2.1. Suppose that a bank holds cash in its vault of $1.

4 million, short-term government securities of

$12.4 million, privately issued money market instruments of $5.2 million, deposits at the Federal Reserve
banks of $20.1 million, cash items in the process of collection of $0.6 million, and deposits placed with other
banks of $16.4 million. How much in primary reserves does this bank hold? In secondary reserves?

PR = 38.5
PR = Cash in vault + Deposits at Fed Reserve + Deposits at other bank + cash items in the process of
collection = 1.4 + 20.1 + 0.6 + 16.4 = 38.5
SR = 17.6
SR = short-term government securities + privately issued money market instruments = 17.6

2.2. Suppose a bank has an allowance for loan losses of $1.25 million at the beginning of the year,
charges current income for a $250,000 provision for loan losses, charges off worthless loans of $150,000, and
recovers $50,000 on loans previously charged off. What will be the balance in the allowance for loan losses
at year-end?

Begin balance 1.25

+0.25
-0.15
+0.05
Ending balance = 1.4

2.3. Jasper National Bank has just submitted its Report of Condition to the FDIC. Please fill in the missing
items from its statement shown below (all figures in millions of dollars):

Report of Condition
Total assets $2,500
Cash and due from Depository Institutions 87
Securities 233
Federal Funds Sold and Reverse Repurch. 45
Gross Loans and Leases 1900?
Loan Loss Allowance 200
Net Loans and Leases 1700
Trading Account Assets 20
Bank Premises and Fixed Assets 25?
= 2500- 87-233-45-1700-20-15-200-175
Other Real Estate Owned 15
Goodwill and Other Intangibles 200
All Other Assets 175
Total Liabilities and Capital 2500?
22
Total Liabilities 60?
Total Deposits 1600?
Federal Funds Purchased and Repurchase
Agreements. 80
Trading Liabilities 10
Other Borrowed Funds 50
Subordinated Debt 480
All Other Liabilities 40
Total Equity Capital 240?
Perpetual Preferred Stock 2
Common Stock 24
Surplus 144
Undivided Profit 70

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2.4. Along with the Report of Condition submitted above, Jasper has also prepared a Report of Income for
the FDIC. Please fill in the missing items from its statement shown below (all figures in millions of dollars):

Report of Income

Total Interest Income $120

Total Interest Expense 80?
Net Interest Income 40
Provision for Loan and Lease Losses 4?
= 40 + 58 – 77 – 17 = Net Interest Income + Net
NonInterest Income – Pretax Net Operating Income

Total Noninterest Income 58

Fiduciary Activities 8
Service Charges on Deposit Accounts 6
Trading Account Gains and Fees 14?
Additional Noninterest Income 30
Total Noninterest Expense 77
Salaries and Benefits 47?
Premises and Equipment Expense 10
Additional Noninterest Expense 20
Pretax Net Operating Income 17
Securities Gains (Losses) 1
Applicable Income Taxes 5
Income Before Extraordinary Income 13?
= Pretax NOI + Gain – Tax
Extraordinary Gains – Net 2
Net Income 15?

2.5. If you know the following figures:

Total Interest Income $140 Provision for Loan Loss $5

Total Interest Expenses 100 Income Taxes 5
Total Noninterest Income 15 Increases in bank’s undivided profits 6
Total Noninterest Expenses 35

Please calculate these items:

Net Interest Income = 140 – 100 = 40
Net Noninterest Income= 15-35= -20
Pretax net operating income= 40-20-5= 15
Net Income After Taxes= 15-5 = 10
Total Operating Revenues=140+15= 155
Total Operating Expenses= 100+35= 135
Dividends paid to Common Stockholders=10-6=4

2.6. The Mountain High Bank has Gross Loans of $750 million with an ALL account of $45 million. Two
years ago the bank made a loan for $10 million to finance the Mountain View Hotel. Two million in principle
was repaid before the borrowers defaulted on the loan. The Loan Committee at Mountain High Bank
believes the hotel will sell at auction for $7 million and they want to charge off the remainder immediately.

a. Net loans?
= Gross Loans – ALL = $750 - $45 = $705 million
b. After charge-off, Gross Loans, ALL and Net Loans?
Gross Loans = $750 - $8 = $742 million

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ALL = $45 – ($8 - $7) = $44 million
Net loans = $742 - $44 = $698 million
c. If the Mountain View Hotel sells at auction for $8 million, how with the affect the pertinent balance sheet
accounts?
Gross Loans = $750 - $8 = $742 million
ALL = $45 – ($8 - $8) = $45 million
Net loans = $742 - $45 = $698 million
2.7. You were informed that a bank’s latest income and expense statement contained the following
figures (in $ millions):

Net Interest Income $700

Net Noninterest Income ($300)
Pretax net operating income $372
Security gains $10
Increases in bank’s Undivided Profit $200

