1. Suppose the Bank of the United States sells $10 million in T-bills to Chase Bank. Using T-accounts, show the impact of this transaction on each banks balance sheet.

2. Suppose that Chet who has an account at SunTrust bank writes a check for $100 to Mary who has an account at National City Bank. Using T-accounts, show the impact of this transaction on each banks balance sheet.

3. Suppose the value of a banks assets is $40 billion and the value of its liabilities is $36 billion. If the bank has a 2% return on assets, what is its return on equity?

4. You are the manager of a bank that has $15 million in fixed-rate assets, $30 million in rate-sensitive assets, $25 million in fixed-rate liabilities, and $20 million in rate-sensitive liabilities. Conduct a gap analysis for the bank, and show what would happen to bank profits if interest rates rise by 5 percentage points. What could management do to reduce interest-rate risk?

5. If the president of a bank told you that the bank was so well run that it never had to call in loans, sell securities, or borrow as a result of deposit outflows, would you be willing to buy stock in that bank?

6. Lowland Bank has the following balance sheet: (Assets) $10 million in reserves and $90 million in loans; (Liabilities) $96 million in deposits; and (Capital) $4 million. If the bank decides to write-off $5 million in loans, is it still solvent? If not, what could it do to deal with this problem?

7. Many investors diversify their asset portfolios to reduce risk. For this reason, does it make sense for banks to never specialize in lending to a particular type of borrower? Why or why not?