ECN 135 University Of California Homework 2 Questions Homework Rubric Homework Rubric level credit Homework CreditThese are the possible scores on the | Homework Answers

ECN 135 University Of California Homework 2 Questions Homework Rubric

Homework Rubric

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level credit

Homework CreditThese are the possible scores on the homework assignment

5.0

Full Credit

Homework is complete and without error or with one or two minor mistakes.

4.0

Standard Credit

Homework is complete but with some errors such as a three or more minor errors or a couple major errors.

3.0

Some Credit

Homework is incomplete such as parts of questions not attempted or is complete but contains numerous major errors.

0.0

No Credit

Homework is not turned in or is turned in late

5.0 ?

? 5.0 ? 5.0

?????? ECN 135 Winter 2019
Instructor: Derek Stimel
Homework #2
Due Friday Feb. 15 by 5 PM in Canvas
Assignment must be uploaded to Canvas as a pdf file or MS Word.
It is ok to scan a hand-written document, but scan to pdf only (no jpeg or camera photo, etc.)
Also, scan must be a single file (no multiple documents or files).
1)
For each of the following, state whether it is True or False. No need to provide an explanation.
a)
b)
US businesses rely more on bank loans than Canadian businesses
In aggregate, businesses in the four industrialized countries we examined rely more on indirect
than direct finance.
US businesses rely more on nonbank loans than bank loans as a source of funds.
In aggregate, businesses in the four industrialized countries we examined rely more on bank loans
than any other category of financing.
US businesses rely more on the stock market than the bond market as a source of funds.
c)
d)
e)
2)
For each of the following transactions, explain which categories on a bank’s balance sheet would
instantly change and how they would change (i.e. up/down, etc.)
a)
b)
c)
d)
e)
A bank customer withdraws $50 from their checking account.
The Federal Reserve conducts a $100 open market purchase of short-term securities with a bank.
A bank decides to retain $80 of profit it just earned rather than paying it out to shareholders.
The Federal Reserve lends $20 to a bank.
A bank customer deposits $10 into a certificate of deposit at a bank.
The following table provides balance sheet information for a bank. You will use this information for
Question 3) and 4).
Oddly Even Bank
Category
Bank Capital
Checkable Deposits
Long-term CDs
Long-term Loans
Long-term Securities
Money Market Deposit Accounts
Reserves
Saving Deposits
Short-term Loans
Short-term Securities
Variable Rate CDs
Variable Rate Loans
Page 1 of 2
$
Value
$3
$15
$33
$19
$7
$23
$3
$17
$31
$21
$9
$19
Duration
–0.1
3.3
11.0
13.0
0.3
0.0
0.7
1.3
0.5
0.9
7.0
3)
a)
b)
c)
d)
e)
4)
a)
b)
c)
d)
e)
5)
a)
c)
d)
Using the information provided, construct a balance sheet for Oddly Even Bank. That is, properly
list the assets, liabilities, and bank capital of Oddly Even Bank in a T-Account format.
What is the reserve ratio for Oddly Even Bank? If the reserve requirement is 25%, does this bank
satisfy that requirement? Briefly explain
Based on your answer to b) suppose this bank decided to buy or sell short-term securities to
match the 25% requirement? Briefly explain how much short-term securities they would need to
buy or sell to do that.
Using the original balance sheet information, if the reserve requirement was 25% and this bank
decided to meet that requirement by increasing their saving deposits (i.e. they conduct a
marketing campaign to get more people to sign up and deposit into saving accounts), how much
saving deposit inflow do they need? Show a calculation.
Using the original balance sheet information, if the reserve requirement was 5%, how much
deposit outflow from checking accounts could this bank sustain and still comply with that
regulation? Show a calculation.
Suppose interest rates in the economy fall from 5% to 3%, what will happen to Oddly Even
Bank’s profit? Show a calculation.
Calculate the average duration of assets and liabilities for Oddly Even Bank.
Suppose interest rates fall in the economy from 5% to 3%, what will happen to Oddly Even
Bank’s capital relative to assets? Show a calculation.
Using the original balance sheet information, what is the leverage ratio for Oddly Even Bank?
Briefly explain whether they comply with regulations for the leverage ratio or not.
Using the original balance sheet information, if Oddly Even Bank had an ROA of 1%, what is the
banks’s ROE?
For each statement, state whether you believe the statement is true or false. Provide a brief
explanation of your reasoning.
Depositors face an adverse selection problem when choosing where to bank.
The principal-agent problem means shareholders face an adverse selection problem in the stock
market
Financial Services Modernization Act allowed a bank to sell insurance if it wanted to do so.
6)
For each of the following you only need to provide a one or two-word response (choose
one of the underlined phrases for each statement).
a)
Because certificates of deposit are less liquid than checking deposits, certificates of deposit are
paid more or less interest?
b)
Higher bank capital decreases the likelihood of bankruptcy and higher bank capital increases or
decreases the return on equity for a given return on assets?
c)
When financial system regulators conduct an examination of bank operations, this is an example
of microprudential or macroprudential regulation?
d)
When we talk about a bank needing to improve its liquidity management, we usually mean the
bank the needs to focus on its excess or required reserves level?
Page 2 of 2

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