Co
espondence Study
ECON 410 Fall 2020
Problem Set #3
Submit your answers on Canvas by 11:59 p.m. on November 30th
1. Use the following balance sheet to answer the questions below in order:
ASSETS
LIABILITIES + BANK CAPITAL
Cash Reserves $ 50 million
Demand Deposits $ 300 million
Loans $ 100 million
Other Liabilities $ 250 million
Short-Term Securities $ 270 million
Long-Term Bonds $ 180 million
Bank Capital $ 50 million
TOTAL: $ 600 MILLION
TOTAL: $ 600 MILLION
(a) Assume a required reserve ratio of 10%. Calculate the required reserves and the excess reserves for this bank.
Required Reserves: Excess Reserves:
(b) Assume you lend out all of your excess reserves. Construct the new balance sheet after these new loans have been made.
ASSETS
LIABILITIES + BANK CAPITAL
(c) A financial crisis destroys half the value of your long-term bonds. Revise your balance sheet to reflect this change. Construct the new balance sheet after this adjustment.
ASSETS
LIABILITIES + BANK CAPITAL
2. Use the following balance sheet to answer the questions below in order:
ASSETS
LIABILITIES + BANK CAPITAL
Cash Reserves $ 60 million
Demand Deposits $ 300 million
Loans $ 200 million
Other Liabilities $ 140 million
Short-Term Securities $ 150 million
Long-Term Bonds $ 90 million
Bank Capital $ 60 million
TOTAL: $ 500 MILLION
TOTAL: $ 500 MILLION
(a) Assume a 5% after tax return on the loan component of your assets. Calculate the ROA, the ROE, and the EM using this assumption before adding the profits to your balance sheet.
ROA: ROE: EM:
(b) Now add these profits to the balance sheet as cash reserves and as additional bank capital. Assume the total value of loans remains unchanged. Construct the new balance sheet.
ASSETS
LIABILITIES + BANK CAPITAL
(c) Assume fifty million dollars worth of your loans become “nonperforming” (this means they have defaulted and are now worthless.) Construct the new balance sheet.
ASSETS
LIABILITIES + BANK CAPITAL
3. Use the following balance sheet to answer the questions below in order:
ASSETS
LIABILITIES + BANK CAPITAL
Cash Reserves $ 10 million
Demand Deposits $ 100 million
Rate-Sensitive Assets
Rate-Sensitive Liabilities
Short-term securities $ 50 million
XXXXXXXXXXCDs $ 120 million
XXXXXXXXXXMoney market $ 40 million
Fixed Rate Assets
Long-term loans $ 150 million
Long-term bonds $ 90 million
Bank Capital $ 40 million
TOTAL: $ 300 MILLION
TOTAL: $ 300 MILLION
(a) Does this bank benefit or suffer from unanticipated increases in interest rates? Why?
(b) Identify and explain three strategies for this bank if it anticipates higher interest rates.
4. Using the following information identify: the M1 money supply, the cu
ency ratio, the excess reserve ratio, the “Mishkin” money multiplier, and the monetary base.
Required reserve ratio: 0.10
Cu
ency held by the public: 250 billion dollars
Deposits: 1000 billion dollars
Excess reserves deliberately held by banks: 150 billion dollars