2.99 See Answer

Question: You have been asked to assess the


You have been asked to assess the impact of possible changes in reserve requirement components on the dollar amount of reserves required. Assume the reserve percentages are currently set at 2 percent on the first $50 million of traction account amounts; 4 percent on the second $50 million; and 10 percent on transaction amounts over $100 million. The First National Bank has transaction account balances of $100 million, while the Second National Bank’s transaction balances are $150 million and the Third National Bank’s transaction balances are $250 million.
a. Determine the dollar amounts of required reserves for each of the three banks.
b. Calculate the percentage of reserves to total transactions accounts for each of the three banks.
c. The Central Bank wants to slow the economy by raising the reserve requirements for member banks. To do so, the reserve percentages will be increased to 12 percent on transaction balances above $100 million. Simultaneously, the 2 percent rate will apply on the first $25 million. Calculate the reserve requirement amount for each of the three banks after these changes have taken place.
d. Show the dollar amount of changes in reserve requirement amounts for each bank. Calculate the percentage of reserve requirement amounts to transaction account balances for each bank.
e. Which of the two reserve requirement changes discussed in © causes the greatest impact on the dollar amount of reserves for all three of the banks?
f. Now assume that you could either: (1) lower the transactions account amount for the lowest category from $50 million down to $25 million, or (2) increase the reserve percentage from 10 percent to 12 percent on transactions account amounts over $200 million. Which choice would you recommend if you were trying to achieve a moderate slowing of economic activity?


> Determine the present value now of an investment of $3,000 made one year from now and an additional $3,000 made two years from now if the annual discount rate is 4 percent.

> Find the future value one year from now of a $7,000 investment at a 3 percent annual compound interest rate. Also calculate the future value if the investment is made for two years.

> Find the default risk premium for a debt security given the following information: inflation premium = 3%, maturity risk premium = 2.5%, real rate = 3%, liquidity premium = 0%, and market interest rate is 10%.

> 1. Which is the method that indicates the value of one unit of a foreign currency in terms of a home country’s currency? a. Direct quotation method b. Indirect quotation method c. Negotiated quotation method d. All of the choices are correct. 2. Wh

> Find the nominal interest rate for a debt security given the following information: real rate = 2%, liquidity premium = 2%, default risk premium = 4%, maturity risk premium = 3%, and the inflation premium = 3%.

> Inflation is expected to be 3 percent over the next year. You desire an annual real rate of return of 2.5 percent on your investments. a. What nominal rate of interest would have to be offered on a one-year Treasury security for you to consider making an

> You are considering an investment in a one-year government debt security with a yield of 5 percent or a highly liquid corporate debt security with a yield of 6.5 percent. The expected inflation rate for the next year is expected to be 2.5 percent. a. Wha

> A thirty-year U.S. Treasury bond has a 4.0 percent interest rate. In contrast, a ten-year Treasury note has an interest rate of 2.5 percent. A maturity risk premium is estimated to be 0.2 percentage points for the longer maturity bond. Investors expect i

> A 30-year U.S. Treasury bond has a 4.0 percent interest rate. In contrast, a ten-year Treasury note has an interest rate of 3.7 percent. If inflation is expected to average 1.5 percentage points over both the next ten years and thirty years, determine th

> A 20-year U.S. Treasury bond has a 3.50 percent interest rate, while a same maturity corporate bond has a 5.25 percent interest rate. Real interest rates and inflation rate expectations would be the same for the two bonds. If a default risk premium of 1.

> A one-year U.S. Treasury security has a market interest rate of 2.25 percent. If the expected real rate of interest is 1.50 percent, what is the expected annual inflation rate?

> Following are some selected interest rates. a. Plot a yield curve using interest rates for government default risk-free securities. b. Plot a yield curve using corporate debt securities with low default risk (high quality) and a separate yield curve fo

> A 30-year corporate bond has a nominal interest rate of 12 percent. This bond is not very liquid and consequently requires a 2 percent liquidity premium. The bond is of low quality and thus has a default risk premium of 2.5 percent. The bond has a remain

> The interest rate on a 20-year Treasury bond is 9.25 percent. A comparable maturity Aaa-rated corporate bond is yielding 10 percent. Another comparable maturity but lower quality corporate bond has a yield of 14 percent which includes a liquidity premium

> 1. The European Union at the end of 2015 consisted of how many independent member states? a. 6 b. 12 c. 18 d. 28 2. How many member states are currently Eurozone members? a. 19 b. 15 c. 12 d. 6 3. The euro became the official currency of 11 E

