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Bank B, on the other hand, makes a $105 loan at 7%, with $100 in deposits at 5% and only $10 in equity. Bank B purchases the rest of Assets as G-Bond at 5% interest rate. Bank B Loan 7% $105 G-Bond 5% ? Deposits 5% $100 Equity $10 Total Assets $? Total Equity and Deposit $110 If the maintenance cost of Loan is 0.1% pf the loan balance, that of G-Bond is 0.2% of the G-bond balance, and that of deposits is 0.5% of the deposit balance. The net income margin (minus maintenance costs) is 37% 19% 24% 26.1% 34.2% 22.3% 23% 11%

EBK CONTEMPORARY FINANCIAL MANAGEMENT

EBK CONTEMPORARY FINANCIAL MANAGEMENT

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ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 30P

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Bank B, on the other hand, makes a $105 loan at 7%, with $100 in deposits at 5% and only $10 in equity. Bank B purchases the rest of Assets as G-Bond at 5% interest rate.

Bank B

Loan 7% $105

G-Bond 5% ?

Deposits 5% $100

Equity $10

Total Assets $?

Total Equity and Deposit $110

If the maintenance cost of Loan is 0.1% pf the loan balance, that of G-Bond is 0.2% of the G-bond balance, and that of deposits is 0.5% of the deposit balance. The net income margin (minus maintenance costs) is

		37%
		19%
		24%
		26.1%
		34.2%
		22.3%
		23%
		11%

Expert Solution

Step 1

Bank purchase

G bond 5% worth $ 5

Total return earn by bank

$105×7% + 5% ×5

7.35+0.25

7.60

Bank pay

Pay on deposit = $100×5 =5

No payment on equity

Maintenance cost as follow

$105×0.1%+$5×0.2%+100×0.5%

0.615

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