1. Two banks have lent $20million each to a country in an Emerging Market. Bank
ID: 1186450 • Letter: 1
Question
1. Two banks have lent $20million each to a country in an Emerging Market. Bank A has total assets of $220 million and a capital to total assets ratio of 7 percent. Bank B has total assets of $350 million and a capital to total assets ratio of 6 percent. Both banks that each of their entire $20 million loan package will be written off as bad loans.
a. Will any of the two banks survive this crisis? Explain carefully.
b. Is the problem one of illiquidity or insolvency? Explain.
2. A bank has issued a one-year certificate of deposit for $50 million at an interest rate of 2 percent. With the proceeds, the bank has purchased a two-year Treasury note that pays 4 percent interest. What risk does the bank face in entering into these transactions? What would happen if all interest rates were to rise by 1 percent?
3. Consider a bank with the following income statement: It has $100 in loans with an interest rate of 5 percent; $50 in security holdings, paying 10 percent; reserves of $10; $100 in savings accounts that earn an interest rate of 2.5 percent; checking deposits equal to $30, a net worth of $30, and other expenses of $15. Find bank profit, the return on equity, and return on assets.
a. What is the total income
b. What is the total expenses
c. What is the bank
Explanation / Answer
Two banks have lent $20million each to a country in an Emerging Market. Bank A has total assets of $220 million and a capital to total assets ratio of 7 percent. Bank B has total assets of $350 million and a capital to total assets ratio of 6 percent. Both banks that each of their entire $20 million loan package will be written off as bad loans.
a. Will any of the two banks survive this crisis? Explain carefully.
bank a will survive as itscapital to total assets ratio is of 7 percent
b. Is the problem one of illiquidity or insolvency? Explain.
yes bceasue both of bank as very low lliquidityposition
2. A bank has issued a one-year certificate of deposit for $50 million at an interest rate of 2 percent. With the proceeds, the bank has purchased a two-year Treasury note that pays 4 percent interest. What risk does the bank face in entering into these transactions? What would happen if all interest rates were to rise by 1 percent?
financial risk will be faced by bank
andif all interest rates were to rise by 1 percent bank will earn net 3% interset
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