is a levered bank, while Is an unlevered bank. Assume that both banks offer an annual rate of 4% on checking deposits and charge an annual rate of 8% on loans. For East Bank, the annual interest cost on deposits is 5 and the annual return on loans is E (Hint: Round to 1 decimal place.) on stockholders' equity. Hence, East Bank earns a net profit of 5 which represents a rate of return of
is a levered bank, while Is an unlevered bank. Assume that both banks offer an annual rate of 4% on checking deposits and charge an annual rate of 8% on loans. For East Bank, the annual interest cost on deposits is 5 and the annual return on loans is E (Hint: Round to 1 decimal place.) on stockholders' equity. Hence, East Bank earns a net profit of 5 which represents a rate of return of
Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter17: Financial Markets
Section: Chapter Questions
Problem 19RQ: Why are banks called financial intermediaries?
Related questions
Question
A3
![Homework: The Financial Crisis and the Great Recession
West Bank Balance Sheet
Assets
Llabilities and Net Worth
Reserves
$0
Checking deposits
$0
Loans outstanding $200,000 Stockholders' equity $200,000
Total
$200,000
Total
$200,000
is a levered bank, while
Is an unlevered bank.
Assume that both banks offer an annual rate of 4% on checking deposits and charge an annual rate of B% on loans.
For East Bank, the annual interest cost on deposits is 5
, which represents a rate of return of
and the annual return on loans is
(Hint: Round to 1 decimal place.) on stockholders' equity.
Hence, East Bank earns a
net profit of
For West Bank, the annual interest cost on deposits is s
net profit of S
and the annual return on loans is 5
(Hint Round to 1 decimal place.) on stockholders' equity.
Hence, West Bank earns a
1. which represents a rate of return of
Suppose that the value of loans in both banks declines by 10%. The amount of loans outstanding for East Bank decreases from $450,000 to
which represents a loss of
(Hint: Round to 1 decimal place.) of stockholders' equity. The amount of loans outstanding
for West Bank decreases from $200,000 to s
,which represents a loss of
(Hint: Round to I decimal place.) of stockholders
equity
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%2F3513c3ec-1dce-49c2-8e7f-c2266150c41b%2Fa381e8bd-bda2-446b-93cb-fff56d830e94%2Fxxyrm5q_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Homework: The Financial Crisis and the Great Recession
West Bank Balance Sheet
Assets
Llabilities and Net Worth
Reserves
$0
Checking deposits
$0
Loans outstanding $200,000 Stockholders' equity $200,000
Total
$200,000
Total
$200,000
is a levered bank, while
Is an unlevered bank.
Assume that both banks offer an annual rate of 4% on checking deposits and charge an annual rate of B% on loans.
For East Bank, the annual interest cost on deposits is 5
, which represents a rate of return of
and the annual return on loans is
(Hint: Round to 1 decimal place.) on stockholders' equity.
Hence, East Bank earns a
net profit of
For West Bank, the annual interest cost on deposits is s
net profit of S
and the annual return on loans is 5
(Hint Round to 1 decimal place.) on stockholders' equity.
Hence, West Bank earns a
1. which represents a rate of return of
Suppose that the value of loans in both banks declines by 10%. The amount of loans outstanding for East Bank decreases from $450,000 to
which represents a loss of
(Hint: Round to 1 decimal place.) of stockholders' equity. The amount of loans outstanding
for West Bank decreases from $200,000 to s
,which represents a loss of
(Hint: Round to I decimal place.) of stockholders
equity
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.
![The following tables show the balance sheets of two banksi East Bank and West Bank.
East Bank Balance Sheet
Assets
Liabilities and Net Worth
Reserves
$150,000
Checking deposits
$500,000
Loans outstanding
$450,000
Stockholders' equity
$100,000
Total
$600,000
Total
$600,000
West Bank Balance Sheet
Assets
Llabilities and Net Worth
Reserves
$0
Checking deposits
Loans outstanding $200,000 Stockholders' equity
$200,000
Total
$200,000
Total
$200,000
is a levered bank, while
is an unlevered bank.
Assume that both banks offer an annual rate of 4% on checking deposits and charge an annual rate of 8% on loans
For East Bank, the annual interest cost on deposits is 5
net profit of S
and the annual return on loans isS
Hence, East Bank earns a
I, which represents a rate of return of
% (Hint: Round to 1 decimal place.) on stockholders' equity
For West Bank, the annual interest cost on deposits is S
and the annual return on loans is 5
Hence, West Bank earns a
net profit of s
which represents a rate of return ofr
(Hint: Round to 1 decimal place.) on stockholders' equity.
Suppose that the value of loans in both bank nes by 10%. The amount of loans outstanding for East Bank decreases from $450,000 to
which represents a loss of
Bound to 1 decimal place.) of stockholders' equity. The amount of gan ding
for West Bank decreases from $200,000 tos
which repres
te.) of stockholders](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F3513c3ec-1dce-49c2-8e7f-c2266150c41b%2Fa381e8bd-bda2-446b-93cb-fff56d830e94%2Ffx3nc9_processed.jpeg&w=3840&q=75)
Transcribed Image Text:The following tables show the balance sheets of two banksi East Bank and West Bank.
East Bank Balance Sheet
Assets
Liabilities and Net Worth
Reserves
$150,000
Checking deposits
$500,000
Loans outstanding
$450,000
Stockholders' equity
$100,000
Total
$600,000
Total
$600,000
West Bank Balance Sheet
Assets
Llabilities and Net Worth
Reserves
$0
Checking deposits
Loans outstanding $200,000 Stockholders' equity
$200,000
Total
$200,000
Total
$200,000
is a levered bank, while
is an unlevered bank.
Assume that both banks offer an annual rate of 4% on checking deposits and charge an annual rate of 8% on loans
For East Bank, the annual interest cost on deposits is 5
net profit of S
and the annual return on loans isS
Hence, East Bank earns a
I, which represents a rate of return of
% (Hint: Round to 1 decimal place.) on stockholders' equity
For West Bank, the annual interest cost on deposits is S
and the annual return on loans is 5
Hence, West Bank earns a
net profit of s
which represents a rate of return ofr
(Hint: Round to 1 decimal place.) on stockholders' equity.
Suppose that the value of loans in both bank nes by 10%. The amount of loans outstanding for East Bank decreases from $450,000 to
which represents a loss of
Bound to 1 decimal place.) of stockholders' equity. The amount of gan ding
for West Bank decreases from $200,000 tos
which repres
te.) of stockholders
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