Q5 (20%) Suppose you are the CF 0 of a bank with the following Balance Sheet and that the required reserve ratio is 10%: Assets I Liabilities + Capital Reserves $ 10 Deposits $110 Securities $ 50 Borrowings and bonds 3: 50 Loans $110 Bank capital 3 10 Notice that the bank issues bonds, which are debt instruments. An internal report forecasts that over the next quarter, the bank will face both a. deposit outow of $20 and losses of $20, out of 1which $5 stern from securities and $15 from loan defaults. 1. Should the bank increase its capital? Why? (5%) 2. Suppose the bank issues a 10yr bond (this is a liability) which is sold for $20. Assume the revenues of this sale are credited into the bank's reserves. Show this change using a Taccount. (5%) 2 3. Do these new funds solve the potential solvency issue? Briey describe why. (5%) 4. Suppose the bank cannot issue equity at the moment. If the expected net earnings of the quarter are $25 (which can be retained as bank capital), what is the least amount of earnings that the bank should retain to avoid insolvency? (5%)