) Briefly describe the three pillars of Asset Liability Management (ALM).98th ................. 24
***Q-16). Define ALCO and its formation structure. Discuss the role and responsibility of ALCO
for performing leading of a bank. Or What is ALCO? What are the major responsibilities of
ALCO?96th BPE, 97th BPE [IBB Manual M-D, Q.N-4].............................................................. 25
***Q-17) What is ALM Desk, Roles and Responsibilities of the ALM Desk. Or Mention the key
roles and responsibilities of ALM Desk.96th BPE,98th BPE ...................................................... 26
**Q-18). What are the key agendas of ALCO meeting? Or Describe the key agendas for ALCO
Meeting as prescribed in ALM Guidelines issued by BB 97th BPE, [IBB Manual M-D, Q.N-5]
..................................................................................................................................................... 27
**Q-20). What are the objectives of the Treasury Department of a bank?97th BPE ........................ 28
**Q-22). Define LCR and NSFR? Explain these with examples. Or What is Net Stable Funding Ratio
(NSFR)? Or Define Maximum Cumulative Outflow (MCO) and Liquidity Coverage Ratio
(LCR).98th ,97th BPE,96th BPE, [IBB Manual M-D, Q.N-7] ....................................................... 28
Module E: Derivatives .................................................................................................................... 29
**Q-01) Define derivatives securities. What are the advantages and Disadvantages of
derivatives?98th BPE, [IBB Manual M-E, Q.N-2]...................................................................... 29
***Q-3) Who are the major participants in the derivative markets? Or Briefly describe the
participants in derivatives contracts.98th BPE, [IBB Manual M-E, Q.N-4] ................................ 30
**Q-5). Briefly describe the types of derivatives with illustrations.or Briefly discuss the four major
types of financial derivatives with examples.97th BPE, [IBB Manual M-E, Q.N-5] ................... 30
***Q-8) Differentiate between future contract and forward contract.98th BPE, [IBB Manual M-E,
Q.N-7] .......................................................................................................................................... 31
**Q-9). Define Hedging Arrangement. What are the types of hedging arrangements. .................... 31
**Q-16). How derivatives can be used to hedge foreign exchange risks?97th BPE ......................... 32
Module F: Fixed Income ................................................................................................................ 33
***Q-2). What are the pros and cons of a fixed income security? Or What do you understand by
Fixed Income Securities? What are the advantages and disadvantages of Fixed Income Securities
for investment purpose?97th BPE, [IBB Manual M-F, Q.N-3] .................................................... 33
***Q-3). What are the reasons for the absence of an active secondary market for Fixed Income
Securities in Bangladesh? 97th BPE............................................................................................. 33
**Q-4) What are risks Associated with Fixed Income Securities.99th BPE ..................................... 33
**Q-7). From an investor ‘s point of view, what considerations must be made before investing in a
perpetual bond? [IBB Manual M-F, Q.N-4] ................................................................................ 34

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**Q-49) Junk bond BB 98th BPE..................................................................................................... 52
**Q-51) OD Sight Rate 99th BPE ..................................................................................................... 53
***Q-52) Islamic Bank Liquidity Facility (IBLF) 99th BPE ............................................................ 53
Differences ....................................................................................................................................... 53
***Q-1). Describes Direct and Indirect Quotation in respect of foreign exchange trade. Or Direct
Quotation and Indirect Quotation Method.96th BPE, Nov/2016 ................................................. 53
**Q-4). Narrate differences between Forward Contract and Futures Contract 97th BPE ................. 54
**Q-5) Narrate Nine Differences between Bear Market and Bull market 97th BPE,98th BPE ........ 54
***Q-10) Define and distinguish between Money Market and Capital Market Nov/17,May/16, 98 th
BPE .............................................................................................................................................. 55
***Q-11) Distinguish between the money market and FX market. [IBB Manual M-A, Q.N-5]Or
Distinguish between money market and Foreign Exchange Market.97th BPE,98th BPE,99th BPE
..................................................................................................................................................... 55
***Q-13). What are the differences between Funded and Non-funded Commitment in banking
sector. Nov/2017.......................................................................................................................... 56
**Q-16). Discuss difference between foreign exchange forwards and foreign exchange swaps.97 th
BPE .............................................................................................................................................. 56
***Q-18) What are the major differences between Integrated Treasury and Traditional Treasury
Management? 98th BPE .............................................................................................................. 57
***Q-19) Repo and Reverse Repo 98th BPE ................................................................................... 57
**Q-20) Primary Market and Secondary Market 98th BPE ............................................................. 58
**Q-22) Call Money and Short Notice Money 98th BPE ................................................................ 59
**Q-23). Primary Dealer (PD) and Authorized Dealer (AD) 98th BPE .......................................... 59
Mathmatical Section ......................................................................................................................... 60

