ECON-E 305 MONEY AND BANKING Individual Assignment 2 Due: N ovember 7, 2015 1. The Jaguar Bank of Indianapolis UBD starts operations on anuary 1,2016 issuing equity amounting S 150. advertises an annual interest of for its savings deposits, paid and 9 a year fee for each On the first day of operations, 3c open checking accounts with JBI and save a total of 1000 in checking a The same customers save a total ofs850 in their savings accounts. The bank lends S 1250 for 3 years at an annual interest rate of and another s 350 for 10 years at an annual interest rate of 8%. It also purchases treasury bills worth $200 which earns 1% per annum. JBI maintains the required reserve (10%of checking deposit balances) at the Fed and keeps the remaining liquidity in cash reserves. Federal Reserve pays no interest on JBI's reserve account. Nor does JBI on checking accounts of its JBI's expenses during its first year of is 70 and the corporate tax rate is 25%. Shareholders of JBI receive 10% dividends. (a) Prepare JBI's balance sheet as at January 1, 2016 at the closure of business. (b) Find the equity and the risk-adjusted capital ratio (Basel I) and compare with the regulatory requirements. (c) Assume one of the clients who borrowed 350 for 10 years defaults and the bank sells a collateral to recover s 300. Can JBI still comply with the capital adequacy requirements Risk-adjusted (d) Prepare JBI's income statement after its first year of operations. Calculate ROE and ROA (Ignore the assumption in part c) 2. A central bank can choose to directly control the money stock or to control the money supply indirectly through an interest rate target. Assume that the money demand in S trillion (M) is given by, M 2.2-0.1, i, where i is the nominal interest rate as a percentage (fi 4% plug in 4, not 0.04) (a) If the Federal Reserve chooses money targeting and sets a target money stock of S 1.7 trillion what is the resultant nominal interest rate? (b) If the Federal Reserve chooses interest rate targeting and sets a target nominal interest rate of 5% what is the resultant money stock? (c) Suppose that the money demand function changes to M- 2.3 0.1 i What is the new nominal interest rate if the Fed maintained the original money target? What is the new money stock the maintained the original interest rate target? l Reserve using money targeting or interest rate targeting now? Why? ECON-E 305 MONEY AND BANKING Individual Assignment 2 Due: N ovember 7, 2015 1. The Jaguar Bank of Indianapolis UBD starts operations on anuary 1,2016 issuing equity amounting S 150. advertises an annual interest of for its savings deposits, paid and 9 a year fee for each On the first day of operations, 3c open checking accounts with JBI and save a total of 1000 in checking a The same customers save a total ofs850 in their savings accounts. The bank lends S 1250 for 3 years at an annual interest rate of and another s 350 for 10 years at an annual interest rate of 8%. It also purchases treasury bills worth $200 which earns 1% per annum. JBI maintains the required reserve (10%of checking deposit balances) at the Fed and keeps the remaining liquidity in cash reserves. Federal Reserve pays no interest on JBI's reserve account. Nor does JBI on checking accounts of its JBI's expenses during its first year of is 70 and the corporate tax rate is 25%. Shareholders of JBI receive 10% dividends. (a) Prepare JBI's balance sheet as at January 1, 2016 at the closure of business. (b) Find the equity and the risk-adjusted capital ratio (Basel I) and compare with the regulatory requirements. (c) Assume one of the clients who borrowed 350 for 10 years defaults and the bank sells a collateral to recover s 300. Can JBI still comply with the capital adequacy requirements Risk-adjusted (d) Prepare JBI's income statement after its first year of operations. Calculate ROE and ROA (Ignore the assumption in part c) 2. A central bank can choose to directly control the money stock or to control the money supply indirectly through an interest rate target. Assume that the money demand in S trillion (M) is given by, M 2.2-0.1, i, where i is the nominal interest rate as a percentage (fi 4% plug in 4, not 0.04) (a) If the Federal Reserve chooses money targeting and sets a target money stock of S 1.7 trillion what is the resultant nominal interest rate? (b) If the Federal Reserve chooses interest rate targeting and sets a target nominal interest rate of 5% what is the resultant money stock? (c) Suppose that the money demand function changes to M- 2.3 0.1 i What is the new nominal interest rate if the Fed maintained the original money target? What is the new money stock the maintained the original interest rate target? l Reserve using money targeting or interest rate targeting now? Why
