ABMF3023 COMMERCIAL BANKING SERVICES

TUTORIAL 1& 2

1. Ali has an overdraft facility with a credit limit of RM50,000 that has not been utilized at all. On 30 July 2009, Ali decided to withdraw all the funds available (RM50,000) to pay his

building contractor for the renovation of his house.

Calculate the overdraft interest payable for the month of July 2009, assuming that the interest

rate charged was 8.5%.

2. Jim pledged his shophouse, valued at RM1.5 million, to Bank Ace for an overdraft facility to increase his business working capital requirement.

Bank Ace provided an overdraft facility of RM1 million. The interest rate was Base Rate (BR)

+ 1.5% per annum.

The overdraft account of Jim recorded the following transactions:

Date Transaction Details Amount (RM)

1 June 2009 Balance brought down 500,000

15 June 2009 Withdrawal 250,000

30 June 2009 Balance brought forward 750,000

20 July 2009 Deposit 200,000

31 July 2009 Balance brought forward 550,000

Required:

a) Calculate the interest on the overdraft facility for the month of June if the BR was 6.5% per annum.

b) Assuming that the BLR increased from 6.5% per annum to 7.0% per annum on 1 July, determine the interest payable on the overdraft facility for the month of July.

c) Calculate the commitment fee for the month of July, assuming that the commitment fee charged on the unutilized portion of the overdraft facility was 1% per annum.

d) Identify FOUR (4) advantages of an overdraft facility over a term loan.

3. En Ahmad has an overdraft (OD) facility with a bank. He was charged an interest of RM1,350 for the amount he utilised in January 2010, based on a 7.0% interest rate. If he had

utilised his credit limit to the maximum, the bank would have charged him RM2,050 in

interest.

Calculate the commitment fee levied for January 2010, assuming that the commitment fee for

the unutilised portion of the OD facility was 1.0% and the base lending rate was unchanged.

4. En Ridzuan, your long-time customer with a good credit record, wants to borrow RM20,000 for a trip around the world. Hence, he is at your bank to apply for a fixed loan (non-revolving)

facility.

a) State ONE (1) advantage of a fixed loan facility.

b) Since En Ridzuan has a good credit standing, is it possible for him to take a loan of RM20,000 on an unsecured basis? Briefly explain your answer.

c) Although a fixed loan has a fixed repayment schedule, En Ridzuan can make prepayment whenever he has the money.

Can En Ridzuan drawdown or utilise the amount he has prepaid into the fixed loan? Why?

5. On 1 July 2009, Alis fixed loan facility of RM100,000 was fully drawn down.

Compute the interest payable for the month of July 2009, assuming that no repayment was

made during the month and the interest rate charged was 8.0%.

6. Mr William Gonzales, a businessman, comes to your bank to apply for a RM350,000 housing loan to buy a new double-storey terrace house in Bandar Utama costing RM450,000.

Construction of the house will begin next month and is scheduled to be completed in two

years time.

Mr Gonzales is accompanied by his wife, a dentist. Mrs Gonzales plans to stay at home to

look after their two children in five years time.

Required:

Mr and Mrs Gonzales have a few questions regarding the loan, which they would like you

to answer.

a) What is the formula for calculating the interest on the housing loan?

b) If part of the housing loan is in the form of an overdraft, what is the formula for calculating the interest on the overdraft portion?

c) What are low-start loans and high-start loans? Which of these two loans are more suitable for Mr and Mrs Gonzales?

7. A housewife, Mrs Tan is planning to buy a recently launched RM400,000 condominium and has approached your bank for financing. She intends to stay in the condominium with her

businessman husband. The condominium will be registered under Mrs Tans name, but her husband will pay monthly instalment. Since her husband does not want to be a co-borrower,

the loan will be solely in Mrs Tans name.

Since this is the first time she is buying a property, she is not familiar with the procedure for

obtaining credit.

Required:

a) i) Should Mrs Tan apply for an overdraft or a housing loan?

ii) Give ONE (1) reason why the credit facility you selected in part (a)(i) above is

appropriate and ONE (1) reason why the other is inappropriate.

b) If Mrs Tan opts for the housing loan facility, advise her on the following:

i) What security would your bank require for the housing loan?

ii) When would the housing loan be released to the developer?

8. Bangi Heights Development Sdn Bhd has embarked on a project to develop 200 units of medium-cost apartments priced at RM150,000 per unit known as Seri Mawar Apartments.

The developer is a subsidiary of a public listed company and the project is located about 12

km from Kajang, Selangor. One of the purchasers of the apartments, Encik Ali has

approached your bank for a 90% housing loan to finance the purchase of a unit.

Required:

Explain any FIVE (5) factors you would take into consideration in assessing Encik Alis housing loan application.

9. En Azmi is interested in buying a new house costing RM280,000. The house is to be financed partly from the proceeds of the sale of his old house and partly by your bank. En Azmi seeks

clarification from your bank regarding the end-finance facility.

a) What is an end-finance facility?

b) When is a loan released under an end-finance facility?

c) Although housing loan applications are assessed based on the usual lending principles, what are the TWO (2) main factors to be taken into account when considering housing

loan applications?

