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# What if the interest rate immediately increases to 9

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What if the interest rate immediately increases to 9 percent? b) After receiving the second coupon payment (at the end of the second year), Simon decides to sell his bond in the bond market. What price can he expect for his bond if the 1-year interest rate at that time is 3 percent? 8 percent? 10 percent? 3. The Bank of Canada purchases \$2 million worth of government securities from an investment dealer with a cheque drawn on the Bank of Canada. The dealer deposits this cheque at the IB&T Bank. The target reserve ratio of all commercial banks is 25 percent. Assume all commercial banks are operating with no excess reserves and there is no cash drain. a) The IB&T Bank is immediately in a position to expand its loans by: a) \$500,000; b) \$1.25 million; c) \$1.5 million; d) \$2 million; e) \$8 million.

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b) If the IB&T Bank increases its loans to the maximum extent possible with its new excess reserves, the second generation banks will be able to expand their loans by: a) \$3.75 million; b) \$1.125 million; c) \$1.5 million; d) \$.94 million; e) \$1 million. c) The maximum creation of new deposits by the banking system, including the dealer’s original deposit in the IB&T Bank, is: a) \$ 2 million; b) \$

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