8/12/2019 Econ161A Spring14 Assignment3 Key

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Econ 161A: Money and Banking Assignment #3Spring 2014: Jenkins

Solutions

1. (a) $12 million.

(b) The balance sheet for Tarheel National:

Assets Liabilities

Reserves $11 mil. $100 mil. DepositsLoans $100 mil. $8 mil. BorrowingsSecurities $9 mil. $12 mil. Capital

(c) $12 million.

(d) ROA = 2%. ROE= 20%.

2. (a) Excess reserves equal $6 million.

(b) The balance sheet after the deposit outflow:

Assets Liabilities

Reserves $1 mil. $90 mil. Deposits

Loans $100 mil. $8 mil. BorrowingsSecurities $9 mil. $12 mil. Capital

(c) $3.5 million.

(d) Borrow from another bank or corporation; sell securities; borrow from the Fed;reduce its loans.

(e) i. If Tarheel National borrows reserves from another bank:

Assets Liabilities

Reserves $4.5 mil. $90 mil. DepositsLoans $100 mil. $11.5 mil. Borrowings

Securities $9 mil. $12 mil. Capitalii. If Tarheel National sells securities:

Assets Liabilities

Reserves $4.5 mil. $90 mil. DepositsLoans $100 mil. $8 mil. BorrowingsSecurities $5.5 mil. $12 mil. Capital

iii. If Tarheel National borrows from the Fed:

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8/12/2019 Econ161A Spring14 Assignment3 Key

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Assets Liabilities

Reserves $4.5 mil. $90 mil. DepositsLoans $100 mil. $11.5 mil. BorrowingsSecurities $9 mil. $12 mil. Capital

iv. If Tarheel National reduces its lending:

Assets Liabilities

Reserves $4.5 mil. $90 mil. DepositsLoans $91 mil. $8 mil. BorrowingsSecurities $9 mil. $12 mil. Capital

3. (a) $3,548.4 billion.

(b) $10,279.9 billion; 2.92%.

(c) $14,359.5; 7.67%.

(d) Cash assets rose from $1,939.1 billion in March 2013 to $2,769.3 billion in March2014. This is largely due to the Federal Reserves expansionary policies increasingthe reserve component of cash reserves, but this is not apparent from Page 2 ofH.8.

(e) 7.68; 9.12.

4. (a) The payoff table:

Asset 1 Asset 2 Asset 3 Senior CDO Mezzanine CDO Junior CDO$100 $100 $100 $100 $100 $100

$100 $100 $0 $100 $100 $0$100 $0 $100 $100 $100 $0$100 $0 $0 $100 $0 $0

$0 $100 $100 $100 $100 $0$0 $100 $0 $100 $0 $0$0 $0 $100 $100 $0 $0$0 $0 $0 $0 $0 $0

(b) $87.5. The senior CDO pays off 87.5% percent of the time.

(c) $50. The mezzanine CDO pays off 50% percent of the time.

(d) $12.5. The junior CDO pays off 12.5% percent of the time.(e) $50: The same expected payoff as each of the underlying assets.

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