Suppose you also were told that the bank’s total interest income is twice as large as its total interest
expense and its noninterest income is three-fourths of its noninterest expense. Imagine that its provision for
loan losses equals 2 percent of its total interest income, while its taxes generally amount to 30 percent of its
net income before income taxes. Calculate the following items for this bank’s income and expense
statement:
Total Interest Income (TII) and Total Interest Expense (TIE):
Total Noninterest Income (TNI) and Total Noninterest Expense (TNE):
Provision for Loan Losses
Taxes
Dividends

TII= x -> TIE = x/2

TNI= y -> TNE= 4/3 y
x-x/2= 700
y-4/3y=-300
 X= 1400 , y = 900

TII = 1400
TIE = 700
TNI = 900
TNE = 1200
Provision = 2%. X= 1400* 2% =28
Taxes = 30%. (372+ 10) = 114.6
Dividend= Net Income After Taxes – Increases in bank’s Undivided Profit= 372 + 10 – 114.6 - 200 = 67.4

3
Chapter 3

3.1. A bank determines from an analysis of its cost-accounting figures that for each $500 minimum-
balance checking account it sells account processing and other operating costs will average $4.87 per month
and overhead expenses will run an average of $1.21 per month. The bank hopes to achieve a profit margin
over these particular costs of 10 percent of total monthly costs. What monthly fee should it charge a
customer who opens one of these checking accounts?

- Unit price charged customer = Operating Expense per unit + Estimated overhead expense + Planned
Profit margin = 4.87 + 1.21 + 10% * (4.87 + 1.21) = 6.698 $

3.2. Use the APY formula required by the Truth in Savings Act for the following calculation. Suppose that
a customer holds a savings deposit in a savings bank for a year. The balance in the account stood at $2,000
for 180 days and $100 for the remaining days in the year. If the Savings bank paid this depositor $8.50 in
interest earnings for the year, what APY did this customer receive?

-
- Average account balance = (2000.180 + 100.185)/ 365 = 1036.9
365/ 365
- APY = [(1+
8.5
) −1 ¿ . 100 = 0,82 %
1036.9

3.3. Monica Lane maintains a savings deposit with Monarch Credit Union. This past year Monica
received $10.75 in interest earnings from her savings account. Her savings deposit had the following average
balance each month:

January $400 July $350

February 250 August 425
March 300 September 550
April 150 October 600
May 225 November 625
June 300 December 300

What was the annual percentage yield (APY) earned on Monica’s savings account?

- Average account balance = 373.56$ =

(400.31+250.28+300.31+150.30+225.31+300.30+350.31+425.31+550.30+600.31+625.30+300.31)/365

[( ) ]
365
10.75
- APY= ¿ 1+ 365
−1 .100=2.9 %
373.56

3.4. The National Bank of Mayville quotes an APY of 3.5 percent on a one-year money market CD sold to
one of the small businesses in town. The firm posted a balance of $2,500 for the first 90 days of the year,
$3,000 over the next 180 days, and $4,500 for the remainder of the year. How much in total interest
earnings did this small business customer receive for the year?

3.5. Gold Mine Pit Savings Association finds that it can attract the following amounts of deposits if it
offers new depositors and those rolling over their maturing CDs the interest rates indicated below:

Expected Volume Rate of Interest

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 of New Deposits Offered Depositors
$10 million 3.00%
15 million 3.25
20 million 3.50
26 million 3.75
28 million 4.00

Management anticipates being able to invest any new deposits raised in loans yielding 6.25 percent. How
far should this thrift institution go in raising its deposit interest rate in order to maximize total profits
(excluding interest costs)?
Deposits Rate of Interest Interest cost Marginal cost Marginal cost rate Marginal Difference Total profit
Inflows Offered revenue between
Depositors rate

10 3% 10*3% = 0,3 0,3 3% 6.25% +3,25% 3,25%*10 = 0,325

15 3.25% 15*3.25% = 0,4875 0,4875-0,3=0,1875 0,1875/(15-10) = 3.75% 6.25% +2.5% (15-10) *2.5% +
3,25%*10 = 0,45

20 3.5% 20*3.5% = 0,7 0,7-0,4875=0,2125 0,2125/(20-15)= 4.25% 6.25% +2% 0,45+5*2%= 0,55

26 3.75% 26*3.75% = 0,975 0,975-0,7=0,275 0,275/(26-20)=4.58% 6.25% +1.67% 0,55+1,67%*6 =0,6502

28 4% 28*4% = 1,12 1,12-0,975= 0,145 0,145/(28-26)=7.25% 6.25% -1% 0,6502-2*1%=0,6302

Chapter 4

4.1. Suppose a customer purchases a $1 million, 90-day CD, carrying a promised 6 percent annualized
yield. How much in interest income will the customer earn when this 90-day instrument matures? What
total volume of funds will be available to the depositor at the end of 90 days?
90
¿ 1000000+1000000. .6 %=1015000 $
360

4.2. Suppose J.P. Morgan Chase Bank of New York discovers that projected new loan demand next week
should total $325 million and customers holding confirmed credit lines plan to draw down $510 million in
funds to cover their cash needs next week, while new deposits next week are projected to equal $680
million. The bank also plans to acquire $420 million in corporate and government bonds next week. What
is the bank's projected available funds gap?
AFG = Current and projected loans and investments the lending institution desires to make - Current and
expected deposit inflows and other available funds
= 325 + 510 – 680 + 420 = 575
4.3. Rockfish Corporation purchases a 60-day negotiable CD with a $5 million denomination from Bait
Bank and Trust, bearing a 3.75 percent annual yield. How much in interest will the bank have to pay when
this CD matures? What amount in total will the bank have to pay back to Rockfish at the end of 60 days?