Module A: Introduction to Treasury

**Q-1). What is Treasury Management? Objectives of Treasury Management? [IBB Manual
M-A, Q.N-2]
Treasury management involves overseeing a company’s daily cash flows and making strategic
financial decisions to optimize liquidity and investment returns. Key components include:
• Cash Flow Management: Monitoring incoming and outgoing cash.
• Debt and Liquidity Management: Handling short- and long-term financing needs.
• Transaction Processing and Reporting: Ensuring efficient transactions and real-time financial
insights.
Objectives of treasury management include maintaining liquidity, optimizing cash resources,
securing financing, managing risk, and coordinating financial functions. Effective treasury
management helps ensure a company has the necessary funds to operate while supporting future
growth and strategic planning. Businesses can manage these processes internally or work with
financial institutions.
Effective treasury management not only secures a company's current financial position but also
supports strategic planning and future growth. Businesses can manage these functions internally or
collaborate with financial institutions to enhance their treasury capabilities.

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***Q-2). What does a bank's treasury do? Or Functions July/ 2019, [IBB Manual M-A,Q.N-2]
A bank's treasury department manages its financial assets and liabilities to ensure efficient fund use,
maximize profitability, and maintain liquidity. Key functions include:
1. Liquidity Management: Monitoring and managing liquidity to meet obligations and regulatory
requirements, using tools like interbank borrowing and asset-liability management.
2. Asset and Liability Management (ALM): Optimizing the balance between risk and return by
analyzing funding needs, managing interest rate risk, and determining the investment portfolio
composition.
3. Risk Management: Overseeing financial risks (interest rate, foreign exchange, credit, and
liquidity risk) by developing strategies and using hedging techniques and derivatives to mitigate
these risks.
4. Capital Management: Assessing capital adequacy and managing the capital structure, including
issuing shares and determining optimal capital levels.
5. Market Operations: Engaging in trading activities in government securities, foreign exchange,
and other instruments to enhance income and manage the investment portfolio.
6. Financial Planning and Analysis: Conducting forecasts and analyses to support strategic
decision-making, including cash flow forecasting and investment evaluations.
Overall, the treasury department is essential for managing financial resources, optimizing risk and
return, and ensuring stability and profitability in a dynamic environment.
**Q-7. Describe about the nature and the benefits of integrated treasury. [IBB Manual M-A,
Q.N-3] Or What is the meaning of Integrated Treasury?99th BPE What are the benefits of it?
98th BPE,96th BPE,or Describe the integrated treasury management system in terms of
meaning, functions and structure. July,2019.
Integrated Treasury refers to the consolidation of domestic and foreign exchange operations
within a bank. This approach enables a bank to efficiently manage its balance sheet, optimize asset-
liability management, and take advantage of arbitrage opportunities. Before integration, treasury
functions often operated independently, leading to inefficiencies.
Role and Functions of Integrated Treasury
A commercial bank with multiple branches can centralize its treasury functions by establishing an
Integrated Treasury Department at its headquarters. This centralized unit manages:
• Liquidity: Ensuring sufficient funds are available while optimizing cash flow and minimizing idle
cash.
• Asset-Liability Management (ALM): Balancing assets (loans, investments) and liabilities
(deposits, borrowings) to mitigate interest rate risks and improve net interest margins.
• Risk Management: Monitoring and mitigating liquidity, market, credit, and operational risks
through hedging, diversification, and stress testing.
By integrating treasury operations, banks reduce financial risks, enhance efficiency, and improve
decision-making across different branches and business units.
Key Components of Integrated Treasury
1. Cash Management: Optimizing cash balances, forecasting liquidity needs, and consolidating
cash flows across branches.

