Consider the simple Financial Intermediary (FI) balance sheet as shown below (in millions of dollars). Before the withdrawal Cash Assets Corporate Loans Total Amount $30 $170 $200 Liabilities/Equity Amount Deposits Equity Total $170 $30 $200 Suppose that depositors unexpectedly withdraw $70 million in deposits and the FI receives no new deposits to replace them. Assume that the FI cannot borrow any more funds in the short-term money markets, and because it cannot wait to get better prices for its assets in the future (as it needs the cash now to meet immediate depositor withdrawals), the FI has to sell any nonliquid assets (corporate loans) at 75 cents on the dollar. What will be the equity (in millions of dollars) of the FI after adjustments are made for the $70 million of deposit withdrawals? Assume no minimum cash reserve requirements.
Consider the simple Financial Intermediary (FI) balance sheet as shown below (in millions of dollars). Before the withdrawal Cash Assets Corporate Loans Total Amount $30 $170 $200 Liabilities/Equity Amount Deposits Equity Total $170 $30 $200 Suppose that depositors unexpectedly withdraw $70 million in deposits and the FI receives no new deposits to replace them. Assume that the FI cannot borrow any more funds in the short-term money markets, and because it cannot wait to get better prices for its assets in the future (as it needs the cash now to meet immediate depositor withdrawals), the FI has to sell any nonliquid assets (corporate loans) at 75 cents on the dollar. What will be the equity (in millions of dollars) of the FI after adjustments are made for the $70 million of deposit withdrawals? Assume no minimum cash reserve requirements.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Consider the simple Financial Intermediary (FI) balance sheet as shown below (in millions of dollars).
Before the withdrawal
Cash Assets
Corporate Loans
Total
Amount
$30
$170
$200
Liabilities/Equity Amount
Deposits
Equity
Total
$170
$30
$200
Suppose that depositors unexpectedly withdraw $70 million in deposits and the FI receives no new deposits to replace them. Assume that the FI cannot borrow any
more funds in the short-term money markets, and because it cannot wait to get better prices for its assets in the future (as it needs the cash now to meet immediate
depositor withdrawals), the FI has to sell any nonliquid assets (corporate loans) at 75 cents on the dollar. What will be the equity (in millions of dollars) of the FI after
adjustments are made for the $70 million of deposit withdrawals? Assume no minimum cash reserve requirements.
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