Question
As an intern with the Bank of Goodlow, Tennessee, you have observed that this bank makes two types of loans, agriculture loans and consumer loans
As an intern with the Bank of Goodlow, Tennessee, you have observed that this bank makes two types of loans, agriculture loans and consumer loans, and offers two types of deposits, demand deposits and time deposits. You must determine if your bank is an asset management bank or a liability management bank by determining if the bank has more core deposits plus capital than demand for loans (asset management bank) or more demand for loans than core deposits plus capital (liability management bank). The bank will invest excess funds, if they exist, in treasury securities that yield an annual rate of 2.00 percent. Borrowed, money market acquired funds, if required, would be obtained from world money centers and the Eurodollar market at a cost of 2.15 percent. Your bank has $400 in capital. Demand/supply functions are:
Demand function for agriculture loans (LA)
rA = .13 - .00005LA
LCI=$___________
rCI= ____________
Demand for function for consumer loans (LC)
rC = .09 - .00002LC
Supply function for demand deposits (DD)
rD = -.04 + .000021875DD
Supply function for time deposits (DT)
rT = -0.001 + .000005DT
a. Using the economics of banking theory covered in class, identify how the balance sheet and income statement for Bank of Goodlow, Tennessee would appear assuming that interest rates and the supply and demand functions remain constant for the next year.
Bank of Goodlow, Tennessee
Statement of Financial Conditions (pro forma)
February 28, 2017
U.S. Treasury Securities $______ Demand Deposits $ ________
Agriculture Loans _______ Time Deposits ________
Consumer Loans _______ Capital 400
Total Assets _ Total Liab & NW $______
Bank of Goodlow, Tennessee
Income Statement (pro forma)
February 28, 2017 - February 27, 2018
Assume all rates and balances remain constant for the next year
Revenues
Interest on Treasury Securities _ ______*_____ = $ _________
Interest on Agriculture Loans __ ______*________= $ _________
Interest on Consumer Loans _ ______*________= $_________
Total Interest Revenue ____________________$__________
Interest Expense
Interest on Demand Deposits __________*_______ = -$________
Interest on Time Deposits __ __________*________= $_________
Total Interest Expense ________________________$_________
Net Interest Revenue ___________________ $__________
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