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Assignment 6 Name: The Fed and Monetary Policy (Chapter 9 & 10) 1. Go to www.federalreserve.gov/releases/h15/update/ & https://apps.newyorkfed.org/markets/autorates/fed%20funds a. What is the current federal funds rate (define this rate as well)? b. What is the current Federal Reserve discount rate (define this rate as well)? c. Have short-term rates increased or declined over the past year? 2. The Federal Open Market Committee (FOMC) meets about every six weeks to assess the state of the economy and to decide what actions the central bank should take. The minutes of this meeting are released three weeks after the meeting; however, a brief press release is made available immediately. Find the schedule of minutes and press releases at www.federalreserve.gov/fomc/ . a. When was the last scheduled meeting of the FOMC? When is the next meeting? b. Review the press release from the last meeting. What did the committee decide to do about short-term interest rates? c. Review the most recently published meeting minutes. What areas of the economy seemed to be of most concern to the committee members? Assignment 6 Name: 3. Illustrate the effect of the Fed purchasing $50 million worth of mortgage-backed securities on the Fed's balance sheet. Federal Reserve Assets Liabilities 4. Suppose the Fed sells $500,000 worth of securities to First National Bank. Illustrate the immediate effect on the bank's balance sheet. First National Bank Assets Liabilities 5. Suppose the Fed makes a $5 million discount loan to a bank. Illustrate how this affects the balance sheets of the Fed and the banking system. Federal Reserve Assets Liabilities Banking System Assets Liabilities Assignment 6 Name: 6. Use graphs of the federal funds market to illustrate the effect on the demand for reserves or the supply of reserves of each of the following Fed policy actions: a. A decrease in the required reserve ratio b. A decrease in the discount rate c. A decrease in the interest rate paid on reserves d. An open market sale of government securities Assignment 6 Name: 7. Use graphs of the federal funds market to analyze each of the following three situations. Be sure that your graphs clearly show changes in the equilibrium federal funds rate, changes in the equilibrium level of reserves, and any shifts in the demand and supply curves. a. Suppose that the Fed decides to increase its target for the federal funds rate from 2% to 2.25% while also increasing the discount rate from 2.5% to 2.75%. Show how the Fed can use open market operations to bring about a higher equilibrium federal funds rat b. Suppose that banks increase their demand for reserves. Show how the Fed can offset this change through open market operations in order to keep the equilibrium federal funds rate unchanged. c. Suppose that the Fed decides to decrease the required reserve ratio but does not want the increase to affect its target for the federal funds rate. Show how the Fed can use open market operations to accomplish this policy. Assignment 6 Name: Assignment 6 Name: 8. Currently the federal funds rate and interest on reserves are both at 0.50% a. What do you expect the supply and demand curve to look like in the market for reserves? Draw your answer and explain. b. What does the supply and demand curve imply about the size of the FED's balance sheet right now? Explain. The Fed has stated that it is planning on bringing an end to the stimulative monetary policy famously known as Quantitative Easing. Based on your supply and demand curve from above... c. Would the FED be able to affect the interest rates by carrying out an open market operation? If not, why? d. What policy tool would be most effective in carrying out the FED's intention? Why? Assignment 4 Name: Financial Services: Depository Institutions (SC Chapter 2) End of Chapter Problem 2 1. Use the data in Table 2-5 for banks in the two asset size groups (a) $100 million-$1 billion and (b) more than $10 billion to answer the following questions. a. Why have the ratios for ROA and ROE tended to increase for both groups over the 19902006 period, decrease in 2007-2009, and increase in 2010-2012? Identify and discuss the primary variables that affect ROA and ROE as they relate to these two size groups. b. Why is ROA for the smaller banks generally larger than ROA for the large banks? c. Why is the ratio for ROE consistently larger for the large bank group? d. Using the information on ROE decomposition in Appendix 2A, calculate the ratio of equity to total assets for each of the two bank groups for the period 1990-2012. Why has there been such dramatic change in the values over this time period, and why is there a difference in the size of the ratio for the two groups? Assignment 4 Name: End of Chapter Problem 10 2. Use the data in Table 2-7 to answer the following questions. a. What was the average annual growth rate in OBS total commitments over the period from 1992-2012? b. Which categories of contingencies have had the highest annual growth rates? c. What factors are credited for the significant growth in derivative securities activities by banks? Assignment 4 Name: End of Chapter Problem 25 3. The financial statements for First National Bank (FNB) are shown below: Balance Sheet - First National Bank Assets Liabilities and Equity Cash $ 450 Demand deposits Demand deposits from other FIs 1,350 Small time deposits Investments 4,050 Jumbo CDs Federal funds sold 2,025 Federal funds purchased Loans 15,525 Equity Reserve for loan losses (1,125) Premises 1,685 Total assets $23,960 Total liabilities/equity Income Statement - First National Bank Interest Income $2,600 Interest expense 1,650 Provision for loan losses 180 Noninterest income 140 Noninterest expense 420 Taxes 90 a. b. c. d. Calculate the dollar value of FNB's earning assets. Calculate FNB's ROA. Calculate FNB's asset utilization ratio. Calculate FNB's spread. $ 5,510 10,800 3,200 2,250 2,200 $23,960 Assignment 4 Name: End of Chapter Problem 26 4. Megalopolis Bank has the following balance sheet and income statement. Balance Sheet (in millions) Assets Cash and due from banks Investment securities Repurchase agreements42,000 Loans Fixed Assets Other assets Total assets Liabilities and Equity $9,000 Demand deposits $19,000 23,000 NOW accounts 