THE INSTITUTE OF BANKERS, BANGLADESH (IBB) 7th Banking Professional Examination, 2026
JAIBB · MONETARY AND FINANCIAL SYSTEM (MAFS)

Questions

6. (a) Suppose the interest rate of a taxable corporate bond is 12.5% and the marginal tax rate is 40%. A tax-free municipal bond with a rate of 9.25% is also available to buy. Which security would you choose to buy? Why?

6. (b) A commercial Bank, facing a temporary liquidity crunch, approaches to Bangladesh Bank and borrows Tk. 500 crore through repo at 6.25% for 7 days. Compute the repo interest payable.

Solutions

6. (a) Taxable Corporate Bond vs. Tax-Free Municipal Bond

Taxable corporate bond rate: 12.5% Marginal tax rate: 40% Tax-free municipal bond rate: 9.25%
Step 1: Calculate After-Tax Yield of Taxable Corporate Bond
After-tax yield = Taxable yield × (1 – Tax rate)
= 12.5% × (1 – 0.40)
= 12.5% × 0.60
= 7.50%
Step 2: Compare After-Tax Yields
Taxable corporate bond (after-tax)7.50%
Tax-free municipal bond9.25%
✅ Choose the tax-free municipal bond at 9.25% because it offers a higher after-tax return than the taxable corporate bond (9.25% > 7.50%).
Note Even though the corporate bond has a higher nominal rate (12.5%), after accounting for the 40% tax, its effective return (7.50%) is lower than the tax-free municipal bond (9.25%). This is known as the tax-equivalent yield comparison.
Alternative View: The corporate bond would need to yield 9.25% / (1 – 0.40) = 15.42% to match the municipal bond’s after-tax return.

6. (b) Repo Interest Payable (360-day convention)

Principal amount: Tk. 500 crore Repo rate: 6.25% per annum Tenure: 7 days Day count: 360 days (money market convention)
Formula:
Interest = Principal × Rate × (Days / 360)
Interest = 500 crore × 6.25% × (7 / 360)
= 500 × 0.0625 × 0.019444
= 500 × 0.00121528
= Tk. 0.60764 crore
✅ Repo Interest Payable = Tk. 0.608 crore (approximately Tk. 60.76 lac)
Note The bank will repay Tk. 500.608 crore to Bangladesh Bank after 7 days (principal + interest). The calculation uses a 360-day convention, which is the standard for money market instruments in Bangladesh and many other countries.
Detailed Breakdown (360-day basis):
Daily interest rate 6.25% / 360 = 0.017361% per day
Daily interest (Tk.) 500 crore × 0.017361% = Tk. 8.68 lac
Total for 7 days Tk. 8.68 lac × 7 = Tk. 60.76 lac
📌 Note: Using a 360-day convention (money market basis) gives slightly higher interest (Tk. 60.76 lac) compared to a 365-day basis (Tk. 59.93 lac). Both are acceptable, but 360-day is standard for repo transactions.
IBB · 7th Banking Professional Examination 2026 · MAFS · Solution
🏦 THE INSTITUTE OF BANKERS, BANGLADESH (IBB) JAIBB · MAFS · 6th Exam 2025
Bond Valuation

5. Bond Valuation: YTM & Perpetual Bond

(a) Consider a coupon bond that has a Tk. 1000 par value and a coupon rate of 10%. The bond is currently selling for Tk. 1200 and has 5 years to maturity. What is the bond’s yield to maturity?

(b) What is the price of a perpetual bond that has a coupon of Tk. 100 per year and a yield to maturity of 5%?

YTM (approximate): YTM ≈ [C + (F – P)/n] / [(F + P)/2] Perpetual bond: P = C / r

Solutions

(a) Yield to Maturity (Coupon Bond)

Par value (F): Tk. 1,000 Coupon rate: 10% Annual coupon (C): Tk. 100 Current price (P): Tk. 1,200 Years to maturity (n): 5 years
YTM ≈ [C + (F – P)/n] / [(F + P)/2]
= [100 + (1000 – 1200)/5] / [(1000 + 1200)/2]
= [100 + (–200)/5] / [2200/2]
= [100 – 40] / 1100
= 60 / 1100
= 0.054545… = 5.45%
✅ Approximate YTM = 5.45%
Note More precise YTM (trial & error / financial calculator) gives ≈ 5.47%. The bond is trading at a premium (above par) because the coupon rate (10%) is higher than the YTM (5.45%).

(b) Perpetual Bond Price

Annual coupon (C): Tk. 100 Yield to maturity (r): 5% = 0.05
P = C / r
= 100 / 0.05
= Tk. 2,000
✅ Perpetual Bond Price = Tk. 2,000.00
Note A perpetual bond (also called a consol) has no maturity date. Its price is simply the annual coupon divided by the yield to maturity.
Summary YTM: 5.45%  |  Perpetual bond: Tk. 2,000 approximate YTM · perpetual pricing
IBB · JAIBB · MAFS · 6th Exam 2025 · Bond Valuation Solution
🏦 THE INSTITUTE OF BANKERS, BANGLADESH (IBB) JAIBB · MAFS · 6th Exam 2025
Stock & Preferred Valuation

6. Stock & Preferred Share Valuation

(a) Find the current market price of ABC Stock assuming dividends grow at a constant rate of 10%. The most recent dividend paid, D0 = Tk. 10 and the required return is 12%.