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2. Liquidity Management: Maintaining adequate liquidity, pooling cash resources, and ensuring
smooth fund transfers.
3. Risk Management: Identifying and mitigating risks related to foreign exchange fluctuations,
interest rate volatility, and credit exposure.
4. Financial Planning: Aligning treasury strategies with organizational goals through budgeting and
capital allocation.
5. Treasury Operations: Handling transaction processing, settlement, reconciliation, and
reporting through automated systems for better efficiency.
Benefits of Integrated Treasury
1. Cost Reduction: Centralized treasury management helps in minimizing transaction costs and
ensuring efficient fund transfers.
2. Improved Efficiency: Streamlining financial operations allows for better control, monitoring,
and decision-making from a single point.
3. Automated Auditing: Digital tools generate automatic audit reports, communication logs, and
transaction records.
4. Reduced Errors: Automation minimizes human errors, ensuring accuracy in payments,
authorizations, and fund routing.
5. Optimized Workforce: Treasury automation reduces the need for additional staff while
improving efficiency.
Integrated Treasury as a Profit Center
Beyond liquidity and risk management, an integrated treasury acts as a hub for hedging and
arbitrage activities, allowing banks to:
• Maximize currency portfolios through strategic forex positioning.
• Facilitate multi-currency transactions as capital account convertibility expands.
This enables banks to strengthen their position in international markets while maintaining a
proactive profit center.
***Q-8). Briefly describes functions of integrated treasury 96th BPE
An integrated treasury in a bank plays a crucial role in managing financial resources and risks. Here
are the key functions it typically encompasses:
(a) Reserve Management and Investment
• CRR/SLR Commitments: Ensures compliance with Cash Reserve Ratio (CRR) and Statutory
Liquidity Ratio (SLR) requirements.
• Balanced Investment Portfolio: Assembles a portfolio that balances yield and duration to
maximize returns.
(b) Liquidity and Funds Management
• Diversified Liability Base: Provides a well-diversified base to fund various assets on the balance
sheet.
• Cash Flow Analysis: Analyzes major cash flows from asset-liability transactions.
• Strategic Funding Policy Inputs: Advises on funding mix (currency, tenor, cost) and expected
yields.

