BANKING IN A GLOBAL WORLD: HOW DO LARGE BANKS MAKE MONEY? Bank of America borrowed $80,000,000 at 5% interest for 180 days from a Japanese investment house. At the same time, the bank made the following three loans, each for the exact same 180-day period: 1. A 7% simple interest note for $38,000,000 to a Canadian firm that extracts oil from Canadian tar sands; 2. An 8.2% simple discount note for $27,500,000 to a European contractor building a factory in South Africa; and 3. An 8% simple discount note for $14,500,000 to a Louisiana company building minesweep- ers in New Orleans for the British government. (a) Find the difference between interest received and interest paid by the bank on these funds. (b) The bank did not loan out all $80,000,000. Find the amount it actually loaned out. (c) Find the effective rate of interest to the nearest hundredth of a percent. This seems like a low rate. However, Bank of America did this using funds borrowed from the Japanese investment house. So it did not even use its own money to make a little over one million dollars.

BANKING IN A GLOBAL WORLD: HOW DO LARGE BANKS MAKE MONEY? Bank of America borrowed $80,000,000 at 5% interest for 180 days from a Japanese investment house. At the same time, the bank made the following three loans, each for the exact same 180-day period: 1. A 7% simple interest note for $38,000,000 to a Canadian firm that extracts oil from Canadian tar sands; 2. An 8.2% simple discount note for $27,500,000 to a European contractor building a factory in South Africa; and 3. An 8% simple discount note for $14,500,000 to a Louisiana company building minesweep- ers in New Orleans for the British government. (a) Find the difference between interest received and interest paid by the bank on these funds. (b) The bank did not loan out all $80,000,000. Find the amount it actually loaned out. (c) Find the effective rate of interest to the nearest hundredth of a percent. This seems like a low rate. However, Bank of America did this using funds borrowed from the Japanese investment house. So it did not even use its own money to make a little over one million dollars.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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