Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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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.
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