UUM Bank bought RM 50 million of USM Bank’s NID on 30 April 2020 to mature on 30 August 2020.

i. Initially what risks would UUM Bank have to consider before buying USM Bank’s NIDs?

ii. What would be the maturity proceeds if the coupon paid was 3.75% p.a?

iii. On 8 July 2020, UUM Bank sensed that interest rates were moving upwards and therefore, decided to sell RM 25 million of USM Bank’s NIDs to UMS Bank. Calculate the settlement proceeds that UUM Bank will receive if the transacted rate was 3.95% per annum.

i.) The risk that the UUM would be the interest rate that they would be paying on the loan from the USM bank's NIDs along with the all the payment terms and conditions that they are putting, that is whether the NIDs can be sold further to the 3rd party in case of any emergency so that the bank can recover the interest rate from the same and prevent from incurring the loses.

ii.) PV of the loan = 50 million
Interest rate = 3.75% p.a
Maturity = 4 months
FV of the Loan or the proceeds from the maturity of the loan = 50,000,000*(1+3.75%/12)^4
= 50,000,000*(1+0.3125%)^4
= 50,000,000*1.012559 = 50,627,935.80

Therefore, the proceeds on the maturity date is equal to RM 50,627,935.80

iii.) PV of the loan = 25 million
   Interest rate = 3.95% p.a
Maturity = 52 days ( From 8 july to 30 august)
FV of the Loan or the proceeds from the maturity of the loan = 25,000,000*(1+3.95%/365)^52
= 25,000,000*(1+0.01082%)^52
= 25,000,000*(1.009508) = 25,237,701.40
Therefore, the settlement proceeds received by the UUM bank from the UMS bank is RM 25,237,701.40