(b) A preferred stock with a face value of Tk. 100 pays Tk. 5 per year as dividend to its investors. The required rate of return on similar issues is 4.5%. What is the approximate intrinsic value of that preferred share?

Gordon growth: P₀ = D₁ / (r – g) Preferred: V = D / r

Solutions

(a) ABC Stock — Constant Growth (Gordon Growth Model)

Most recent dividend (D₀): Tk. 10 Growth rate (g): 10% = 0.10 Required return (r): 12% = 0.12
D₁ = D₀ × (1 + g) = 10 × (1 + 0.10) = 10 × 1.10 = Tk. 11
P₀ = D₁ / (r – g)
= 11 / (0.12 – 0.10)
= 11 / 0.02
= Tk. 550
✅ Current Market Price = Tk. 550.00
Note The Gordon Growth Model assumes constant dividend growth indefinitely. Since r > g (12% > 10%), the model is valid.

(b) Preferred Stock — Perpetual Dividend

Face value: Tk. 100 Annual dividend (D): Tk. 5 Required return (r): 4.5% = 0.045
V = D / r
= 5 / 0.045
= Tk. 111.11
✅ Intrinsic Value = Tk. 111.11
Note Preferred stock is valued as a perpetuity because it has no maturity date and pays a fixed dividend. The face value (Tk. 100) is not used in pricing since the dividend amount is already specified.
Summary ABC Stock: Tk. 550.00  |  Preferred: Tk. 111.11 constant growth · perpetual dividend
IBB · JAIBB · MAFS · 6th Exam 2025 · Stock & Preferred Valuation Solution
THE INSTITUTE OF BANKERS, BANGLADESH (IBB) 99th Banking Professional Examination, 2024
JAIBB · MONETARY AND FINANCIAL SYSTEM (MAFS)

Questions

4. (a) Distinguish between stock and bond. Which one is riskier? Why?

4. (b) Find out the price of a two-year, 10% coupon bond (semi-annual coupon payments) with a face value of Tk. 1,000 and a yield to maturity 12%.

4. (c) You decided to buy a stock that is currently selling for Tk. 55 per share and pays dividend Tk. 4 per year. The market analyst predicts that the stock will be sold at Tk. 60 in one year. Your expected rate of return is 12%:

  • (i) Calculate the current price of the stock.
  • (ii) Should you buy this stock? Why the stock is selling for less than market price?

Solutions

4. (a) Stock vs. Bond – Distinction & Risk

FeatureStockBond
NatureEquity (ownership)Debt (loan)
ReturnsDividends + Capital gainsFixed interest (coupon)
MaturityNo maturity (perpetual)Fixed maturity date
Claim on assetsResidual (after debt)Senior (priority)
Voting rightsYes (shareholders)No
Tax treatmentDividends may be taxedInterest is tax-deductible for issuer
RiskHigher (variable returns)Lower (fixed returns)

Which one is riskier? Why?

Stocks are riskier than bonds because:

  • Returns are uncertain – dividends and capital gains are not guaranteed.
  • Lower priority in bankruptcy – bondholders are paid first; shareholders get residual.
  • Price volatility – stock prices are more sensitive to market conditions, earnings, and news.
  • No contractual obligation – companies are not legally required to pay dividends.

Bonds, on the other hand, have fixed coupon payments and priority claim, making them relatively safer.

4. (b) Bond Valuation (Semi-annual)

Given: Par Value (F) = Tk. 1,000  ·  Coupon Rate = 10% p.a. → 5% per half-year  ·  Maturity = 2 years → 4 periods  ·  YTM = 12% → 6% per half-year
Method 1: Formula-based Approach
C (semi-annual coupon) = 1,000 × 5% = Tk. 50
r (semi-annual) = 12% / 2 = 6%  ·  n = 2 × 2 = 4 periods
Bond Value = (C × PVIFAr,n) + (F × PVIFr,n)
PVIFA6%,4 = [1 – (1.06)−4] / 0.06 = 3.4651
PVIF6%,4 = 1 / (1.06)4 = 0.7921
PV of Coupons = 50 × 3.4651 = 173.25
PV of Par Value = 1,000 × 0.7921 = 792.10
Bond Value = 173.25 + 792.10 = Tk. 965.35
✅ Bond Price = Tk. 965.35
Note The bond is trading at a discount (below par) because the coupon rate (10%) is lower than the YTM (12%).
Method 2: NPV-style Tabular Approach
Note: Period 4 includes Coupon + Face Value = 50 + 1,000 = Tk. 1,050  ·  Discount rate per period = 6%
PeriodCash Flow (Tk.)Discount Factor (6%)Present Value (Tk.)
1500.943447.17
2500.890044.50
3500.839641.98
41,0500.7921831.70
Total Present Value965.35
✅ Bond Value (NPV-style) = Tk. 965.35

4. (c) Stock Valuation – Expected Return & Decision

Current market price: Tk. 55 Dividend (D₁): Tk. 4 Expected selling price (P₁): Tk. 60 Required return (r): 12%
(i) Calculate Current Price of the Stock
P₀ = (D₁ + P₁) / (1 + r)
= (4 + 60) / (1 + 0.12)
= 64 / 1.12
= Tk. 57.14
✅ Intrinsic Value = Tk. 57.14
(ii) Should you buy this stock? Why is it selling for less than market price?

