Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
![The following tables show the balance sheets of two banks: Wide Bank and Narrow Bank.
Wide Bank Balance Sheet
Assets
Llabilities and Net Worth
Reserves
$100,000
Checking deposits
$300,000
Loans outstanding $250,000 Stockholders' equity
$50,000
Total
$350,000
Total
$350,000
Narrow Bank Balance Sheet
Assets
Liabilities and Net Worth
Reserves
$0
Checking deposits
$0
Loans outstanding $500,000 Stockholders' equity $500,000
Total
$500,000
Total
$500,000
Wide Bank
is a levered bank, while Narrow Bank
is an unlevered bank.
Narrow Bank
h banks offer an annual rate of 4% on checking deposits and charge an annual rate of 8% on loans.
Wide Bank
Por wiue vank, the annual interest cost on deposits is s
profit of s
and the annual return on loans is s
Hence, Wide Bank earns a net
], which represents a rate of return of
% (Hint: Round to 1 decimal place.) on stockholders' equity.
For Narrow Bank, the annual interest cost on deposits is s
and the annual return on loans is s
. Hence, Narrow Bank earns a
net profit of s
which represents a rate of return of|
% (Hint: Round to 1 decimal place.) on stockholders' equity.
Suppose that the value of loans in both banks declines by 10%. The amount of loans outstanding for Wide Bank decreases from $250,000 to
1, which represents a loss of
% (Hint: Round to 1 decimal place.) of stockholders' equity. The amount of loans outstanding for
% (Hint: Round to 1 decimal place.) of stockholders' equity.
Narrow Bank decreases from $500,000 to $
which represents a loss of
Therefore,
provides a higher rate of return to its investors, and
exposes its investors to greater risk in the event
of a decline in the value of loans.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F745006f4-27be-4792-942f-fc52c4b89489%2Fea35afac-8b8f-4a3e-95f6-d48d5510e5ee%2Fiknk9tr_processed.png&w=3840&q=75)
Transcribed Image Text:The following tables show the balance sheets of two banks: Wide Bank and Narrow Bank.
Wide Bank Balance Sheet
Assets
Llabilities and Net Worth
Reserves
$100,000
Checking deposits
$300,000
Loans outstanding $250,000 Stockholders' equity
$50,000
Total
$350,000
Total
$350,000
Narrow Bank Balance Sheet
Assets
Liabilities and Net Worth
Reserves
$0
Checking deposits
$0
Loans outstanding $500,000 Stockholders' equity $500,000
Total
$500,000
Total
$500,000
Wide Bank
is a levered bank, while Narrow Bank
is an unlevered bank.
Narrow Bank
h banks offer an annual rate of 4% on checking deposits and charge an annual rate of 8% on loans.
Wide Bank
Por wiue vank, the annual interest cost on deposits is s
profit of s
and the annual return on loans is s
Hence, Wide Bank earns a net
], which represents a rate of return of
% (Hint: Round to 1 decimal place.) on stockholders' equity.
For Narrow Bank, the annual interest cost on deposits is s
and the annual return on loans is s
. Hence, Narrow Bank earns a
net profit of s
which represents a rate of return of|
% (Hint: Round to 1 decimal place.) on stockholders' equity.
Suppose that the value of loans in both banks declines by 10%. The amount of loans outstanding for Wide Bank decreases from $250,000 to
1, which represents a loss of
% (Hint: Round to 1 decimal place.) of stockholders' equity. The amount of loans outstanding for
% (Hint: Round to 1 decimal place.) of stockholders' equity.
Narrow Bank decreases from $500,000 to $
which represents a loss of
Therefore,
provides a higher rate of return to its investors, and
exposes its investors to greater risk in the event
of a decline in the value of loans.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 5 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education