ECON2408 Practice Questions - Short answer.pdf - ECON 2408...

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1 ECON 2408 Money and Banking Practice Questions – Short Answer (1) The spread between the interest rates on Baa corporate bonds and Canada bonds was very large during the Great Depression years 1930-1933. Explain this difference using the bond supply and demand analysis. (2) If a higher inflation is expected, what would you expect to happen to the shape of the yield curve? Why? (3) Explain how the use of collateral in financial markets can lessen the effects of asymmetric information in the form of adverse selection. (4) Calgary Finance Bank has the following balance sheet: Assets Liabilities Reserves $10m Chequable Deposits $100m Industrial Loans $90m Bank Capital $10m Canada Bonds $10m The desired reserves ratio is 10%. Assuming that Calgary Finance Bank suffers a $10 million deposit outflow, describe how this withdrawal may affect the bank and its balance sheet. What problem will this create and how can it be resolved? (5) Fraser Valley Bank has balance sheet as below: Assets Liabilities Reserves $10m Chequable deposits $20m Securities $15m Term deposits $50m Loans $70m CDs $20m Physical capital $5m Equity capital $10m The manager estimates the average duration of assets to be 2.5 years, and average duration of liabilities to be 1.5 years. If interest rate rises from 2% to 3%, what will happen to this bank’s net worth? How should the manager alter the duration of liabilities to immunize the bank’s net worth from interest-rate risk? (6) a) NewBank started its first day of operations with $6 million in capital. A total of $100 million in chequable deposits is received. The bank makes a $25 million commercial loan and lends another $25 million in mortgage loans. If desired reserves are 8%, what does the bank balance sheet look like? b) NewBank decides to invest $45 million in 30-day T-bills. The T-bills are currently
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