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3. Interest Rate Risk Management:Assessing exposure to interest rate fluctuations and their impact
on profitability and stability.
4. Credit Risk Management:Monitoring borrower creditworthiness and evaluating overall credit
risk exposure.
5. Regulatory Compliance:Ensuring adherence to regulatory requirements and aligning risk
management practices accordingly.
6. Capital Management:Focusing on maintaining adequate capital to absorb unexpected losses.
Overall, ALCO meetings aim to balance risk and opportunity for the institution's long-term financial
stability.
**Q-20). What are the objectives of the Treasury Department of a bank?97th BPE
The Treasury Department of a bank is essential for managing its financial health. Key objectives
include:
1. Liquidity Management: Ensure adequate liquidity to meet short-term obligations by managing
cash reserves and short-term investments.
2. Risk Management: Identify and mitigate financial risks such as interest rate, market, credit, and
liquidity risks to maintain stability.
3. Asset and Liability Management (ALM): Optimize the balance sheet by aligning the maturity
profiles of assets and liabilities, controlling interest rate risk, and enhancing profitability.
4. Capital Management: Manage capital efficiency and adequacy ratios to support operations and
comply with regulatory requirements.
5. Foreign Exchange Management: Monitor and hedge against foreign exchange risks from
international transactions to protect against adverse currency movements.
6. Investment Portfolio Management: Execute investment strategies that optimize returns while
considering risk tolerance and regulatory constraints.
**Q-22). Define LCR and NSFR? Explain these with examples. Or What is Net Stable Funding
Ratio (NSFR)? Or Define Maximum Cumulative Outflow (MCO) and Liquidity Coverage
Ratio (LCR).98th ,97th BPE,96th BPE, [IBB Manual M-D, Q.N-7]
Liquidity Coverage Ratio (LCR)
LCR is a regulatory measure assessing a financial institution's ability to meet short-term liquidity
needs during stressed conditions. It requires institutions to hold a sufficient stock of high-quality
liquid assets (HQLA) that can be quickly converted to cash to cover net cash outflows over a 30-day
period. The LCR is calculated as:
LCR=HQLA/Net Cash Outflows over 30 Days
Example: If a bank has $100 million in HQLA and expects $50 million in cash outflows, the LCR
would be:
LCR=100 million/50 million=2.0
This indicates sufficient liquid assets for the next 30 days.
Net Stable Funding Ratio (NSFR)
NSFR measures a financial institution's ability to maintain a stable funding profile over a one-year
horizon. It requires a stable mix between assets and liabilities, ensuring sufficient stable funding for
activities. The NSFR is calculated as:

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NSFR=Available Stable Funding (ASF)/ Required Stable Funding (RSF)
Example: If a bank has $100 million in assets funded by $80 million in stable sources, the NSFR
would be:
NSFR=80 million/100 million=0.8
This indicates the need for improved stable funding.
MCO reflects the maximum cumulative outflow against total assets in a maturity bucket, ensuring
that outflows do not exceed a certain percentage. For conventional banks, the MCO for the one-
month bucket is set at 19% (combining minimum CRR and SLR). The formula for MCO in the one-
month bucket is:
MCO=Total Outflow (1 month)+Total OBS (1 month)/{Total Inflows+Net Nostro Account Balanc
e+Available Foreign Currency Balance with BB}
Banks must adhere to Bangladesh Bank guidelines regarding Structural Liquidity Profiles (SLP) and
should prepare combined SLP and MCO for better overall understanding, especially if they operate
Islamic banking alongside conventional banking.
Module E: Derivatives
**Q-01) Define derivatives securities. What are the advantages and Disadvantages of
derivatives?98th BPE, [IBB Manual M-E, Q.N-2]
Derivative securities, or derivatives, are financial instruments whose value is based on underlying
assets like commodities, stocks, bonds, and currencies. They allow investors to trade price
movements without owning the actual asset. Common types include options, futures, forwards,
and swaps.
• Options grant the right (but not the obligation) to buy or sell an asset at a fixed price before
expiration.
• Futures and forwards obligate the buyer to purchase the asset at a predetermined price and date.
• Swaps involve exchanging cash flows based on asset movements.
Derivatives are widely used for hedging risks and speculation, but they also carry high complexity
and risk due to factors like market volatility, interest rates, and counterparty reliability. These
financial instruments are typically used by sophisticated investors with high-risk tolerance.
Advantages of Derivatives
1. Hedging: Investors use derivatives to manage risks from price fluctuations, interest rates, and
currency exchange rates. For example, commodity producers use futures to lock in prices and protect
against volatility.
2. Liquidity: Derivative markets offer increased liquidity, enabling faster and cost-effective trading,
improving market efficiency.
3. Flexibility: Contracts can be customized to fit investors' risk profiles and objectives, allowing for
tailored investment strategies.
4. Speculation: High-risk investors can earn significant profits by predicting future price movements
of underlying assets.
5. Price Discovery: Derivative markets provide insights into future price trends, helping investors
make informed decisions.
Disadvantages of Derivatives