Decision: YES, you should buy the stock.

Comparison:
Intrinsic ValueTk. 57.14
Market PriceTk. 55.00
Expected Return:
= (4 + 60 – 55) / 55
= 9 / 55 = 16.36%
Required return = 12%

Why is the stock selling for less than its intrinsic value?

  • The market price (Tk. 55) is below the intrinsic value (Tk. 57.14), indicating the stock is undervalued.
  • This could be due to market inefficiency, investor pessimism, or temporary negative sentiment.
  • The expected return (16.36%) exceeds the required return (12%), making it an attractive investment.
✅ Buy the stock – it is undervalued and offers a return higher than the required rate.
IBB · 99th Banking Professional Examination 2024 · MAFS · Solution
THE INSTITUTE OF BANKERS, BANGLADESH (IBB) 98th Banking Professional Examination, 2024
JAIBB · MONETARY AND FINANCIAL SYSTEM (MAFS)

Questions

6. (a) What is freely floating exchange rate? How it helps to combat inflation?

6. (b) Calculate the present value of a Tk. 1,000 zero coupon bond with 7 years to maturity if the yield to maturity is 8%.

6. (c) “A low price-earning (P/E) ratio provoke to buy stock” – is this statement true/false? Explain.

Solutions

6. (a) Freely Floating Exchange Rate & Inflation Control

What is a Freely Floating Exchange Rate?

A freely floating exchange rate (also called a clean float) is a system where a currency’s value is determined solely by market forces – supply and demand in the foreign exchange market – without any government or central bank intervention. The exchange rate fluctuates freely based on economic factors such as inflation, interest rates, trade balances, and investor sentiment.

How Does a Freely Floating Exchange Rate Help Combat Inflation?
  • Import price adjustment – When a country has higher inflation, its currency tends to depreciate. A weaker currency makes imports more expensive, reducing demand for foreign goods and encouraging domestic production.
  • Export competitiveness – Depreciation makes exports cheaper and more competitive, boosting net exports and economic growth without fueling domestic inflation.
  • Automatic stabilizer – The exchange rate acts as a shock absorber. Inflationary pressures lead to currency depreciation, which helps correct trade imbalances and reduces demand-pull inflation.
  • Discipline on monetary policy – Governments cannot artificially keep the currency overvalued, which discourages excessive money printing that would otherwise cause inflation.
Key Insight: A freely floating exchange rate provides an automatic adjustment mechanism that helps contain inflationary pressures without direct intervention.

6. (b) Zero-Coupon Bond Valuation

Face Value (F): Tk. 1,000 Years to Maturity (n): 7 years Yield to Maturity (r): 8% = 0.08
Formula:
PV = F / (1 + r)n
= 1,000 / (1.08)7
= 1,000 / 1.7138
= Tk. 583.49
✅ Present Value = Tk. 583.49
Note A zero-coupon bond pays no periodic interest; its value is the present value of the face value discounted at the YTM. The bond is trading at a deep discount because it has no coupon payments.
Alternative: Step-by-Step NPV-style Calculation
YearCash Flow (Tk.)Discount Factor (8%)Present Value (Tk.)
1–60––
71,0000.5835583.49
Total Present Value583.49
✅ Present Value (NPV-style) = Tk. 583.49

6. (c) Low P/E Ratio – Should You Buy?

Statement: “A low price-earnings (P/E) ratio provoke to buy stock.”

Answer: This statement is NOT ALWAYS TRUE. It requires careful analysis of the underlying reasons for the low P/E ratio.

When a low P/E ratio may indicate a buying opportunity:
  • Undervaluation – The stock may be temporarily undervalued due to market sentiment, presenting a bargain.
  • High growth potential – The company may have strong fundamentals with earnings expected to grow.
  • Industry cyclicality – Cyclical stocks often have low P/E ratios at the bottom of the cycle, making them attractive for long-term investors.
When a low P/E ratio may indicate a value trap:
  • Declining earnings – The low P/E may reflect falling profits or negative growth prospects.
  • Industry challenges – The company may face structural issues or technological disruption.
  • Poor management – Weak corporate governance or inefficient operations.
  • High debt – Excessive leverage can make the company risky despite a low P/E.
Conclusion: A low P/E ratio is a signal to investigate, not a guaranteed buy signal. Investors should analyze earnings growth, industry trends, debt levels, and management quality before making a decision. The statement is partially true but requires context and fundamental analysis.
✅ Answer: The statement is not always true – it depends on why the P/E ratio is low.
IBB · 98th Banking Professional Examination 2024 · MAFS · Solution