89,000 Retail CDs 28,000 90,000 Debentures 19,000 15,000 Total liabilities $155,000 4,000 Common stock 12,000 $183,000 Paid in capital 4,000 Retained earnings 12,000 Total liabilities and equity $183,000 Income Statement Interest on fees and loans $9,000 Interest on investment securities 4,000 Interest on repurchase agreements 6,000 Interest on deposits in banks 1,000 Total interest income $20,000 Interest on deposits 9,000 Interest on debentures 2,000 Total interest expense $11,000 Operating income Provision for loan losses Other income Other expenses Income before taxes Taxes Net income For Megalopolis, calculate: a. b. c. d. e. f. g. h. i. Return on equity Return on assets Asset utilization Equity multiplier Profit margin Interest expense ratio Provision for loan loss ratio Noninterest expense ratio Tax ratio $9,000 2,000 2,000 1,000 $8,000 3,000 $5,000 Assignment 6 Name: The Fed and Monetary Policy (Chapter 9 & 10) 1. Go to www.federalreserve.gov/releases/h15/update/ & https://apps.newyorkfed.org/markets/autorates/fed%20funds a. What is the current federal funds rate (define this rate as well)? b. What is the current Federal Reserve discount rate (define this rate as well)? c. Have short-term rates increased or declined over the past year? a. The current federal funds rate is 0.91%. It is the interest rate that a depository institution borrows overnight's loan from other depository institutions. b. The current Federal Reserve discount rate is 1.50%. It is the interest rate that commercial banks and depository institutions borrow loan from the Federal Reserve Bank. c. Short-term rates have increased over the past year. Federal funds rate have increased from around 0.12% to 0.91% since the end of 2015. 2. The Federal Open Market Committee (FOMC) meets about every six weeks to assess the state of the economy and to decide what actions the central bank should take. The minutes of this meeting are released three weeks after the meeting; however, a brief press release is made available immediately. Find the schedule of minutes and press releases at www.federalreserve.gov/fomc/ . a. When was the last scheduled meeting of the FOMC? When is the next meeting? b. Review the press release from the last meeting. What did the committee decide to do about short-term interest rates? c. Review the most recently published meeting minutes. What areas of the economy seemed to be of most concern to the committee members? a. The last scheduled meeting was held on 2-3 May 2017. The next meeting is scheduled on 13-14 June 2017. b. The committee decided to maintain the federal funds rate at 3/4 to 1 percent. c. Some committee members express concerns that a substantial undershooting of longer-run normal unemployment rate could pose significant upside risk to inflation. Assignment 6 Name: 3. Illustrate the effect of the Fed purchasing $50 million worth of mortgage-backed securities on the Fed's balance sheet. Federal Reserve Cash Mortgagebacked securities Assets -50 millions Liabilities 50 millions 4. Suppose the Fed sells $500,000 worth of securities to First National Bank. Illustrate the immediate effect on the bank's balance sheet. Cash Mortgagebacked securities First National Bank Assets -500000 Liabilities 500000 5. Suppose the Fed makes a $5 million discount loan to a bank. Illustrate how this affects the balance sheets of the Fed and the banking system. Federal Reserve Assets Cash -5 million Discount loan 5 million Banking System Assets Cash 5 million Loan Liabilities Liabilities 5 million Assignment 6 Name: 6. Use graphs of the federal funds market to illustrate the effect on the demand for reserves or the supply of reserves of each of the following Fed policy actions: a. A decrease in the required reserve ratio b. A decrease in the discount rate c. A decrease in the interest rate paid on reserves d. An open market sale of government securities Assignment 6 Name: 7. Use graphs of the federal funds market to analyze each of the following three situations. Be sure that your graphs clearly show changes in the equilibrium federal funds rate, changes in the equilibrium level of reserves, and any shifts in the demand and supply curves. a. Suppose that the Fed decides to increase its target for the federal funds rate from 2% to 2.25% while also increasing the discount rate from 2.5% to 2.75%. Show how the Fed can use open market operations to bring about a higher equilibrium federal funds rate. b. Suppose that banks increase their demand for reserves. Show how the Fed can offset this change through open market operations in order to keep the equilibrium federal funds rate unchanged. c. Suppose that the Fed decides to decrease the required reserve ratio but does not want the increase to affect its target for the federal funds rate. Show how the Fed can use open market operations to accomplish this policy. Assignment 6 Name: 8. Currently the federal funds rate and interest on reserves are both at 0.50% a. What do you expect the supply and demand curve to look like in the market for reserves? Draw your answer and explain. At equilibrium, quantity demanded and quantity supplied of reserves are equal, giving an equilibrium federal funds rate of 0.50%. b. What does the supply and demand curve imply about the size of the FED's balance sheet right now? Explain. There is no discount loans made as the demand curve does not intersect the horizontal portion of the supply curve, so the size of the balance sheet is normal or small compared with when the FED made discount loans. The Fed has stated that it is planning on bringing an end to the stimulative monetary policy famously known as Quantitative Easing. Based on your supply and demand curve from above... c. Would the FED be able to affect the interest rates by carrying out an open market operation? If not, why? Since the demand curve intersect with the supply curve on the vertical portion and open market operations will shift the vertical portion of the supply curve, the FED can affect interest rates by open market operations. d. What policy tool would be most effective in carrying out the FED's intention? Why? Since the demand curve does not intersect with the supply curve on the horizontal portion, changing discount rate is not effective. Therefore, as from (c), open market operation will be more effective