Suppose Universal Bank holds $100 million in assets, which are composed of the following:

Required Reserves:	$10 million
Excess Reserves:	$ 5 million
Mortgage Loans:	$20 million
Corporate Bonds:	$15 million
Stocks:	$25 million
Commodities:	$25 million

Do you think it is a good idea for Universal Bank to hold stocks, corporate bonds, and commodities as assets?

A.

Yes, as these types of assets surely provide the bank with extra profits.

B.

No, as these types of assets are relatively high risk, and there is a threat of insolvency.

Your answer is correct.

If the housing market suddenly crashed, Universal Bank would be better off with

the historical-cost

accounting system.

If the price of commodities suddenly increased sharply, Universal Bank would be better off with

a mark-to-market

accounting system.

What do your previous answers tell you about the tradeoffs between the two accounting systems? (Check all that apply.)

A.

Mark dash to dash market rules increase the value of collateral in downturns.Mark-to-market rules increase the value of collateral in downturns.

B.

Using historical dash cost can provide more capital stability for banks during downturns.Using historical-cost can provide more capital stability for banks during downturns.

C.

Mark-to-market rules generally provide a more accurate picture of a bank's capital position.

D.

The historical-cost system provides a more accurate picture of a bank's capital position.