Using T-accounts, please record the following transactions. M&B Bank PLC (the bank) is incorporated with equity capital
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Using T-accounts, please record the following transactions.
- M&B Bank PLC (“the bank”) is incorporated with equity capital of £10 million.
- The bank issues deposits to customers for £30 million.
- The bank issues bonds for £20 million.
- The bank must maintain 10% of assets in required reserves at all times. Please discuss the role of required reserves as a monetary policy tool by central banks.
- After setting aside the required reserves, the bank decides to invest the remaining amount of cash. The bank invests £10 million in a coupon bond issues by UK Treasury. What is left is loaned out.
- The coupon bond of point (e) pays a coupon of 5% per year, paid semi-annually. It has 3 years to maturity. If the current Yield-to-Maturity is 2.5% semi-annually, what is the price of the bond?
- A year later, the Bank of England is worried by rising inflation and announces its intention to raise interest rates. This announcement immediately sends the Yield-to-Maturity of bond in point (f) surging 200 basis points. Recalculate the price of the bond.
- What is the Holding Period Return recorded on the bond position over the past year?
- What is the Profit-and-Loss recorded on the bond position in Pound Sterling (£)?
- Record the result of point (g) in the T-accounts.
- If your result is a loss, please discuss if the bank has enough equity capital to support that loss.
- Discuss the Basel Capital accords. Focus in particular on capital requirements and their calculation
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