BACKGROUND INFO An Ireland economy with two opposing factions: the Belgium and the Germany. There is one bank, the cross Bank, that will only loan money to the faction that is currently winning the war. The bank holds $70B in reserves, $290B in loans, $180B in investments in zero coupon bonds. They have taken in $400B in deposits. Because Germany is currently winning the war, all of the banks investments are in 2yr zero coupon bonds sold by the Germany. The reserve ratio is 20%. The Germany is considering strengthening their army at a cost of $50B. The market interest rate on bonds is 4% and the face value of every bond is $1000. QUESTION One year later, the Belgium attacked and their advantage in arrows allowed them to conquer the Germany. Due to this, the Germany defaulted on their bonds that was used to finance the army so they did not repay the bank. They continued to repay all their other bond obligations. What happens to the Cross Bank? Could it still be solvent?

BACKGROUND INFO An Ireland economy with two opposing factions: the Belgium and the Germany. There is one bank, the cross Bank, that will only loan money to the faction that is currently winning the war. The bank holds $70B in reserves, $290B in loans, $180B in investments in zero coupon bonds. They have taken in $400B in deposits. Because Germany is currently winning the war, all of the banks investments are in 2yr zero coupon bonds sold by the Germany. The reserve ratio is 20%. The Germany is considering strengthening their army at a cost of $50B. The market interest rate on bonds is 4% and the face value of every bond is $1000. QUESTION One year later, the Belgium attacked and their advantage in arrows allowed them to conquer the Germany. Due to this, the Germany defaulted on their bonds that was used to finance the army so they did not repay the bank. They continued to repay all their other bond obligations. What happens to the Cross Bank? Could it still be solvent?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter4: Exchange Rate Determination

Section: Chapter Questions

Problem 26QA

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