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Record the following transactions using t-accounting: Exercise 2 1) A new bank is incorporated with initial capital of 10m. 2) The bank issues bonds for
Record the following transactions using t-accounting:
Exercise 2 1) A new bank is incorporated with initial capital of 10m. 2) The bank issues bonds for 10m, checkable deposits for 15m and must hold 5% of assets in reserves at all times. The remaining funds are loaned out. 3) The bank collects interest of 5% on loans and pays 4% to bondholders. 4) The housing market turns sour. Borrowers stop paying interest, but the bank must honour its obligation to bond holders. It pays 4% to bondholders but collects no interest. 5) The value of loans falls by 10%. 6) Depositors read on the news that the housing market is under strain. They worry the bank may not honour its deposits, so they rush to the bank and withdraw 5m depositsStep by Step Solution
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