> A Treasury note with a maturity of four years carries a nominal rate of interest of 10 percent. In contrast, an 8-year Treasury note has a yield of 8 percent. a. If inflation is expected to average 7 percent over the first four years, what is the expecte

> Assume that the interest rate on a one-year Treasury bill is 6 percent and the rate on a two-year Treasury note is 7 percent. a. If the expected real rate of interest is 3 percent, determine the inflation premium on the Treasury bill. b. If the maturity

> Find the default risk premium for a debt security given the following information: inflation premium – 2.5 percent, maturity risk premium = 2.5 percent, real rate = 3 percent, liquidity premium = 1.5 percent, and nominal interest rate = 14 percent.

> Assume investors expect a 2.0 percent real rate of return over the next year. If inflation is expected to be 0.5 percent, what is the expected nominal interest rate for a one-year U.S. Treasury security?

> A country in Southeast Asia states its gross domestic product (GDP) in terms of yen. Last year its GDP was 50 billion yen when one U.S. dollar could be exchanged into 120 yen. a. Determine the country’s GDP in terms of U.S. dollars for last year. b. Assu

> A nation’s gross domestic product (GDP) is stated in U.S. dollars at $40 million. The dollar value of one unit of the nation’s currency (FC) is $0.25. a. Determine the value of GDP in FC’s. b. How would your answer change if the dollar value of one FC in

> A nation’s gross domestic product is $600 million. Its personal consumption expenditures are $350 million and government purchases of goods and services are $100 million. Net exports of goods and services amount to $50 million. a. Determine the nation’s

> Assume some of the data provided in Problem 5 changes next year. Specifically, government purchases of goods and services increase by 10 percent; gross private domestic investment declines by 10 percent; and the imports of goods and services drop to $6 b

> The components that comprise a nation’s gross domestic product were identified and discussed in the chapter. Assume the following accounts and amounts were reported by a nation last year. Government purchases of goods and services were $5.5 billion; pers

> Assume personal income was $28 million last year. Personal outlays were $20 million and personal current taxes were $5 million. a. What was the amount of disposable personal income last year? b. What was the amount of personal saving last year? c. Calcul

> 1. Before World War I, the international monetary system operated mostly under which type of standard? a. U.S. dollar standard b. Euro standard c. Gold standard d. Diamond standard 2. Which of the following currencies is not included in the current

> Personal income amounted to $17 million last year. Personal current taxes amounted to $4 million and personal outlays for consumption expenditures, non-mortgage interest, and so forth were $12 million. a. What was the amount of disposable personal income

> How would your answer change in Problem 1 if the gross domestic product had been $14 million? Data from Problem 1: A very small country’s gross domestic product (GDP) is $12 million. If government expenditures amounted to $7.5 million and gross private

> Following are data relating to a nation’s operations last year. Capital consumption allowances…………………………………………$150 million Undistributed corporate profits………………………………………………40 million Personal consumption expenditures …………………………………….450 million Personal

> A very small country’s gross domestic product (GDP) is $12 million. If government expenditures amounted to $7.5 million and gross private domestic investment is $5.5 million, what would be the amount of net exports of goods and services?

> Assume that last year the Australian dollar was trading at $.5527, the Mexican peso at $.1102, and the British pound was worth $1.4233. By this year the U.S. dollar value of an Australian dollar was $.7056, the Mexican peso at $.0867, and the British pou

> Assume that five years a euro was trading at a direct method quotation of $.8767. Also assume that recently the indirect method quotation was .8219 euros per U.S. dollar. a. Calculate euro “currency per U.S. dollar” five years ago. b. Calculate the “U.S

> Assume a U.S. dollar is worth 10.38 Mexican Pesos and .64 euros. Calculate the implied value of a Mexican Peso in terms of a euro.

> If the U.S dollar value of a British Pound is $1.95 and a euro is $1.55, calculate the implied value of a euro in terms of a British Pound.

> A few years ago the U.S. dollar equivalent of a foreign currency was $1.2167. Today, the U.S. dollar equivalent of a foreign currency is $1.3310. Determine the percentage change of the euro between these two dates.

> A few years ago the U.S. dollar equivalent of a foreign currency was $1.2167. Today, the U.S. dollar equivalent of a foreign currency is $1.3310. Using the indirect quotation method, determine the currency per U.S. dollar for each of these dates.

> 1. By which method is the M1 definition of the money supply calculated? a. Monetary base divided by the money multiplier b. Money multiplier divided by the monetary base c. Monetary base times the money multiplier d. None of the choices is correct.