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4. Earnings (E): Reviews profitability, examining sources of income and cost management to
determine sustainability.
5. Liquidity (L): Analyzes the bank's ability to meet short-term obligations without incurring
significant losses.
6. Sensitivity (S): Evaluates how sensitive the bank is to market risks, including interest rate
fluctuations and economic changes.
The ratings help regulators monitor financial institutions' stability and take corrective actions when
necessary. If you need more detailed information on any specific component, feel free to ask!
***Q-39). Bangladesh Government Islamic Investment. Bond 97th BPE
The issuance of Sukuk by the Bangladesh government marks a significant step in promoting Shariah-
compliant financing options. The Safe Water Supply Project, funded through this Sukuk, not only
aims to enhance infrastructure but also addresses the need for sustainable investment opportunities
for Islamic financial institutions and individual investors. The structured returns and compliance with
Islamic finance principles make it an attractive option for those seeking ethical investment avenues.
If you need more details or specific aspects related to Sukuk or Islamic finance, feel free to ask!
**Q-41). Structural Liquidity Profile 97th BPE
The Structural Liquidity Profile (SLP) is a framework used by the Bangladesh Bank to assess the
long-term liquidity position of banks. It evaluates the maturity profiles of a bank's assets and
liabilities to identify potential gaps or mismatches that could impact liquidity.
Key Components:
• Maturity Buckets: Banks categorize their assets and liabilities into time intervals, such as less than
1 month, 1-3 months, 3-6 months, 6 months to 1 year, and beyond 5 years.
• Gap Analysis: For each time bucket, the bank calculates the total amounts maturing. This analysis
highlights periods where liabilities exceed assets, indicating potential liquidity risks.
• Risk Management: Insights from the SLP allow banks to make informed decisions, such as
adjusting the maturity of their assets and liabilities, diversifying funding sources, and implementing
risk mitigation strategies.
The SLP is crucial for ensuring that banks maintain adequate liquidity to meet their obligations over
time, thereby supporting overall financial stability in the banking sector.
***Q-43). Primary Dealer (PD) 97th BPE
A Primary Dealer (PD) is a financial institution that underwrites government securities in primary
auctions. If bids are deemed unacceptable, the auction committee can devolve securities onto PDs,
who receive underwriting commissions for successful bids and devolved amounts.
Primary Dealers Bangladesh Limited (PDBL) is the apex body overseeing primary dealer banks in
Bangladesh, aiming to create a vibrant secondary market for government securities. A technical
committee, comprising representatives from the Bangladesh Bank, the Bangladesh Association of
Banks (BAB), and the Bangladesh Foreign Exchange Dealers’ Association (BAFEDA), supports
PDBL's operations.
Overall, primary dealers have a direct relationship with the central bank, facilitating the buying and
selling of government securities, which helps enhance liquidity and market depth.
**Q-45) B. C. Selling Rate. 97th BPE

