Kangaroo Bank has the following assets in its portfolio: $10,000 cash and $20,000 illiquid assets. The liability consists of deposits of $4,000 each in 10 demand deposit accounts. A rumour about the solvency of the bank has caused all 10 depositors to line up outside the bank to demand withdrawals. Assume that the illiquid assets of the bank can only be liquidated at a 75% discount (i.e. at 25% of the current value) and there is no deposit insurance and minimum reserve requirement. Further, assume that borrowing is impossible for the bank. Thinking about what will happen, which of the following statements is correct? Select one: a. None of the 10 depositors will get the deposit back. Ob. The equity holders in the bank will get their $10,000 capital back. C. The 10 depositors will each get $2,000 back. Od. The first 5 depositors in the line will each get $4,000 back and the last 5 depositors will get nothing back. e. The first 3 depositors will each get $4,000 back, the third one will get $3,000 back and the rest of the depositors get nothing back.
Kangaroo Bank has the following assets in its portfolio: $10,000 cash and $20,000 illiquid assets. The liability consists of deposits of $4,000 each in 10 demand deposit accounts. A rumour about the solvency of the bank has caused all 10 depositors to line up outside the bank to demand withdrawals. Assume that the illiquid assets of the bank can only be liquidated at a 75% discount (i.e. at 25% of the current value) and there is no deposit insurance and minimum reserve requirement. Further, assume that borrowing is impossible for the bank. Thinking about what will happen, which of the following statements is correct? Select one: a. None of the 10 depositors will get the deposit back. Ob. The equity holders in the bank will get their $10,000 capital back. C. The 10 depositors will each get $2,000 back. Od. The first 5 depositors in the line will each get $4,000 back and the last 5 depositors will get nothing back. e. The first 3 depositors will each get $4,000 back, the third one will get $3,000 back and the rest of the depositors get nothing back.
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:Kangaroo Bank has the following assets in its portfolio:
$10,000 cash and $20,000 illiquid assets.
The liability consists of deposits of $4,000 each in 10 demand deposit accounts.
A rumour about the solvency of the bank has caused all 10 depositors to line up
outside the bank to demand withdrawals. Assume that the illiquid assets of the
bank can only be liquidated at a 75% discount (i.e. at 25% of the current value) and
there is no deposit insurance and minimum reserve requirement. Further, assume
that borrowing is impossible for the bank.
Thinking about what will happen, which of the following statements is correct?
Select one:
a.
None of the 10 depositors will get the deposit back.
Ob. The equity holders in the bank will get their $10,000 capital back.
C.
The 10 depositors will each get $2,000 back.
Od. The first 5 depositors in the line will each get $4,000 back and the last 5
depositors will get nothing back.
e. The first 3 depositors will each get $4,000 back, the third one will get $3,000
back and the rest of the depositors get nothing back.
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