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Barclays Bank Case Summary

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Barclays Bank’s investment banking division has invested `10,00,000 in bonds. The bond specifications are it bears coupon of 5% with maturity period of 2 years. Also, it has invested in shares of L&T Ltd. for ` 10,00,000. Suppose, if government announces an increase in interest rates to 7% then; bond price bearing coupon less than 7% will fall. In Barclay’s case, the bond prices will fall as its coupon is less than 7%. Also on the other hand, the share price of L&T Ltd. falls in the market due to changes poor performance in the previous financial year. This also has an impact on Barclays as it has invested in shares of L&T Ltd. Thus, it is concluded that Barclays Bank faces interest rate risk due to changes in the interest rates in the market. …show more content…

For example, if Mr. Tony depositor makes a fixed deposit for `5,00,000 with ICICI bank for 2 years at 7% interest per annum. ICICI bank after following all legal compliances lends `3,00,000 of the deposit amount to Dr. Reddy’s Laboratories as a loan for 3 years at an interest rate of 12% per annum. This situation clearly indicates an asset-liability mismatch with respect to maturity period. Thus, bank should take care that the liabilities are paid on time and the collection system is also proper. If this difference is not managed properly, it can cause asset-liability mismanagement in the …show more content…

For example if a bond has a coupon rate of 4% then, it means that the interest on the bond is 4%. Zero-coupon bond, do not have separate coupon rate specified. This is because zero-coupon bonds are issued at discount and redeemed at face value.
Yield refers to the average return earned during the bond’s lifetime. There is an inverse relationship between the coupon and yield. As the interest rate increases, the yield of the bond decreases and vice versa.
Zero-coupon bond (ZCB’s) refers to those bonds wherein, investors do not receive interest amount separately. ZCB’s are issued at a discounted amount that is the amount lower than the face value and while redeeming the bonds, the face value of the bond is paid back. The difference between the discounted value of the bond and its face value is the interest amount which bond holder receives as a return on investment.
Maturity refers to the lifespan for a bond. Each bond has different lifespan. The interest rates of a bond depend on the maturity of a bond. For example, if the maturity period of a bond is higher then, interest rate on the bond will be high and vice versa. Even in case of higher maturity period, the bond is considered to be risky than, a bond having lower maturity

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