In the tables that follow you will find consolidated balance sheets for the commercial banking system and the 12 Federal ReserveBanks. Use columns 1 through 3 to indicate how the balance sheets would read after each of transactions a to cis completed. Do notcumulate your answers; that is, analyze each transaction separately, starting in each case from the numbers provided. All accounts arein billions of dollars.Instructions: Enter your answers as a whole number.Consolidated Balance Sheet: All Commercial Banks12Assets:Reserves$ 34Securities58Loans62Liabilities and net worth:Checkable deposits$ 150Loans from the Federal Reserve BanksConsolidated Balance Sheet: 12 Federal Reserve Banks12Assets:Securities$ 60Loans to commercial banks4Liabilities and net worth:Reserves of commercial banks$ 34Treasury deposits3Federal Reserve Notes27 a. A decline in the discount rate prompts commercial banks to borrow an additional $3 billion from the Federal Reserve Banks. Showthe new balance sheet numbers in column 1 of each table.b. The Federal Reserve Banks sell $5 billion in securities to members of the public, who pay for the bonds with checks. Show the newbalance sheet numbers in column 2 of each table.c. The Federal Reserve Banks buy $4 billion of securities from commercial banks. Show the new balance sheet numbers in column 3of each table.d. Now review each of the above three transactions, asking yourself these three questions: (1) What change, if any, took place in themoney supply as a direct and immediate result of each transaction? (2) What increase or decrease in the commercial banks' reservestook place in each transaction? (3) Assuming a reserve ratio of 20 percent, what change in the money-creating potential of thecommercial banking system occurred as a result of each transaction?Transaction a.(1) The money supply (Click to select) v(2) Reserves (Click to select) v from $34 billion to $billion.(3) The money-creating potential (Click to select) v by $billion.Transaction b:(1) The money supply (Click to select) v by $| billion.(2) Reserves (Click to select) v from $34 billion to $billion.(3) The money-creating potential (Click to select) ♥ by $billion.Transaction c.(1) The money supply (Click to select) v(2) Reserves (Click to select) v from $34 billion to $billion.(3) The money-creating potential (Click to select) - by $billion.

1 2 3 Assets: Reserves 34 37 29 38 Securities 58 58 58 54 Loans 62 62 62 62…

Answered: a. A decline in the discount rate…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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A bank with a required reserve ratio of 10%, has just sold a Treasure bond for $100. What is the maximum amount this bank can lend of that money?
3. Open market operations versus discount loans Consider an expansionary open market operation. Suppose the Federal Reserve buys government securities from the nonbank public. Suppose that the sellers of government securities cash the checks and hold on to the cash. Then, ceteris paribus, bank reserves do not change ▼ currency in circulation increases , and thus the monetary base will increase Suppose now that the Federal Reserve wants to increase the monetary base by increasing bank reserves only. Which of the following actions enables the Fed to achieve its goal? ○ Lend to commercial banks through the term auction facility Lend to the non-banking public at the discount window Require the non-banking public to repay discount loans Buy the government securities exclusively from the non-banking public By lending to commercial banks through the discount window, the Federal Reserve alters the monetary base and thus affects
41) Sweep accounts A) have made reserve requirements nonbinding for many banks. B) sweep funds out of deposit accounts into long-term securities. C) enable banks to avoid paying interest to corporate customers. D) reduce banks' assets. 42) Since 1974, commercial banks importance as a source of funds for nonfinancial borrowers A) has shrunk dramatically, from around 40 percent of total credit advanced to around 25 percent by 2011. B) has shrunk dramatically, from around 70 percent of total credit advanced to below 50 percent by 2011. C) has expanded dramatically, from around 50 percent of total credit advanced to above 70 percent by 2011. D) has expanded dramatically, from around 30 percent of total credit advanced to above 50 percent by 2011. 43) Thrift institutions importance as a source of funds for borrowers A) has shrunk from around 40 percent of total credit advanced in the late 1970s to below 30 percent by 2011. B) has shrunk from over 20…
The discount rate is O the interest rate commercial banks charge each other for overnight loans. the interest rate the Federal Reserve charges member banks for loans from the Fe the interest rate consumers with good credit pay for bank loans. O the interest rate the Federal Reserve charges consumers for short term loans.
9
Do you agree or disagree with the statement? Explain your answer. When the Treasury of the United States issues bonds and sells them to the public to finance the deficit, the money supply remains unchanged because every dollar of money taken in by the Treasury goes right back into circulation through government spending. This is not true when the Fed sells bonds to the public.
A Canadian bank that issues AUD 250M 5-year bonds to fund AUD 200M loans with 6-year maturity is exposed to the following risks : A depreciation of the Australian dollar against the Canadian plus credit plus liquidity risk plus reinvestment risk, i.e. decreasing interest rates. A depreciation of the Australian dollar against the Canadian dollar, plus credit risk plus liquidity risk plus refinancing risk, i.e. increasing interest rates. An appreciation of the Australian dollar against the Canadian dollar, plus credit risk plus refinancing risk, i.e. increasing interest rates. An appreciation of the Australian dollar against the Canadian dollar, plus credit risk plus reinvestment risk, i.e. decreasing interest rates.
A6) Please show answer with formula calculations. Thank you.
A central bank has a policy of intervening in the market for its government’s debt to ensure 10-year, zero-coupon bond yields stay within the range of 2% to 4%. Assume the zero-coupon bonds have a par value of 100 units. Explain clearly what enforcing this policy requires the central bank to do. (including bond prices relevant for implementing this policy, and comments on the credibility of the policy at the 2% bound and at the 4% bound.)
The rise of securities markets and the expansion of intermediation by nonbanks has come partly at the expense of commercial banks. Plot the ratio of bank credit (FRED code: TOTLL) to debt securities owed (FRED code: ASTDSL). What is the overall trend? Has the trend changed since the 1990s and, if so, how?
A bank is considering a debt-for-equity swap to slavage a $5 million loan that is in default. They expect to recover $2.7 million after liquidation ane legal fees. A turnaround expert has recommended the following cassh flow analysis if the bank chooses the debt-for-equirt swap. Initial Investment $5,000,000 in year 0 Expected cash flows after turnaround $1,750,000 in years 2-6 Sale of Equity (Exit) $3,500,000 in year 6 Equity ownership 70% Cost of capital 12% Should they engage in the debt-for-equity swap? A Yes, they should engage in the debt-for-equity swap B No, they should not because the NPV after the turnaround is greater than the liquidation value C Yes, they should engage in the debt-for-equity swap only if the cost of capital is 10% D No, they should not engage in the…

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