A bank has book value of $5 million in liquid assets and $95 million in nonliquid assets. Large depositors unexpectedly withdraw $9.5 million in deposits. To cover the withdrawals the bank sells all of its liquid assets at book value. To raise the additional funds needed the bank sells the necessary amount of nonliquid assets at 80 cents per dollar of book value. As a result, the bank's equity will Multiple Choice O O remain unchanged fall $4.5 million fall $3.6 million fall $1.4 million fall $5.0 million
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- Researching GAAP Situation Hamilton Company operates in an industry with numerous competitors. It is experiencing a shortage of cash and decides to obtain money from a large bank by using some of its receivables as collateral. Hamilton pledges 5100,000 of its receivables, is charged a 12% fee on this amount, and notifies these credit customers to make their payments directly to the bank. Hamilton transfers the receivables to the bank, and the bank assumes the servicing activities, but Hamilton is responsible for all bad debts which it reasonably estimates to be 2% of the receivables amount. When the balance of the receivables pledged is reduced to 3,000, Hamilton is required to repurchase the receivables, notify the remaining credit customers to make payments to it, and reassume the servicing activities. The bank has the right to sell the receivables, except to Hamiltons major competitor. Hamiltons president has asked you how to account for (and record) this transaction. Directions Research the related generally accepted accounting principles and prepare a short memo to the president that answers his question. Cite your reference and applicable paragraph numbers.Beleaguered State Bank (BSB) holds $200,000,000 in deposits and maintains a reserve ratio of 10%, which also is the reserve requirement. On paper, write the T account for BSB and use it to answer the rest of this question. Now suppose that BSB's largest depositor withdraws $10,000,000 from her account one day. On paper, show the effect of this on the T account. How many dollars of cash reserves does BSB need to raise to be allowed to open for business the next morning?Normanby Bank has the following balance sheet. Assets ($ million) Liabilities and equity ($ million) Treasury notes 85 Deposits 125 Loans 115 Interbank funds 55 Equity 20 Total assets 200 Total liabilities and equity 200 One of Normanby Bank’s wholesale customers decides to make an immediate deposit withdrawal of $15 million. To fund this withdrawal request, the bank adopts a liability liquidity management approach via the interbank funds market. Which of the following statements is CORRECT? Select one: a. After the transactions, the bank has 140m in deposits, 40m in interbank funds, and total assets remain unchanged. b. After the transactions, the bank has 110m in deposits, 40m in interbank funds, and 170m in total assets. c. After the transactions, the bank has 125m in deposits, 70m in interbank funds, and 215m in total assets. d. After the transactions, the bank has 110m in deposits,…
- National Bank currently has $500 million in transaction deposits on its balance sheet. The current reserve requirement is 15 percent. The Federal Reserve decreases this requirement to 10 percent. Assume National Bank does not keep any excess reserve before and after the change in reserve ratio. National Bank is the only commercial bank in this economy. Show the balance sheet of the Federal Reserve and National Bank before and after the reserve requirement change if National Bank does not keep any excess reserve after the change in reserve ratio, and public deposit all the cash in National Bank as transaction deposits.Assume that the following balance sheet portrays the state of the banking system. The banks currently have no excess reserves. Assets Liabilities and Net Worth (Billions of Dollars) Total reserves 5 Checkable deposits 100 Loans 45 Securities 50 Total 100 Total 100 What is the required reserve ratio? 25% 40% 10% 5% Suppose that the Federal Reserve (the "Fed") buys $8 million of bonds from a bond dealer, who immediately deposits the funds in her checking account. What is the initial impact of this transaction? Checkable deposits rise by $8 million, and the banking system's holdings of securities rise by $8 million. The banking system's holdings of securities rise by $8 million, and the banking system's total reserves fall by $8 million. The banking system's holdings of securities fall by $8 million, and the banking system's total reserves rise by $8 million. Checkable deposits rise by $8…The Staal Corporation is trying to decide whether to switch to a bank that will accommodate electronic funds transfers from Staal's customers. Staal's financial manager believes the new system would decrease its collection float by as much as five days. The new bank would require a compensating balance of $2,000,000, whereas its present bank has no compensating balance requirement. Staal’s average daily collections are $800,000, and it can earn 8% on its short-term investments. Should Staal make the switch? (Assume the compensating balance at the new bank will be deposited in a non-interest earning account.)
- Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 20%. The Federal Reserve buys a government bond worth $750,000 from Lorenzo, a customer of First Main Street Bank. He deposits the money into his checking account at First Main Street Bank. Complete the following table to reflect any changes in First Main Street Bank's balance sheet (before the bank makes any new loans). Assets Liabilities Complete the following table to show the effects of the new deposit on excess and required reserves, assuming a required reserve ratio of 20%. Hint: If the change is negative, be sure to enter the value as a negative number. Amount Deposited Change in Excess Reserves Change in Required Reserves (Dollars) (Dollars) (Dollars) 750,000 Now, suppose First Main Street Bank loans out all of its new excess reserves to Juanita, who immediately…a. Paradise Retailers, Inc. (PRI) determined that $1,500,000 is needed for cash transactions made during the next year. Each time PRI deposits money in its checking account, a charge of $12.95 is assessed to cover clerical costs. PRI can hold marketable securities that yield 4.5%, and then convert these securities to cash at a cost of only the $12.95 deposit charge. Optimal Cash Amount = 29382.53 PRI’s financial managers have not been following the Baumol Model. Instead, they have been transferring cash from marketable securities less frequently, namely, transferring cash every three weeks. What total cash cost including holding costs and transactions costs could PRI save by transferring the optimal cash amount C* rather than this larger transfer amount?Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 20%. The Bank of Canada buys a government bond worth $750,000 from Eric, a client of First Main Street Bank. He deposits the money into his chequing account at First Main Street Bank. NOTE: the options for the LEFT dropdown question for ASSETS are (building and furniture or deposits or loans or networth or reserves) the options for the RIGHT dropdown question for ASSETS are ($150,000 or $600,000 or $750,000 or $1,800,000) the options for the LEFT dropdown question for LIABILITIES are (building and furniture or deposits or loans or networth or reserves) the options for the RIGHT dropdown question for LIABILITIES are ($150,000 or $600,000 or $750,000 or $1,800,000) the VERY last dropdown question at the bottom choices are ($375,000 or $3,000,000 or $3,750,000)
- Bank Three currently has $850 million in transaction deposits on its balance sheet. The Federal Reserve has currently set the reserve requirement at 6 percent of transaction deposits. a. If the Federal Reserve decreases the reserve requirement to 4 percent, show the balance sheet of Bank Three and the Federal Reserve System just before and after the full effect of the reserve requirement change. Assume Bank Three withdraws all excess reserves and gives out loans and that borrowers eventually return all of these funds to Bank Three in the form of transaction deposits.b. Redo part (a) using a 10 percent reserve requirement.Here is Simple Bank’s balance sheet (with associated interest rates): Assets $800 million Business Loans, 7.5% $200 million Corporate Bonds, 4.25% $25 million Reserves, Fed pays 0.5% $10 million Real Assets Liabilities $550 million Demand Deposits $360 million Time Deposits, 2.5% $25 million Preferred Shares, 3.3% $100 million Common Shares Q. If capital requirements are 8% for loans and 6% for bonds, calculate the bank’s capital excess or deficiency.Explain how each of the following potentially affects a bank's liquidity risk: a. Most (95 percent) of the banks securities holdings are classified as held-to-maturity. b. The bank's core deposit base is a low (35 percent) fraction of total assets. c. The bank's securities all mature after eight years. d. The bank has no pledged securities out of the $10 million in securities it owns.