> Over a two-year period, the U.S. dollar equivalent of a euro increased from $1.3310 to 1.4116. Determine the percentage change of the euro between these two dates.

> Over a two-year period, the U.S. dollar equivalent of a euro increased from $1.3310 to 1.4116. Using the indirect quotation method, determine the currency per U.S. dollar for each of these dates.

> Following are currency exchange “cross rates” between pairs of major currencies. Currency cross rates include both direct and indirect methods for expressing relative exchange rates. a. Fill in the missing exchange r

> Assume the interest rate in Australia on one-year government debt securities is 10 percent and the interest rate on Japanese one-year debt is 5 percent. Assume the current Australian dollar value of the Japanese yen is $0.0200. Using interest rate parity

> Assume the interest rate on a one-year U.S. government debt security is currently 9.5 percent compared with a 7.5 percent on a foreign country’s comparable maturity debt security. If the U.S. dollar value of the foreign country’s currency is $1.50, what

> Assume inflation is expected to be 8 percent in New Zealand next year compared with 4 percent in France. If the New Zealand dollar value of a euro $0.400, what is the expected exchange rate one-year from now based on purchasing power parity?

> Assume inflation is expected to be 3 percent in the United States next year compared with 6 percent in Australia. If the U.S. dollar value of an Australian dollar is currently $0.500, what is the expected exchange rate one-year from now based on purchasi

> Assume one U.S. dollar ($US) can currently purchase 1.316 Swiss francs. However, it has been predicted that one $US soon will be exchangeable for 1.450 Swiss francs. a. Calculate the percentage change in the $US if the exchange rate change occurs. b. Det

> Assume the U.S. dollar ($US) value of the Australian dollar is $0.73 while the U.S. dollar value of the Hong Kong dollar is $0.13 a. Determine the number of Australian dollars that can be purchased with one $US. b. Determine the number of Hong Kong dolla

> Assume that the Danish krone (DK) has a current dollar ($US) value of $0.18 a. Determine the number of DK that can be purchased with one $US. b. Calculate the percentage change (appreciation or depreciation) in the Danish krone if it falls to $0.16. c. C

> 1. When required reserves are larger than the bank reserves of a depository institution, what is the difference called? a. Excess reserves b. Deficit reserves c. Excess vault cash d. Federal Reserve float 2. Which of the following transactions affe

> Exchange rate relationships between the U.S. dollar and the euro have been quite volatile. When the euro began trading at the beginning of 1999, it was valued at 1.17 U.S. dollars. By late-2000, a euro was worth only $.83 and peaked at $1.60 in mid-2008.

> Show how your answers in problem 6 would change if the fed lowered the cut-off between the 2 percent rate and the 8 percent rate from $40 million in transaction account balances down to $20 million. Data from problem 6: Assume that banks must hold a 2

> Assume that the Fed decides to increase the required reserve percentage on transaction accounts above $40 million from 8 percent to 10 percent. All other information remains the same as given in Problem 6, including the transaction account balances held

> Assume that banks must hold a 2 percent reserve percentage against transaction account balances up and including $40 million. For transaction accounts above $40 million, the required reserve percentage is 8 percent. Also assume that the Dell National Ban

> The Friendly National Bank holds $50 million in reserves at its Federal Reserve District Bank. The required reserves ratio is 12 percent. a. If the bank has $600 million in deposits, what amount of vault cash would be needed for the bank to be in complia

> A bank has $10 million in vault cash and $110 million in deposits. If total bank reserves were $15 million with $2 million considered to be excess reserves, what required reserves ratio is implied?

> A bank has $110 million in deposits and holds $10 million in vault cash. a. If the required reserves ratio is 10 percent, what dollar amount of reserves must be held at the Federal Reserve Bank? b. How would your answer in Part (a) change if the required

> Assume a Bank has $5 million in deposits and $1 million in vault cash. If the bank holds $1 million in excess reserves and the required reserves ratio is 8 percent, what level of deposits are being held?

