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Econ 161A: Money and Banking Assignment #3

Spring 2014: Jenkins
Solutions
1. (a) $12 million.
(b) The balance sheet for Tarheel National:
Assets Liabilities
Reserves $11 mil. $100 mil. Deposits
Loans $100 mil. $8 mil. Borrowings
Securities $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. Borrowings
Securities $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. Deposits
Loans $100 mil. $11.5 mil. Borrowings
Securities $9 mil. $12 mil. Capital
ii. If Tarheel National sells securities:
Assets Liabilities
Reserves $4.5 mil. $90 mil. Deposits
Loans $100 mil. $8 mil. Borrowings
Securities $5.5 mil. $12 mil. Capital
iii. If Tarheel National borrows from the Fed:
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Assets Liabilities
Reserves $4.5 mil. $90 mil. Deposits
Loans $100 mil. $11.5 mil. Borrowings
Securities $9 mil. $12 mil. Capital
iv. If Tarheel National reduces its lending:
Assets Liabilities
Reserves $4.5 mil. $90 mil. Deposits
Loans $91 mil. $8 mil. Borrowings
Securities $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 March
2014. This is largely due to the Federal Reserves expansionary policies increasing
the reserve component of cash reserves, but this is not apparent from Page 2 of
H.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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