problem_set_3(answers)

problem_set_3(answers) - Problem Set 3 Chapter 12...

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Problem Set 3 Chapter 12 1. A bank's reserves include: a. U. S. Treasury bills b. Currency in the bank but not currency in the ATM machines C . The bank's deposits at the Federal Reserve d. U. S. Treasury bills and currency in the bank 2. Commercial banks differ from credit unions in the following way: A . Credit unions focus on consumer loans while commercial banks primarily make loans to businesses b. Credit unions make loans and accept deposits while commercial banks just make loans c. Commercial banks cannot make auto loans to individuals, just to businesses while credit unions can do both d. Credit unions do not have to hold reserves while commercial banks do 3. Which of the following is a bank asset? a. Demand deposits b. Borrowings from other banks C . Mortgage loans d. CDs 4. Of the more than 7400 banks in the United States at the end of 2006, by far the greatest numbers of them were: a. Regional banks b. Money center banks C . Community banks d. Savings banks 1
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5. If a bank increases its assets by adding $1 to capital for every $1 added to assets: a. Leverage increases B . Leverage decreases c. Leverage stays constant d. The answer cannot be determined from the information in the question 6. A bank's net interest margin is calculated by taking net interest income and: a. Dividing it by the bank's capital B . Dividing it by the bank's assets c. Dividing it by the sum of the bank's assets and capital d. Subtracting taxes 7. If a bank has deposits of $250 million, reserves that total $30 million and has a required reserve rate of 10 percent: a. The bank is short of required reserves b. The bank has excess reserves of $27.5 million C . The bank has excess reserves of $5 million d. The bank has excess reserves of $3 million 8. Explain why a bank with a high debt-to-equity ratio may be more profitable than a bank with a lower ratio but would also have a higher level of risk A bank with a high debt-to-equity ratio is financing the acquisition of assets with borrowed funds. The return (profit) earned on these assets belong to the owners (the providers of the bank's capital or equity). With a high debt-to-equity ratio, the owners of the bank stand to earn a higher return on equity than the owners of a bank with a lower debt-to-equity ratio, assuming the same return on assets. The problem or the risk comes from the fact that with the high leverage anything that reduces the value of assets can potentially wipe out the capital of the bank, leaving the bank insolvent since the capital cushion is inadequate to meet the drop in asset value. 2
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9. We saw in Chapter 12 that initially savings and loans were created to make home mortgages, and their main source of funds was deposits from savers. In the late 1970's and into the 1980's, the U. S. experienced rising interest rates that had depositors looking for higher returns. Congress quickly removed the interest rate ceilings that savings and loans could offer. Explain the initial impact this had on the interest rate spread and the net interest
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problem_set_3(answers) - Problem Set 3 Chapter 12...

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