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B.C. Selling Rate is a term used in the context of foreign exchange transactions in Bangladesh. It is
the rate at which banks sell foreign currency to importers. The B.C. Selling Rate is calculated by
adding the exchange margin to the TT Selling Rate. The TT Selling Rate is the rate used for all
transactions that do not involve the handling of documents by the bank, such as issue of demand
drafts, mail transfers, telegraphic transfer, etc., other than for retirement of an import bill.
For example, suppose the TT Selling Rate for USD is 85.50 and the exchange margin is 0.25. Then
the B.C. Selling Rate would be calculated as follows:
B.C.Selling Rate=TT Selling Rate + Exchange Margin
B.C.Selling Rate=85.50+0.25
B.C.Selling Rate=85.75
Therefore, the B.C. Selling Rate for USD would be 85.75
The importance of the B.C. Selling Rate lies in its role in facilitating foreign exchange transactions
and ensuring compliance with foreign exchange regulations. The B.C. Selling Rate helps to promote
international trade and investment by providing a reliable and efficient mechanism for foreign
exchange transactions. It also helps to maintain the stability of the foreign exchange market by
ensuring that foreign exchange transactions are conducted in accordance with the regulations of
Bangladesh Bank
**Q-46) Commercial paper 98th BPE
Commercial Paper: Corporates issue Commercial Paper (CP’s) to meet their short-term working
capital requirements. Hence serves as an alternative to borrowing from a bank. Also, the period of
commercial paper ranges from 15 days to 1 year. This money market product functions as a
promissory note created by a business or organization to raise short-term capital. It is an unsecured
instrument, meaning there is no connected collateral.Here are some key features of commercial
paper:
• Short-term maturity: Commercial paper is a short-term debt instrument, typically maturing within
a timeframe of 30 to 270 days, with most maturing much sooner (often within a month). This makes
it suitable for companies needing to bridge short-term funding gaps.
• Unsecured debt: Unlike bonds, which may be backed by collateral, commercial paper is unsecured.
Investors rely on the creditworthiness and reputation of the issuing company to repay the debt. As a
result, commercial paper is typically issued by companies with high credit ratings.
• High credit quality issuers: Due to the unsecured nature, only companies with a strong financial
track record and a demonstrated ability to meet their obligations can issue commercial paper. This
makes it a relatively low-risk investment for qualified investors.
• Discount or interest-bearing: Commercial paper can be issued at a discount or with a fixed interest
rate. When issued at a discount, the investor purchases the note for less than its face value and
receives the full face value at maturity. Interest-bearing commercial paper pays a predetermined
interest rate at maturity.
• Low-cost financing: Compared to other borrowing options like bank loans, commercial paper can
be a cheaper source of financing for creditworthy companies, especially due to the shorter maturities
and potentially lower interest rates.
In summary, commercial paper is a flexible, short-term financing tool that offers advantages for both
issuers and investors, including cost-effectiveness, high liquidity, and minimal interest rate risk,
while relying heavily on the creditworthiness of the issuing corporation.

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 AIBB Quick (Page-63) Review Note
• Hedging with futures contracts: Trunk Road Corporation can enter into futures contracts to lock
in a price for their raw materials at a specific future date. This protects them from price increases
above the agreed-upon price.
• Put options: Purchasing put options allows Trunk Road to set a minimum price for their raw
materials. If the price falls below the strike price, they can exercise the option and sell the raw
materials at the guaranteed price, limiting potential losses.
Enhancing Financial Flexibility:
• Interest rate swaps: If Trunk Road has variable-rate debt, they can use interest rate swaps to
convert it to fixed-rate debt. This provides predictability in their financing costs and protects them
from rising interest rates.
• Currency swaps: If Trunk Road purchases raw materials in a foreign currency, they can use
currency swaps to lock in an exchange rate. This safeguards them from adverse currency fluctuations
that could increase their material costs.
By implementing a combination of these strategies , Trunk Road Corporation can mitigate the
financial risks associated with commodity price volatility and interest rate fluctuations. This allows
for more predictable costs, improved cash flow management, and ultimately, greater financial
flexibility.
8) A bank had posted interest revenues of Tk. 80 million and interest expenses from all of its
borrowing of Tk. 50 million. If the bank possesses Tk. 750 million in total earning assets, what
is the net. interest margin of this bank?98th BPE
The Net Interest Margin (NIM) is a measure of the difference between the interest income generated
by banks from their earning assets and the amount of interest paid to their Borrowers, Depositors etc.
It is typically expressed as a percentage. The formula to calculate the Net Interest Margin is:
Net Interest Margin (NIM)={(Interest Revenues−Interest Expenses)/Total Earning Assets)}×100
Given:
• Interest Revenues = Tk. 80 million
• Interest Expenses = Tk. 50 million
• Total Earning Assets = Tk. 750 million
First, calculate the net interest income:
Net Interest Income=Interest Revenues−Interest Expenses
Net Interest Income=𝑇𝑘.80 million−𝑇𝑘.50 million
Net Interest Income=𝑇𝑘.30 million
Next, calculate the Net Interest Margin (NIM):
NIM=(Net Interest Income/Total Earning Assets)×100
NIM=(𝑇𝑘.30 million/𝑇𝑘.750 million)×100,NIM=4%
Thus, the Net Interest Margin (NIM) of the bank is 4%.
9)Mr. Rahman is planning to send CAD, equivalent to BDT 5,00,000 to his son studying in
Canada. The current exchange rate for USD/BDT is 117.52 and USD/CAD is 1.36. (i) Calculate
CAD/BDT exchange rate. (ii) Based on the cross-exchange rate in how much CAD will Mr.
Rahman's son receive assuming no other charges? 99th BPE
Sol.
(i) To calculate the CAD/BDT exchange rate, we can divide the USD/BDT rate by the USD/CAD
rate:
CAD/BDT = (USD/BDT) / (USD/CAD) CAD/BDT = 117.52 / 1.36 CAD/BDT ≈ 86.41
Therefore, 1 CAD is equivalent to approximately 86.41 BDT.
(ii) To calculate the amount of CAD Mr. Rahman's son will receive, we can divide the BDT
amount by the CAD/BDT exchange rate:

