FINS 3630 Week 4 Tutorial QuestionsS2, 2012

1. NSW Bank reports that it holds $70 billion in (one-year) loans, $20 billion in Marketable Securities, and $10 billion in cash reserve. On the liability side of its accounts, it reports $95 billion in customer deposits.

(1) Assuming the bank has no other assets and liabilities, construct the bank’s balance sheet and find the bank’s total equity capital.

Assets LiabilitiesCash reserve: ____________ Deposits: __________

Securities: _____________ Equity Capital: _______________

Loans: ___________

(2) At the end of the first quarter of the year, the bank manager estimates that 1% of the loans have become uncollectible. What would the balance sheet look like at the end of the first quarter?

Assets Liabilities

Cash reserve: ________________ Deposits: _______________

Securities: ______________ Equity Capital: _____________

Loans: ______________

Less: Allowances for loan losses: ___________

(3) At the end of the year, the 1% of the loan is not repaid and the bank manager decides to charge off the loan. What should the balance sheet look like?

Assets Liabilities

Cash reserve: _______________ Deposits: _______________

Securities: ________________ Equity Capital: ______________

Loans: ________________

Less: Allowances for loan losses: _________

(4) Please fill in the numbers in the bank’s quarterly income statement at the end of the first quarter using the balance sheet in part (1) and the following interest–rate assumptions:

a. The average contract interest rate on the bank’s loans is 8 percent per annum (Hint: the interest rate would be 2 percent per quarter)

b. The average coupon interest rate on the bank’s securities is 4 percent per annum.c. The average explicit interest rate paid on the bank’s deposits is 2 percent per annum.

Interest Income: Loans: ________________ Securities: ___________________

Interest Expenses Interest on deposits: ___________________

Net Interest Income: ___________________Provision for loan losses: _________________

Net Income: ______________________

Chapter 13: Questions 2, 6, 9, 12, 13, 19, 20