ch17 - : current and future economic conditions Effective...

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FIN 3303 Chapter 17 Bank Sources and Uses of Funds Main assets, liabilities, and equity accounts. Liabilities : deposits (demand deposit accounts, savings accounts, time deposits, money market accounts), borrowed funds (fed funds purchased, federal reserve bank borrowing, capital notes and bonds) Equity : common stock, preferred stock, retained earnings (capital is critical in the banking industry, for absorbing losses and protecting depositors). Assets : cash, US treasury securities, munis, fed funds sold, loans, buildings and equipment Does a bank’s balance sheet look like that of a typical firm? It is identical in the set up (Assets=Liabilities + Capital), but a bank’s assets and liabilities are somewhat different from a typical firm. 5 C’s of evaluating a loan Character : willingness to pay Capacity : ability to pay, D/I, cash flow Capital : wealth Collateral : pledged assets Conditions
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Unformatted text preview: : current and future economic conditions Effective Rate of Interest ERI is the actual cost of borrowing. = $ amount of interest/loan proceeds Discount versus simple interest Simple : pay all interest at the end of the loan Discount : pay all interest up front. If simple interest is used and no strings attached then the ERI and stated rate are the same. For discount ERI, subtract interest from face value in the denominator to get the load proceeds. Higher interest rate because interest is paid up front. What is a compensating balance requirement? A form of collateral; keep a percentage of loan in reserve on deposit with bank at all times. It minimizes risk for the bank. Have to subtract CBR from denominator. How to compute the amount you should borrow if you want loan proceeds to equal a particular amount. x-x(CBR%) = desired loan amount...
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