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 AIBB Quick (Page-64) Review Note
CAD amount = BDT amount / CAD/BDT CAD amount = 500,000 / 86.41 CAD amount ≈
5,786.25
So, Mr. Rahman's son will receive approximately CAD 5,786.25.

10) Suppose, you have a bond with face value of BDT 1,000 and an annual coupon rate of 12%.
The bond will be matured after 8 years. If the current market price of the bond is BDT 850,
calculate the Yield To Maturity (YTM) of the bond. 99th BPE
Let's calculate the Yield to Maturity (YTM) using the trial-and-error method with assumed interest
rates of 14% and 16%, and then interpolate to find the YTM.
1: Calculate the bond price at 14% interest 2: Calculate the bond price at 16% interest
rate: rate:
Year Cash PV PV of Year Cash PV PV of
Flow Factor at Cash Flow Factor at Cash
(BDT) 14% Flow (BDT) 16% Flow
(BDT) (BDT)
1 120 0.8772 105.26 1 120 0.8621 103.45
2 120 0.7695 92.34 2 120 0.7432 89.18
3 120 0.6746 80.95 3 120 0.6407 76.88
4 120 0.5921 71.05 4 120 0.5523 66.28
5 120 0.5194 62.33 5 120 0.4761 57.13
6 120 0.4551 54.61 6 120 0.4104 49.25
7 120 0.3991 47.89 7 120 0.3538 42.46
8 120 0.3503 42.04 8 120 0.3050 36.60
8 1000 0.3503 350.30 8 1000 0.3050 305.00
Total 906.77 Total 826.23
NPV at 14% = 906.77 - 850 = 56.77 NPV at 16% = 826.23 - 850 = -23.77
3: Interpolate to find the YTM:
We know the bond price at 14% is 906.77 and at 16% is 826.23. The actual market price is 850. We
can use linear interpolation to estimate the YTM.
C
YTM = 𝐴 + (D) × (B − A)
56.77
• A: Lower interest rate = 14%
YTM = 14%+ (56.77-(-23.77)) ×(16%-14%) • B: Higher interest rate = 16%
56.77 • C: NPV at the lower interest rate (A)
YTM = 14% + × 2%
80.54 = 56.77
YTM = 14% + 0.705 × 2% • D: Difference in NPV between the
∴ YTM = 15.41% higher and lower interest rates = NPV
at 14% - NPV at 16% = 80.54

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