> A new bank has vault cash of $1 million and $5 million in deposits held at its Federal Reserve District Bank. a. If the required reserves ratio is 8 percent, what dollar amount of deposits can the bank have? b. If the bank holds $65 million in deposits

> 1. The U.S. fractional reserve system requires that at each depository institution funds be held in reserve equal to a certain percentage of which one of the following? a. Deposit liabilities b. Stockholders’ equity c. Securities held d. Loans secure

> 1. A surplus economic unit is one that a. spends more money than it brings in. b. generates more money than it spends. c. produces an amount money equal to what it spends. d. borrows money from businesses or the government. 2. The savings-investmen

> Tenth National Bank has common stock of $2 million, retained earnings of $5 million, loan loss reserves of $3 million, and subordinated notes outstanding in the amount of $4 million. Total bank assets are $105 million. Calculate the common equity capital

> Use the data from Problem 7 for Second National Bank and calculate the common equity capital ratio assuming that stockholders’ equity was equal to common equity (i.e., there was no preferred stock). Data from Problem 7: Rearrange the following accounts

> Rearrange the following accounts to construct a bank balance sheet for the Second National Bank. What are the total amounts that make the bank’s balance sheet “balance”? Demand deposits:…………………………………………..$20 million Cash assets:……………………………………………………..$5

> A bank’s assets consist of: Cash: ………………………………………..$1.5 million Loans:……………………………………….$10 million Securities…………………………………$4.5 million Fixed assets…………………………………$2 million In addition, the bank’s common equity is $1.5 million. a. Calculate the common equ

> Following are selected balance sheet accounts for the Third State Bank: vault cash = $2 million; U.S. government securities = $5 million; demand deposits = $13 million; non transactional accounts = $20 million; cash items in process of collection = $4 mi

> ATM Banc has the following liabilities and equity categories: Deposits…………………………………………………$9 million Other liabilities……………………………………….$4 million Stockholders’ equity…………………………………………….? Total liabilities and stockholders’ equity ……………….? a. What would be

> ABE Banc has the following asset categories: Cash………………………………………$1 million Securities……………………………..$4 million Loans…………………………………………………? Other assets …………………………$2 million Total assets…………………………………………? a. What would be the bank’s total assets if loans wer

> Assume that you can borrow $175,000 for one year from a local commercial bank. a. The bank loan officer offers you the loan if you agree to pay $16,000 in interest plus repay the $175,000 at the end of one year. b. As an alternative you could get a one-

> This problem focuses on bank capital management and various capital ratio measures. Following are recent balance sheet accounts for Prime First National Bank. All amounts are in millions of dollars. a. Calculate the common equity capital ratio. How cou

> Let’s assume that you have been asked to calculate risk-based capital ratios for a bank with the following accounts: Cash…………………………………………………..= $5 million Government securities………………………..= $7 million Mortgage loans………………………………….= $30 million Other loans

> 1. The largest annual government deficit occurred in which of the following fiscal years? a. 1969 b. 2001 c. 2009 d. 2015 2. What, approximately, is the amount of the national debt today (2016)? a. $1 trillion b. $6 trillion c. $12 trillion d.

> The following three one-year “discount” loans are available to you: Loan A: $120,000 at a 7 percent discount rate Loan B: $110,000 at a 6 percent discount rate Loan C: $130,000 at a 6.5 percent discount rate a. Determine the dollar amount of interest you

> The following problem requires a basic knowledge about probabilities and the calculation of expected values. In addition, the problem is more easily solved using Excel spreadsheet software. a. Calculate the dollar amount of the money supply under each

> The One Product economy which produces and sells only personal computers (PCs), expects that it can sell 500 more or 12,500 PCs next year. Nominal GDP was $20,000,000 this year and the money supply was $7,000,000. The central bank for the One Product eco

> The following information was gathered for the XYZ economy: velocity of money = 3.8 times; average price level = $85; and real output = 10,000 units. a. What is the nominal GDP for the XYZ economy? b. What is the size of the money supply for the XYZ econ

> Using the data in Problem 8, along with the monetarists’ view of the relationship between money supply and GDP, answer the following: a. If the M1 money supply increases by 10 percent and the M1 velocity of money does not change, what is the expected val

> Assume that a country estimates its M1 money supply at $20 million. A broader measure of the money supply, M2, is $50 million. The country’s gross domestic product (GDP) is $100 million. Production or real output for the country is 500,000 units or produ

> Assume that the real output (RO) for a country is expected to be 2.4 million products. a. If the price level (PL) is $250 per product, what will be the amount of the gross domestic product (GDP)? b. Now assume that the GDP is projected to be $8 million n

> A country’s gross domestic product (GDP) is $20 billion and its money supply (MS) is $5 billion. a. What is the country’s velocity of money (VM)? b. If the MS stays at the same level next year while the velocity of money “turns over” 4.5 times, what woul

> The balance sheets for the Genatron Manufacturing Corporation for the years 2016 and 2017 are listed in the text. a. Calculate the weighted average cost of capital based on book value weights. Assume an after-tax cost of new debt of 8.63 percent and a co

