f.The average interest earned on the loans is 7 percent and the average cost of deposits is 6percent. Rising interest rates are expected to reduce the deposits by $1.5 million. Borrowing(Incurring) more debt will cost the bank 8 percent in the short term.Liabilities and Equity$8 million$2 million$2 million$12 millionAssets$2 million | Deposits$10 million Long-term DebtEquity$12 million TotalCash Required ReservesLoansTotalWhat will be the cost of using a strategy of purchased liquidity management to meet theexpected decline in deposits? Assume that the bank intends to keep $2 million in cash asliquidity precaution.

The strategy of liquidity management is a strategy to make arrangements for and to ensure the…

The average interest earned on the loans is 7 percent and the average cost of deposits is 6 percent. Rising interest rates are expected to reduce the deposits by $ 1.5 million. Borrowing (Incurring) more debt will cost the bank 8 percent in the short term. Liabilities and Equity $8 million Assets $2 million | Deposits $10 million Long-term Debt Equity $12 million Total Cash Required Reserves Loans $2 million $2 million Total $12 million What will be the cost of using a strategy of purchased liquidity management to meet the expected decline in deposits? Assume that the bank intends to keep $2 million in cash as liquidity precaution.

The average interest earned on the loans is 7 percent and the average cost of deposits is 6 percent. Rising interest rates are expected to reduce the deposits by $ 1.5 million. Borrowing (Incurring) more debt will cost the bank 8 percent in the short term. Liabilities and Equity $8 million Assets $2 million | Deposits $10 million Long-term Debt Equity $12 million Total Cash Required Reserves Loans $2 million $2 million Total $12 million What will be the cost of using a strategy of purchased liquidity management to meet the expected decline in deposits? Assume that the bank intends to keep $2 million in cash as liquidity precaution.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 14P

See similar textbooks

Similar questions

Assume that ABC bank has $10 in deposits, with a required reserve ratio of 10% it is holding $3M in required reserve. There is a substantial withdrawal of $3M. Consider cost and customer service you are required to adjust the balance sheet after the withdrawal. The bank has no desire to borrow. List the new values for assets and liabilities after the withdrawal Assets Required Liabilities Deposits 3,000,000 10,000,000 reserve Loans Securities Total 20,000,000 12,000,000 35,000,000 Capital 25, 000,000 35,000,000
A bank has an interest rate spread of 150 basis points on $30 million in earning assets funded by interest-bearing liabilities. However, the interest rate on its assets is fixed and the interest rate on its liabilities is variable. If all interest rates go up 50 basis points, the bank's new pretax net interest income will be __________. a. $600,000 b. $450,000 c. $300,000 d. $250,000 e. $175,000 Clear my choice
Suppose the Royal Bank of Pullman has the following assets: cash = 100 (with modified duration of 0) and a 10-year loan worth $900 (with modified duration of 9). Its liabilities are a CD worth $800 (with a modified duration of 2). If interest rates rise by 1% the bank's equity will fall by ________ %. A. 9 B. 5.6 C. 2 D. 6.5
A bank has $400 million in demand deposits and desires a 20 percent reserve ratio. How much will it hold as reserves? O a. $200 million O b. $120 million O c. $80 million O d. $500 million
A company plans to take $1000000 bank credit for 11 years while i=40%. After some negotiations, manager of the company convince the bank for i=38%. The decrease in interest rate result in a decrease in total debt. What is the approximate percantage of debt decrease? a. 10% O b. 20% O c. 15% O d. 8%
Suppose a bank makes a two-year $20,000 loan with the entire principal amount due in two years at an annual rate of 4.25%. The bank funds this with a six-month $20,000 CD at a cost of 1.75%. What is the bank's six month static GAP? O $20,000 O $10.000 O $0 O $10,000 O $20,000
2. A loan earns an interest of 12% compounded- quarterly and should be paid within 6 yrs. How much is the loan if the mode of payment is made this way: CFD *focal point at 4, and draw a cash flow diagram LIFT 2 3 4 $ 15,000 $ 30,000 P 0 1 $ 20,000 5 i=12% compounded quarterly F = P(1 + i)n P=F(1+i)" 6 $40,000 REMEMBER THIS!
We have the following information about a bank's balance sheet. Rate sensitive assets = $10,000,000 Fixed-rate assets = $20,000,000 Rate sensitive liabilities = $4,000,000 Fixed-rate liabilities = $26,000,000 Let's do a simple gap analysis. If the interest rate falls by 5 percent, O a. The bank will lose $300,000. O b. The bank will lose $500,000. O c. The bank will lose $200,000. O d. The bank will gain $300,000. O e. The bank will gain $200,000.
Consider a bank with the following balance sheet: Assets Required reserves Excess reserves Loans $10 $24 $70 Required reserves Excess reserves Loans Was the capital injection enough to stabilize the bank? The bank now has a capital ratio of %, and the bank is million million million Assume that required reserves are 8%. In order to avoid insolvency, regulators decide to provide the bank with $29 million in bank capital. Assume that bad news about mortgages is featured in the local newspaper, causing a bank run. As a result, $25 million in deposits is withdrawn. Show the effects of the capital injection and bank run on the balance sheet. (Round your responses to the nearest whole number.) Assets $ $ $ Liabilities Checkable deposits Bank capital million million million $120 million - $16 million Liabilities Checkable deposits Bank capital $ $ million million V. (Round your response to one decimal place.)
2. Assuming that you obtain a bank loan for 500,000 with an annual interest payment of 10% of the principal. Compute for the present value under the following independent scenarios: a. Effective rate is 10% b. Effective rate is 8% c. Effective rate is 12%
A bank makes a loan of $1,000,000 at a rate of 6% p.a. It also requires a compensating balance of 5%. What is the effective cost to the borrower? 6.05% 6.25% 6.32% 6.45% You invest $10,000 in a 270-day CD at a rate of 6%, compounded daily. What is the amount you receive at maturity? $10,460.24 $10,600.22 $11,200.35 $11,345.48
Suppose a bank has $1,000 in deposits and $100 in reserves. If the desired reserve ratio is 5 percent, how much can this bank increase its loans? O a. $50 O b. $80 O c. $0 O d. $400 O e. $100