Microsoft Word - Week 2__W

1. 1: Time Value of Money: Introduction A dollar in hand today is worth -Select- ✓a dollar to be received in the future because if you had it now you could invest that dollar and Select- interest. Of all the techniques used in finance, none is more important than the concept of time value of money (TVM), also called -Select- analysis. Time value analysis has many applications including retirement planning, stock and bond valuation, loan amortization and capital budgeting analysis. Time value of money uses the concept of compound interest rather than simple interest.

Use the following table to answer the question about the money supply given the following hypothetical data for an economy. Item Billions of Dollars $2,000 350 80 Checkable Deposits Small Time Deposits Currency Held By The Public Savings Deposits, Including Money-Market Deposit Accounts Money-Market Mutual Funds Held By Individuals Money-Market Mutual Funds Held By Businesses 1,300 600 700 Refer to the table above. The size of the M1 money supply is: Select one: O a. $1,940 O b. S2,730 O c. None of the above O d. S2,220 O e. $2,080 Activate Windows Go to Settings to activate

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12 Paragraph Styles 3. Suppose you dopiest SR 5000 in currency into your checking account at a branch of Al-Rajhi Bank, which we will assume that the required reserve ration is %10. a. Use a T-account to show the initial effect of this transaction on Al-Rajhi's balance sheet. b. Suppose that Al-Rajhi Bank makes the maximum loan it can from the fund you deposited. Use a T-account to show the the initial effect of this transaction on Al- Rajhi's balance sheet. Also include in this T-account the transaction from part (a). c. Now suppose that whoever took out the loan in part (b) writes a check for this amount and that person receiving the check deposit in Alinma Bank. Use a T-account to show the the initial effect of this transaction on Alinma's balance sheet. ribility Investigate Focus

The Money Multiplier Process Loan Loan Loan Initial etc. deposit ($100) University Bank Deposit Bank #2 Deposit Bank #3 Bank Deposit #4 Excess reserves: $25 Required reserves: $75 Excess reserves: $6.25 Required reserves: $18.75 Excess reserves: $1.56 Required reserves: $4.69 Excess reserves: $0.39 Required reserves: $1.17 a. What volume of loans can the banking system in the figure support? b. If the reserve requirement were 80 percent rather than 75 percent, what would the system's lending capacity be?

Question 5.A bank has borrowing needs at timeT >0. Show that by combining an FRAtrade today with a libor loan at timeT, the bank can today lock in its interest cost forthe periodTtoT+α. Does the borrowing bank need to buy or sell the FRA to do this?What is the fixed rate that the bank locks in?

Please answer “d” and “e” below.

Which of the following would increase a bank’s Net Interest Margin, assuming all else stays the same?  Choose Two     an increase in the interest rate on its loans     companies paying off some of their loans and the bank using the funds to purchase Treasury bonds     customers switching a portion of their time deposits to demand deposits     the bank issues additional equity and keeps the funds in cash     an increase in the federal funds rate assuming the bank borrows more in the federal funds market than it lends

Suppose a bank has the following Balance Sheet Assets Liabilities RSA = 120 RSL = 90 FRL = X FRA = 110 (Fixed rate liabilities can be found if needed by determining what number it must be to balance the balance sheet.) Suppose all the Assets and Liabilities were set last year when the interest rate was 10, if the interest rate has changed by 2% since that time what is the current cost from all of the bank's liabilities? Your Answer:

If you chose to use only long-term financing, what total amount of borrowing would you need to have on a permanent basis? Forecast your excess cash levels under this scenario (see MyFinanceLab for the data in Excel format).

[Related to Solved Problem 11.13 Suppose that you intend to buy a house for $210,000. Calculate your bank leverage ratio for this investment in each of the following situations: You pay the entire $210,000 price in cash Bank leverage ratio is equal to

A)What is the amount of RSA, RSL and the income gap amount? B) Calculate the duration gap. C)What is the change in this bank’s net income if the interest rises by 1%, does it go up or does it go down? Show work D) What happens when the interest rises by 1% to this bank’s asset value, liability value and the net worth in dollar amounts? Show work.