The Seedy Bank
Assets Liabilities + Owner's Equity
Reserves $1 Checking Deposits $5
Short-term
Securities $10 Variable Rate CDs $15
Long-term Long-term CDs $5
Securities $19 Bank Capital $5
a) Suppose the reserve-requirement is 25% and this bank decides to comply by a marketing campaign. If the campaign increases checking deposits, how much additional funds do they need to raise to satisfy the requirement? If the campaign increases variable rate CDs, how much additional funds do they need to raise to satisfy the requirement? Label clearly.
b) Based on the given above balance sheet, if interest rates fell from 5% to 3%, what would happen to the profit of this bank? [Show a calculation.]
c) If this bank wanted to completely insulate its profit from interest rate changes by a marketing campaign to raise funds, what category of liabilities, if any, should they target? Briefly explain