Question
1.) Angus bank holds no excess reserves but complies with the reserve requirement. The required reserves ratio is 9% and reserves are currently $27 million.
1.) Angus bank holds no excess reserves but complies with the reserve requirement. The required reserves ratio is 9% and reserves are currently $27 million. Determine the amount of deposits, the reserve shortage created by a deposit outflow of $5 million, and the cost of the reserve shortage if Angus Bank borrows in the federal funds market, assuming the federal funds rate is 0.25%.
2.) A bank is considering two investment portfolios composed of a mix of government securities (federal and municipal securities). The first portfolio has a return of 6% with probability 0.9 and returns of 5% and 7% with 0.05 probability. The second portfolio has a return of 5% with probability 0.5 and a return of 7% with probability 0.5. Which portfolio has the best combination of return, risk, and liquidity?
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