Chapter 15 Calculation of Interest and Annuities – CS Professional Banking Law and Practice Notes is designed strictly as per the latest syllabus and exam pattern.
Calculation of Interest and Annuities – CS Professional Banking Law and Practice Study Material
Question 1.
Ajay has availed of 3 loans from his bank amounting to ₹ 2 lakh, ₹ 3 lakh and ₹ 5 lakh carrying interest of 12%, 13% and 15% respectively. Further, the loan of ₹ 2 lakh has become time barred. Ajay pays ₹ 5 lakh without indicating the loan for which he has made payment. The bank appropriates the amount towards the first two loans. Ajay disputes this and explains that the amount was meant to pay-off the third loan where interest rate was highest. Explain the position of the banker. (Dec 2014, 5 marks)
Answer:
When an individual or entity is a debtor as well as a creditor, the entity has a right to set off monies receivable against monies payable. Section 59 and 61 of the Indian Contract Act, 1872 contains provisions for appropriation. Under Section 59, the right of appropriation, rests with the debtor who has to make payment to his creditor to whom he owes debts. He may appropriate the payment by intimation or implying that the payment is to be applied towards settling a particular debt.
However, if the Debtor does not intimate the creditor that for which debt the payment is being made, the right of appropriation rests with the creditor. And creditor may apply the monies received at his discretion to any lawful debt payable by the debtor. Further where interest is also overdue the banker has a right to appropriate the deposits against interest unless there is an agreement to the contrary.
Hence, in this example there are 2 points to be considered. These are:
- Whether the bank can appropriate the debt which is time barred and
- Whether it was right in appropriating the payment towards the loans with lower interest.
A debt which is time barred is neither extinguished nor can it be recovered. However, under the Limitation Act, the lender loses his right to recover the debt through court or legal process. In the given case as the customer did not mention the details that for which debt is he paying the bank, the right to decide that against which of the loans the amount is to be appropriated lies with the bank.
Thus, the Bank has acted within its right by appropriating the amount to the first 2 loans.
Question 2.
(i) A 5-year 5% Bond has a Basis Point Value (BPV) of 50. How much the bond will gain or lose due to increase in the yield of bond by 2 bps?
(ii) Bond A is a 7-year, 8% Coupon Bond. It has Duration of 4.2 and a Current Yield of 6.6%. If the yield were to suddenly decrease to 6.1 % approximately, what will be the percentage price change for this Bond?
(iii) A 10-year 12% Semi-annual Bond @ Market Yield of 8.520% has a price of 116.16 which rises to 117.45 at a Yield of 8.320%. What is the Basis Point Value (BPV) of the bond ? (Book Value of Bond is 1,000.) (Dec 2021, 1+2 + 4 marks)
Answer:
(i) Increase in yield will affect the bond adversely and the bond will lose.
Since Basis Point Value (BPV) of the bond is ₹ 50/-. Increase in yield by 2 bps will result into loss of value of Bond by 50*2 = 100
Loss of Value by 1100
(ii) Increase in Price of Bond will Decrease Current Yield Price is Inversely proportionate to Yield
Change in Price = – Modified Duration × Yield Change
= -4.2 *(-0.5)
= 2.1
Price Increases by 2.1 %
(iii) BPV is Change in Price (Market Value) by 1 Basis Point Change in Yield (Market) Here change in Price is 117.45 – 116.16 = 1.29
And change in Yield is 8.520 – 8.320 = 0.20
So, one basis point change in Yield = 0.20 divided by 20 = 0.01 % So, as we divide price change also by 20 = 1.29 / 20 = 0.0645 That 0.0645 BPV face (Book) value of 11,000 ₹ 64.5 at book value at ₹ 1,000.