Construct a bank balance sheet with the following items : reserves , deposits , loans , securities , capital , and debt . Choose values so that the reserve -deposit ratio is 10 percent and the leverage ratio is 10. Give an example of a change in asset values that would push bank capital to zero . What happens when bank capital is gone ?

Construct a bank balance sheet with the following items : reserves , deposits , loans , securities , capital , and debt . Choose values so that the reserve -deposit ratio is 10 percent and the leverage ratio is 10. Give an example of a change in asset values that would push bank capital to zero . What happens when bank capital is gone ?

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter7: Types And Costs Of Financial Capital

Section: Chapter Questions

Problem 1bM

See similar textbooks

Similar questions

Consider a bank with the following balance sheet (Shown in image):a) Calculate the equity (total asset – total liability) to asset ratio of the bank(Hint: equity to asset ratio = total equity/total asset) b) Calculate the duration and convexity of the both asset and liability sides; c) If the interest rates go up by 1%, using the duration and convexity rule to determine the networth of the bank and the equity to asset ratio; d) In c)’s scenario, to maintain the equity to asset ratio at 40% which is required by the regulation,the bank decides to raise cash (zero duration and zero convexity) from the equity holders.How much cash does the bank need to raise? e) Do you agree with the following statement? Explain why. “The information about a bond’s duration and convexity adjustment is sufficient to quantifyinterest rate risk exposure.”
c) If the interest rates go up by 1%, using the duration and convexity rule to determine the net worth of the bank and the equity to asset ratio d) In c)’s scenario, to maintain the equity to asset ratio at 40% which is required by the regulation, the bank decides to raise cash (zero duration and zero convexity) from the equity holders. How much cash does the bank need to raise? D) IS IN NEED ONLY. plz show the process.
Which of the following would increase a bank’s Net Interest Margin, assuming all else stays the same? Choose Two an increase in the interest rate on its loans companies paying off some of their loans and the bank using the funds to purchase Treasury bonds customers switching a portion of their time deposits to demand deposits the bank issues additional equity and keeps the funds in cash an increase in the federal funds rate assuming the bank borrows more in the federal funds market than it lends
If the interest rates go up by 1%, using the duration and convexity rule to determine the net worth of the bank and the equity to asset ratio
How should a bank structure its liquid assets portfolio to take advantage of falling interest rates ? a. The bank should invest in short-term securities to minimise capital loss b. The bank should invest in long term securities to maximise capital gains. c. The bank should borrow at fixed interest rates d. The bank should issue certificate deposits with fixed interest rates. e. The bank should hold cash to maximise its interest income. Which option is correct
The average maturity of its assets is larger than that of its deposits, as is typical of most banks. There is a reinvestment risk re-finance risk re-pricing risk default risk
A bank holds a loan portfolio with the following characteristics: Loan i Xi Annual spread between loan rate and bank’s cost of funds Annual fees Loss to bank given default Expected default frequency Correlation 1 .6 6% 3% 20% 3% -0.2 2 .4 5% 2% 30% 5% Question 1: what is the return and standard deviation on loan 1? Question 2: what is the return and standard deviation on loan 2?
1. Rank the following types of bank liabilities, first according to their level of liquidity risk, and then according to their interest rate risk. Then rank them according to their current cost to the bank. Explain why the rankings vary. DDAs Interest-checking accounts MMDAs Small-time deposits Jumbo CDs Federal funds purchased Eurodollar liabilities Federal Home Loan Bank advances
If a bank has net-interest-margin (NIM) of 4% and return-on-assets (ROA) of 0% then: Chose 1 option: -The bank is very profitable since a high NIM also implies a high return-on-equity (ROE). -The bank appears to be utilising its assets efficiently, since a high NIM implies a high asset utilisation (total revenue/total assets) rate. -The bank is making good money since NIM is a key measure of bank profitability. -None of the answers. The bank has ROE equal to zero. Thanks!
First National Bank has assets that are more rate-sensitive than its liabilities. As interest rates rise, then we should expect the bank profits to: A. Rise B. Fall C. Remain unchanged
If a bank doubles the amount of its capital and ROAstays constant, what will happen to ROE?
Which of the following will have the same effect on money supply as raising the reserve requirement? a) The central bank decreases the interest rate. b) The central bank purchases bonds in the market. c) The central bank purchases securities and debentures in the market. d) Lower bond prices.