60
¿ 5000000+5000000. . 3.75 %
360

4.4. Lost Valley Bank borrows $125 million overnight through a repurchase agreement (RP)
collateralized by Treasury bills. The current RP rate is 2.75 percent. How much will the bank pay in interest
cost due to this borrowing?

5
 ¿ 125 000 000 . 2.75 %
4.5. Rosemary Bank of New York expects new deposit inflows next month of $375
million and deposit withdrawals of $500 million. The bank's economics department has projected that new
loan demand will reach $460 million and customers with approved credit lines will need $175 million in
cash. The bank will sell $480 million in securities, but plans to add $85 million in new securities to its
portfolio. What is the projected available funds gap?

¿ 500−375+460+175−480 +85=375
4.6. Clear Skies Bank of Florida issues a 3-month (90-day) negotiable CD in the amount of $25 million to
ABC Insurance Company at a negotiated annual interest rate of 3.25 percent (360 day basis). Calculate the
value of this CD account on the day it matures and the amount of interest income ABC will earn. What
interest return will ABC Insurance earn in a 365-day year?

4.7. Banks and other lending affiliates within the holding company of Goodtimes Financial are reporting
heavy loan demand this week from companies in the southeastern United States that are planning a
significant expansion of inventories and facilities before the beginning of the fall season. The holding
company plans to raise $850 million in short-term funds this week, of which about $835 million will be used
to meet these new loan requests. Fed funds are currently trading at 2.25 percent, negotiable CDs are trading
in New York at 2.40 percent, and Eurodollar borrowings are available in London at all maturities under one
year at 2.30 percent. One-month maturities of directly placed commercial paper carry market rates of 2.35
percent, while the primary credit discount rate of the Federal Reserve Bank of Richmond is currently set at
3.25 percent a source that Interstate has used in each of the past two weeks. Noninterest costs are
estimated at 0.25 percent for Fed funds, discount window borrowings, and CDs; 0.35 percent for Eurodollar
borrowings; and 0.50 percent for commercial paper. Calculate the effective cost rate of each of these
sources of funds for Interstate and make a management decision on what sources to use. Be prepared to
defend your decision.

 FED FUNDs
Current Interest cost on amount borrowed = 2.25%. 850 = 19.125
Noninterest cost incurred to access these funds= 0.25%. 850 = 2.125
Net investable fund raised from this sourse= 835
19.125+2.125
- Effective cost rate = =2.54 %
835

 CDs
Current Interest cost on amount borrowed = 2.4%. 850= 20.4
Noninterest cost incurred to access these funds= 0.25%. 850= 2.125
Net investable fund raised from this sourse= 835
20.4+2.125
- Effective cost rate = =2.69 %
835

 Eurodollar
Current Interest cost on amount borrowed = 2.35%. 850
Noninterest cost incurred to access these funds= 0.35%. 850
Net investable fund raised from this sourse= 835
19.975+2.975
- Effective cost rate = =2.74 %
835

 Commercial paper
Current Interest cost on amount borrowed = 2.3%. 850
Noninterest cost incurred to access these funds= 0.5%. 850
Net investable fund raised from this sourse= 835
19.55+4.25
- Effective cost rate = =2.85 %
835

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  Borrowed from Fed
Current Interest cost on amount borrowed = 3.25%. 850
Noninterest cost incurred to access these funds= 0.25%. 850
Net investable fund raised from this sourse= 835
27.625+2.125
- Effective cost rate = =3.56 %
835
Deposits Rate of Interest Interest cost Marginal cost Marginal cost rate Marginal Difference Total profit
Inflows Offered revenue rate between
Depositors

10 3% 10*3% = 0,3 0,3 3% 5.75% +2.75% 2.75%*10 = 0,275

15 3.25% 15*3.25% = 0,4875 0,4875-0,3=0,1875 0,1875/(15-10) = 3.75% 5.75% +2.5% (15-10) * 2.5% + 2.75%*10
= 0,4

20 3.5% 20*3.5% = 0,7 0,7-0,4875=0,2125 0,2125/(20-15)= 4.25% 5.75% +2.25% 0,4 + 5*2.25%= 0,5125

25 3.75% 25*3.75% = 0,9375 0,9375-0,7=0,2375 0,2375/(25-20)=4.75% 5.75% +2% 0,5125 + 2%*5 =0.6125

27 4% 27*4% = 1,12 1,12-0,9375= 0,1825 0,1825/(27-25)=9.125% 5.75% +1.75% 0,6125+ 2*1.75%=0.6475

ACB