1) The more bank capital the bank holds on its balance sheet, the better off are its equity holders. Is this true, false or uncertain? Explain.
2) Suppose that the First National Bank has the following balance sheet position and that the required reserve ratio is 15 percent.
Assets Liabilities Reserves $40 million
Deposits $200 million
Loans $160 million
Bank Capital $20 million
Securities $20 million
First National bank has a net profit after tax of $1,700,000.
Calculate First National Bank’s Return on Assets (ROA)
Calculate First National Bank’s Equity Multiplier (EM)
Using the info in a and b, calculate First National Bank’s Return on Equity (ROE).
3) Go to www.federalreserve.gov and find the latest FOMC press release. Review the release. What did the committee decide to do about short term rates? What impact does this change is expected to have on a) borrowers, b) lenders, c) the size of the economy? Explain.
4) "Bank managers should always seek the highest return possible on bank's assets." Is this statement true, false or uncertain? Explain your answer.
5) You are a banker. You expect interest rates to increase in the future. Do you want to make short-term or long term loans to your clients? Explain.
6) Suppose that the First National Bank has the following balance sheet position and that the required reserve ratio is 15 percent.
Assets Liabilities Reserves $40 million
Deposits $200 million
Loans $160 million
Bank Capital $20 million
Securities $20 million
What are the bank's a) required reserves and b) excess reserves?
If the bank was hit with a deposit outflow of $20 million, would it have to make an adjustment to the balance sheet? Why or why not?
If the bank has to make an adjustment to its balance sheet, what are its options? Explain.