> The Nutrex Corporation wants to calculate its weighted average cost of capital. Its target capital structure weights are 40 percent long-term debt and 60 percent common equity. The before-tax cost of debt is estimated to be 10 percent and the company is

> 1. Examples of automatic stabilizer programs that act on a continuing basis to stabilize disposable income and economic activity include which one of the following? a. Unemployment insurance program b. Welfare payments c. Pay-as-you-go progressive inc

> The income statements for Genatron Manufacturing for 2016 and 2017 are listed in the text. Assuming one-half of the general and administrative expenses are fixed costs, estimate Genatron’s degree of operating leverage, degree of financial leverage, and d

> A firm has sales of $10 million, variable costs of $4 million, fixed expenses of $1.5 million, interest costs of $2 million and has a 30 percent average tax rate. a. Compute its DOL, DFL, and DCL. b. What will be the expected level of EBIT and net income

> Redo Problem 4, assuming that the less leveraged capital structure will result in a borrowing cost of 10% and a common stock price of $40. Data from Problem 4: Faulkner’s Fine Fries, Inc. (FFF) is thinking about reducing its debt burd

> Faulkner’s Fine Fries, Inc. (FFF) is thinking about reducing its debt burden. Given the information below and an expected EBIT of $50 million (plus or minus 10 percent) next year, should FFF change their capital structure? CURRENT

> Stern’s Stews, Inc., is considering a new capital structure. Its current and proposed capital structure follows: Stern’s Stews’ president expects next year’s EBIT to be $20 million

> Champion Telecommunications is restructuring. Currently Champion has no debt outstanding. After it restructures, debt will be $5 million. The rate offered to bondholders is 10 percent. Champion currently has 700,000 shares outstanding at a market price o

> Big 10+1 Corp. intends to raise $5 million by one of two financing plans: Plan A: Sell 1,250,000 shares at $4 per share net to the firm. Plan B: Issue $5 million in ten year debentures with a 9 percent coupon rate. The firm expects an EBIT level of $800,

> Company A1 intends to raise $3 million by either of two financing plans: Plan A: Sell 100,000 shares of stock at $30 net to firm Plan B: Issue $3 million in long term bonds with a 10 percent coupon The firm expects an EBIT of $1 million. Currently A1 has

> URA, Incorporated, has operating income of $5 million, total assets of $45 million, outstanding debt of $20 million, and annual interest expense of $3 million. a. What is URA’s indifference level of EBIT? b. Given its current situation, might URA benefit

> Here's a recent income statement from TC1 Telecommunications Services, Inc. (numbers are in millions) a. Compute TC1's degree of financial, operating, and combined leverage if one-half of the costs of good sold are variable costs and one-half are fixed c

> 1. Which of the following is not a way a government raises funds to pay for its activities? a. Levies taxes b. Borrows c. Prints money for its own use d. Issues common stock 2. Which of the following is a responsibility of the U.S. Treasury? a. Co

> Using the income statements from the Mount Lewis Copy Centers for 2016 and 2017 in Problem 17, find the percentage change in sales, EBIT, and net income. Use them to compute the degree of operating leverage, financial leverage, and combined leverage. Da

> Income statements for Mount Lewis Copy Centers for 2016 and 2017 appear below (in the text). a. Compute and interpret the degree of operating leverage, degree of financial leverage, and degree of combined leverage in 2016. Assume the components of the co

> The following information is from the financial statements of Bagel’s Biscuits (in text) a. Find Bagel’s internal growth rate. b. Compute Bagel’s sustainable growth rate.

> Below are items from recent financial statements from Moss and Mole Manufacturing (listed in text). a. Find M&MM's internal growth rate. b. Find their sustainable growth rate.

> Using the same notation used in the previous problem, now assume that the firm will raise some funds externally in order to keep the firm's debt-to-equity (D/E) ratio constant. a. What will this year's net income equal? b. How much will be added to stoc

> Derive equation 18-8 for the internal growth rate. Let S = last year's sales revenue; A = last year's total assets; D = last year's total liabilities; E = last year's stockholder's equity; NI/S =the firm's (presumably constant) profit margin, the ratio o

> Through library or internet resources, find information regarding the sources of long-term financing for AT&T. What are the current market prices for their outstanding bonds and stock? Estimate their current market value weights. Estimate the cost of eac

> Using various internet resources and information contained in this text to estimate the cost of debt, cost of retained earnings, the cost of new equity, and the weighted average cost of capital for the following firms: Walgreens, Microsoft, and ExxonMobi

2.99

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