
Re: MGT411 GDB 1 Solution and Discussion
Total Marks 5
Starting Date Wednesday, June 03, 2020
Closing Date Monday, June 08, 2020
Status Open
Question Title Nominal and Real Interest rate
Question DescriptionSEMESTER SPRING 2020
Money and Banking (MGT411)
GDB No. 1
Due Date: June 08, 2020 Marks: 5
Learning Objective:
The objective of this question is to enable the students to understand the difference in nominal interest rate and real interest rate and its importance for lenders and borrowers.
Discussion Question:
It is important to understand the difference between nominal interest rate and real interest rate. Nominal interest rate is expressed in terms of current dollars as used in present value calculation where the purpose is to assess the amount of money you would pay today for fixed payments in the future. In case of borrowers and lenders; inflation is another important factor as they are concerned about the purchasing power of money and there is possibility that inflation may change the purchasing power of dollars. So there is a need to use inflation adjusted interest rate that is real interest rate. It equals to nominal interest rate minus inflation and expressed in terms of purchasing power. This phenomenon is best expressed by Irving Fisher in the form of Fisher equation that states that nominal interest rate ‘i’ is equal to real interest rate ‘r’ plus expected inflation ‘πe’.
Keeping this in mind; answer the following questions:
If there are equal chances of being paid back; whether 8% nominal interest rate is more attractive to a lender or 5% nominal interest rate? Explain your answer.
Also explain in the context of Fisher equation; what compensation a borrower is giving to a lender when he pays nominal interest rate?
Important Instructions:
Your discussion must be based on logical facts. The GDB will remain open for 07 working days. Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course. Obnoxious or ignoble answer should be strictly avoided. Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via email, will not be replied till the due date of GDB is over.For Detailed Instructions please read the GDB Announcement

Total Marks 5
Starting Date Wednesday, January 22, 2020
Closing Date Tuesday, January 28, 2020
Status Open
Question Title Liquidity Risk of Banks
Question DescriptionSEMESTER Fall 2019
Money and Banking (MGT411)
GDB No. 1
Due Date: January 28, 2020 Marks: 5
Learning Objective:
The objective of this question is to enable the students to understand the concept of liquidity risk for banks its sources and how banks manage it thorough different strategies.
Discussion Question:
Liquidity is a term used to describe the ease with which an asset can be converted into cash. Most of the time businesses face a situation where they have to meet sudden demand of cash or liquid funds that creates liquidity risk. Banks face liquidity risk on both sides i.e. asset and liability side of their balance sheet. On liability side, it is due to sudden deposit withdrawals and on asset side it is due to failure of banks to provide loans to their customers when demanded. One way to manage liquidity risk is to hold sufficient excess reserves but it is considered to be expensive one. The other two ways are adjusting assets and adjusting liabilities. Banks can manage it from asset side by selling a portion of its securities, selling some of its loans to other banks or by simply refusing to renew a customer loan that has come due which is absolutely not very appealing. On liability side; banks can manage it by attracting additional deposits or by borrowing either from the Central Bank or any other bank. But banks prefer to find other sources of funds instead of selling existing assets to manage liquidity risk.
Keeping this in mind; answer the following questions:
Briefly explain why keeping excess reserves in banks is considered to be expensive? Why do banks prefer to manage liquidity risk by adjusting liability side instead of assets?Important Instructions:
Your discussion must be based on logical facts. The GDB will remain open for 07 working days. Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course. Obnoxious or ignoble answer should be strictly avoided. Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via email, will not be replied till the due date of GDB is over.For Detailed Instructions please read the GDB Announcement
MGT411 GDB 1 Solution and Discussion

Re: MGT411 GDB 1 Solution and Discussion
Total Marks 5
Starting Date Wednesday, June 03, 2020
Closing Date Monday, June 08, 2020
Status Open
Question Title Nominal and Real Interest rate
Question DescriptionSEMESTER SPRING 2020
Money and Banking (MGT411)
GDB No. 1
Due Date: June 08, 2020 Marks: 5
Learning Objective:
The objective of this question is to enable the students to understand the difference in nominal interest rate and real interest rate and its importance for lenders and borrowers.
Discussion Question:
It is important to understand the difference between nominal interest rate and real interest rate. Nominal interest rate is expressed in terms of current dollars as used in present value calculation where the purpose is to assess the amount of money you would pay today for fixed payments in the future. In case of borrowers and lenders; inflation is another important factor as they are concerned about the purchasing power of money and there is possibility that inflation may change the purchasing power of dollars. So there is a need to use inflation adjusted interest rate that is real interest rate. It equals to nominal interest rate minus inflation and expressed in terms of purchasing power. This phenomenon is best expressed by Irving Fisher in the form of Fisher equation that states that nominal interest rate ‘i’ is equal to real interest rate ‘r’ plus expected inflation ‘πe’.
Keeping this in mind; answer the following questions:
If there are equal chances of being paid back; whether 8% nominal interest rate is more attractive to a lender or 5% nominal interest rate? Explain your answer.
Also explain in the context of Fisher equation; what compensation a borrower is giving to a lender when he pays nominal interest rate?
Important Instructions:
Your discussion must be based on logical facts. The GDB will remain open for 07 working days. Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course. Obnoxious or ignoble answer should be strictly avoided. Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via email, will not be replied till the due date of GDB is over.
For Detailed Instructions please read the GDB Announcement

@zaasmi said in MGT411 GDB 1 Solution and Discussion:
If there are equal chances of being paid back; whether 8% nominal interest rate is more attractive to a lender or 5% nominal interest rate? Explain your answer.
Nominal Interest Rate
The nominal interest rate is the stated interest rate of a bond or loan, which signifies the actual monetary price borrowers pay lenders to use their money. If the nominal rate on a loan is 5%, borrowers can expect to pay $5 of interest for every $100 loaned to them. This is often referred to as the coupon rate, because it was traditionally stamped on the coupons redeemed by bondholders. KEY TAKEAWAYS
The different types of interest rates, including real, nominal, effective and annual, are distinguished by key economic factors that can help individuals become shrewder investors.
Real interest rates, unlike nominal rates, take account of inflation.
Investors and borrowers should also be aware of the effective interest rate, which takes the concept of compounding into account.
Real Interest Rate
The real interest rate is so named, because unlike the nominal rate, it factors inflation into the equation, to give investors a more accurate measure of their buying power, after they redeem their positions. If an annually compounding bond lists a 6% nominal yield and the inflation rate is 4%, then the real rate of interest is actually only 2%.It’s feasible for real interest rates to be in negative territory, if the inflation rate exceeds the nominal rate of an investment. For example, a bond with a 3% nominal rate will have a real interest rate of 1%, if the inflation rate is 4%. A comparison of real and nominal interest rates can be calculated using this equation:
RR=Nominal Interest Rate − Inflation Rate
where:
RR = Real Rate of Return
 KEY TAKEAWAYS

@zaasmi said in MGT411 GDB 1 Solution and Discussion:
It is important to understand the difference between nominal interest rate and real interest rate
A real interest rate is an interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower and the real yield to the lender or to an investor. A nominal interest rate refers to the interest rate before taking inflation into account.