10. Wendy purchased a RM2.5 million bungalow with a housing loan from Bank Ace. The margin of finance is 80%. Wendys housing loan account recorded the following transactions and activities:

Date Transaction Details RM

1 July 2009 Balance brought down 1,750,000

1 August 2009 Final drawdown of the balance 10% progressive

release

250,000

31 August 2009 Balance brought forward 2,000,000

Required:

a) Assuming that the interest rate charged was 5.00% per annum, compute the following:

i) Interest payable for the month of June 2009, if there was no drawdown during the month.

ii) Interest payable for the month of July 2009.

iii) Interest payable for the month of August 2009.

b) Although the risks of housing loan financing (to the financial institution) are lower than other forms of lending, there are specific risks facing housing loan financiers. What are

these risks?

c) Apart from careful attention to credit analysis procedures, what other risk reduction measures are available to a housing loan financier?

11. Your bank offers three types of share financing facilities, i.e. new public issue, purchase of quoted shares on the stock exchange, and margin account. You have been asked to draft the

answers for the following frequently asked questions:

New public issue

a) Up to what amount of financing will the bank provide for application of new public issue shares?

b) Will the financing amount cover the commission for the cashiers order or draft?

c) What is the security required for new public issue share financing?

d) If the borrower fails to sell the shares within the period stipulated by the bank, what will the bank do with these shares?

e) What is the procedure if the share application is unsuccessful?

f) How is interest charged for new public issue share financing?

Purchase of quoted shares on the stock exchange

g) Up to an agreed percentage of what value will the bank provide funds for the purchase of quoted shares on the stock exchange?

h) Can unquoted shares be pledged as security for share financing?

12. Madam Wong opened a margin account with the following terms:

Market value of securities RM250,000

Agreed value of financing (65%) RM162,500

Margin of finance 2 times

Pre-set line of credit RM325,000

Required:

Based on the above information, answer the following questions:

a) What is a margin account?

b) What are the types of security that may be accepted for a margin account?

c) How does Madam Wong pledge shares in her Central Depository System account as security?

d) What is the maximum amount of funds from the margin account that Madam Wong may use to buy or sell shares?

e) What happens to the profit Madam Wong makes from her share transactions?

13. John opened a share margin trading account with Bank One. The share margin account position as at 31 December 2009 showed the following details:

Market value of securities RM300,000

Agreed margin of financing 70%

Margin of finance 2 times

Pre-set line of credit RM420,000

Required:

a) Determine the maximum value of shares that John can purchase from his stockbroker, based on the agreed margin of financing.

b) Assuming that the market value of the securities pledged and purchased rose to RM640,000 and the outstanding loan amount remained at RM350,000, determine the

maximum value of shares that John can purchase from his stockbroker.

c) Assuming that the market value of the securities pledged and purchase fell, resulting in Bank One making a margin call, what are the THREE (3) options available to John?

d) What would happen if John does not respond to the margin call within the stipulated period required by Bank One?

14. a) Briefly describe what a unit trust is.

b) What are the advantages of unit trust investment?

a) Identify THREE (3) disadvantages of unit trust investment.

CDS ACCOUNT

http://www.investmentmalaysia.org/2013/04/how-to-open-an-investment-account-in-bursa-

malaysia/

Steps to become stock investor is to open an account with Bursa Malaysia. Below are the steps:

Step 1: Open CDS account with Bursa Malaysia. CDS is an acronym for Central Depository System. The Central Depository System is a system that is fully owned and operated by Bursa Malaysia Depository Sdn Bhd (formerly known as Malaysian Central Depository Sdn Bhd), a wholly

owned subsidiary of Bursa Malaysia Berhad. There are 3 forms that you need to fill in:

CDS Card Form

Open account with Bursa

E-Dividend Form: This is for crediting dividend direct into your bank account

Investors who wish to trade in securities listed on Bursa Malaysia must open CDS accounts with

Authorised Depository Agents (ADAs), i.e. stockbroking companies. Securities bought will be

credited into CDS accounts that the investors have opened. Likewise for securities sold, these

securities will be debited from the CDS accounts.

You need to pay RM10.00 fee to open an account. But some brokers do waive this fee.

Step 2: For your trading account (trust account) with authorized brokers with Bursa. You can call

them and ask them to meet you which is nearest to your home:

Bursa Registered Brokers

The buy and sell activities will be transacted with brokers. If you asked me, i am biased for CIMB

Securities, Malacca Securities and Jupiter Securities

What you should be looking for when choosing brokers for investment?:

1. Cheaper brokerage fee. Normal standard fee is around 0.40%. The cheapest would be around 0.05%

2. Excellent, efficient service and definitely fast response or feedback from them 3. Extensive Report analysis for stock. CIMB Securities provides excellent analysis on this. 4. Easier to transfer money from and to your trust account. You can withdraw the money from

trust account and transfer your saving account if you need the money (only once you sell off

your shares)

Step 3: Start transferring your money into your trust account. Dont worry, your trust account is safe and secure.

Step 4: Set your investment goals and strategies

Step 5: Start your investment transaction buy and sell stocks