Finance

1. Go to http:// www. stlouisfed. org and identify sources and uses of funds for commercial banks.

5. Banks provide checking account services, accept savings deposits, and lend to borrowers. In other words, they are in the money busi-ness. We all have heard stories of banks or their partner firms “ misplacing” or “ losing” bags of money. Lending rates are also subject to change periodically. Both of these situations can produce ethical dilemmas or decisions. How would you react to the following scenarios? a. You are walking down the street and see a large money bag with “ First National Bank” printed on it. The bag is sitting on the sidewalk in front of a local office of First National Bank. You are considering whether to pick up the bag, check its contents, and then try to find the owner. Alternatively, you could pick up the money bag and take it to the local police station or return it directly to the bank itself. What would you do? b. You are a loan officer of First National Bank. The owner of a small business has come into the bank today and is request-ing an immediate $ 100,000 loan for which she has appropri-ate collateral. You also know that the bank is going to reduce its lending interest rate to small businesses next week. You could make the loan now or inform the small business owner that she could get a lower rate if the loan request is delayed. What would you do?

1. The following three one- year “ discount” loans are available to you: Loan A: $ 120,000 at a 7 percent discount rate Loan B: $ 110,000 at a 6 percent discount rate Loan C: $ 130,000 at a 6.5 percent discount rate a. Determine the dollar amount of interest you would pay on each loan and indicate the amount of net proceeds each loan would provide. Which loan would provide you with the most upfront money when the loan takes place? b. Calculate the percent interest rate or effective cost of each loan. Which one has the lowest cost?

2. 5. Following are selected balance sheet accounts for Third State Bank: vault cash $ 2 million; U. S. government securities $ 5 million; demand deposits $ 13 million; nontransactional accounts $ 20 million; cash items in process of collection $ 4 million; loans to indi-viduals $ 7 million; loans secured by real estate $ 9 million; federal funds purchased $ 4 million; and bank premises $ 11 million.

a. From these accounts, select only the asset accounts and calculate the bank’s total assets.

b. Calculate the total liabilities for Third State Bank.

c. Based on the totals for assets and liabilities, determine the amount in the owners’ capital account.

5. The Friendly National Bank holds $ 50 million in reserves at its Federal Reserve District Bank. The required reserves ratio is 12 percent. a. If the bank has $ 600 million in deposits, what amount of vault cash would be needed for the bank to be in compliance with the required reserves ratio? b. If the bank holds $ 10 million in vault cash, determine the required reserves ratio that would be needed for the bank to avoid a reserves deficit.

1. Assume that Banc One receives a primary deposit of $ 1 million. The bank must keep reserves of 20 percent against its deposits. Prepare a simple balance sheet of assets and liabilities for Banc One immediately after the deposit is received.

6. Assume a financial system has a monetary base of $ 25 million. The required reserves ratio is 10 percent, and there are no leakages in the system. a. What is the size of the money multiplier? b. What will be the system’s money supply?

9. Assume that last year the Australian dollar was trading at $. 5527, the Mexican peso at $. 1102, and the United Kingdom ( British) pound was worth $ 1.4233. By this year the U. S. dollar value of an Australian dollar was $. 7056, the Mexican peso was $. 0867, and the British pound was $ 1.8203. Calculate the percentage appreciation or depreciation of each of these three currencies between last year and this year.

4. Assume personal income was $ 28 million last year. Personal outlays were $ 20 million and personal current taxes were $ 5 million. a. What was the amount of disposable personal income last year? b. What was the amount of personal saving last year? c. Calculate personal saving as a percentage of disposable personal income.

4. A thirty- year U. S. Treasury bond has a 4.0 percent interest rate. In contrast, a ten- year Treasury bond has an interest rate of 3.7 percent. If inflation is expected to average 1.5 percentage points over both the next ten years and thirty years, determine the maturity risk premium for the thirty- year bond over the ten- year bond.

6. Determine the present values if $ 5,000 is received in the future ( i. e., at the end of each indicated time period) in each of the follow-ing situations:

a. 5 percent for ten years b. 7 percent for seven years

c. 9 percent for four years

22. The Fridge- Air Company’s preferred stock pays a dividend of $ 4.50 per share annually. If the required rate of return on compara-ble quality preferred stocks is 14 percent, calculate the value of Fridge- Air’s preferred stock.

23. The Joseph Company has a stock issue that pays a fixed dividend of $ 3.00 per share annually. Investors believe the nominal risk- free rate is 4 percent and that this stock should have a risk premium of 6 percent. What should be the value of this stock?

24. The Lo Company earned $ 2.60 per share and paid a dividend of $ 1.30 per share in the year just ended. Earnings and dividends per share are expected to grow at a rate of 5 percent per year in the future. Determine the value of the stock:

a. if the required rate of return is 12 percent.

b. if the required rate of return is 15 percent.

c. Given your answers to ( a) and ( b), how are stock prices affected by changes in investor’s required rates of return?

2. In late 2010, you purchased the common stock of a company that has reported significant earnings increases in nearly every quarter since your purchase. The price of the stock increased from $ 12 a share at the time of the purchase to a current level of $ 45. Notwith-standing the success of the company, competitors are gaining much strength. Further, your analysis indicates that the stock may be over-priced based on your projection of future earnings growth. Your analysis, however, was the same one year ago and the earnings have continued to increase. Actions that you might take range from an outright sale of the stock ( and the payment of capital gains tax) to doing nothing and continuing to hold the shares. You reflect on these choices as well as other actions that could be taken. Describe the various actions that you might take and their implications. 3. Which of the following securities is likely to be the most liquid according to this data? Explain.

STOCK BID ASK

R $ 39.43 $ 39.55 S

S 13.67 13.77 T

T 116.02 116.25

6. Find the real return on the following investments:

STOCK NOMINAL RETURN INFLATION A

A 10% 3% B

B 15% 8% C

C – 5% 2%

8. The countries of Stabilato and Variato have the following average returns and standard deviations for their stocks, bond, and short-term government securities. What range of returns should you expect to earn 95 percent of the time for each asset class if you invested in Stabilato’s securities? From investing in Variato’s securities?

STABILATO ASSETS AVERAGE RETURN STANDARD DEVIATION

Stocks 8% 3%

Bonds 5% 2%

Short Term Government Debt 3% 1%

VARIATO ASSETS AVERAGE RETURN STANDARD DEVIATION

Stocks 8% 3%

Bonds 5% 2%

Short Term Government Debt 15% 13%