ECON 3323-002 Money & Banking Chapter 9 homework

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Suppose First National Bank holds ​$100 million in assets with an average duration of 4 ​years, and it holds ​$85 million in liabilities with an average duration of 3 years. Further suppose there is a 5​-percentage-point increase in interest rates. Calculate the percentage decrease in First National​ Bank's net worth relative to the total original asset value.

A 5​-percentage-point increase in interest rates decreases First National​ Bank's net worth by 7.25​% of the total original asset value. ​

what is a Gap Analysis

A measurement of the sensitivity of bank profits to changes in interest​ rates, calculated by subtracting the amount of​ rate-sensitive liabilities from the amount of​ rate-sensitive assets.

What is a Duration Analysis

A measurement of the sensitivity of the market value of a​ bank's assets and liabilities to changes in interest rates.

NewBank started its first day of operations with ​$121 million in capital. A total of ​$93 million in checkable deposits is received. The bank makes a ​$28 million commercial loan and another ​$24 million in mortgage loans. The required reserve ratio is 8.3​%. ​

Assets are Required reserves $8 million, excess reserves of $154 million, and loans of $52 million. Liabilities are checkable deposits of $93 million and bank capital of $121 million

Suppose that you are the manager of a bank whose​ $100 billion of assets have an average duration of four years and whose​ $90 billion of liabilities have an average duration of six years. Conduct a duration analysis for the​ bank, and show what will happen to the net worth of the bank if interest rates rise by 2 percentage points.

Assets fall in value by ​$8 billion. Liabilities fall in value by ​$10.80 billion. Net worth increases by ​$2.8 billion. ​

If a bank experiences a deposit outflow of​ $50 million with a required reserve ratio on deposits of​ 10%, which balance sheet would the bank rather have​ initially: Balance Sheet A or Balance Sheet B​? ​Why?

Balance Sheet B because the excess reserves are adequate to cover the deposit outflow without the bank needing to alter its balance sheet.

A bank almost always insists that the firms it lends to keep compensating balances at the bank.​ Why?

Compensating balances help establish​ long-term customer​ relationships, which make it easier for the bank to collect information about prospective​ borrowers, thus reducing the adverse selection problem, Compensating balances help the bank monitor the activities of a borrowing​ firm, which reduces the moral hazard problem, and Compensating balances can act as collateral

"Because diversification is a desirable strategy for avoiding​ risk, it never makes sense for a bank to specialize in making specific types of​ loans." Is this statement true or​ false? Explain your answer.

False. A bank may have developed expertise in screening and monitoring a particular type of​ loan, thus improving its ability to handle problems of adverse selection and moral hazard.

If a bank doubles the amount of its capital and ROA stays​ constant, what will happen to​ ROE?

Given the​ ROA, if bank capital​ doubles, then ROE will fall by half.

If the bank you own has no excess reserves and a sound customer comes in asking for a​ loan, should you automatically turn the customer​ down, explaining that you​ don't have any excess reserves to lend​ out? Why or why​ not? What options are available for you to provide the funds your customer​ needs?

No. There are several ways that reserves can be acquired. For​ example, the bank can borrow at the discount window or in the federal funds​ market, or it can acquire funds by issuing negotiable CDs.

A bank finds that its ROE is too low because it has too much bank capital. Which of the following will not raise its​ ROE?

The bank can sell part of its holdings of securities and hold more excess reserves

Suppose that you are the manager of a bank that has​ $15 million of​ fixed-rate assets,​ $30 million of​ rate-sensitive assets,​ $25 million of​ fixed-rate liabilities, and​ $20 million of​ rate-sensitive liabilities. Conduct a gap analysis for the​ bank, and show what will happen to bank profits if interest rates rise by 5 percentage points.

The change in bank profits is ​$0.5 million

X-Bank reported an ROE of 16​% and an ROA of 1.06%. What is the equity​ multiplier?

The equity multiplier is 15.09

How well capitalized is this​ bank

This is a​ well-capitalized bank because its​ equity/asset ratio exceeds the minimum required level.

If you are a banker and expect interest rates to rise in the​ future, would you want to make​ short-term or​ long-term loans?

You would want to make​ short-term loans so you can reinvest the funds at higher interest rates after their maturity.

Which of the following may not be used as a backup line of​ credit?

mortgages

Large-denomination CDs are​ ________, so that like a​ bond, they have a​ ________degree of liquidity and can be sold in secondary markets.

negotiable; greater

Using the​ T-accounts of the First National Bank and the Second National​ Bank, describe what happens when Jane Brown writes a check for ​$40 on her account at the First National Bank to pay her friend Joe​ Green, who in turn deposits the check in his account at the Second National Bank.

​T-account for the First National​ Bank: Assets reflect negative 40 in reserves; liabilities reflect negative 40 in checkable deposits. T-account for the Second National​ Bank: Assets reflect positive 40 in reserves; liabilities reflect positive 40 in checkable deposits.


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