Question 11 week 4 business finance by huanglianjiang1


									Question 11:

    2. Glenwood National Bank is short of required legal reserves. The bank’s money
manager estimates it will need to raise an additional $50 million in funds to
cover its reserve requirement over the next three days. Federal funds are trading
today at 5.90 percent, and the bank’s economist has forecast a federal funds
rate of 6.15 percent tomorrow and 6.20 percent the next day. Negotiable CDs
in minimum maturities of seven days have been trading this morning at 5.85
percent, with a forecast of 5.90 percent tomorrow and 5.98 percent the next day.
The FDIC charges 30 cents per $100 for insurance coverage.
Calculate the lowest-cost source of funding for Glenwood National Bank
and the next cheapest source for borrowing over the next three days (today,
tomorrow, and the next day). What are the relative advantages and disadvantages
of each of these funding sources?

    3. If Sterling Corporation purchases a $5 million bank CD that matures in 90 days
and promises an interest return of 6.25 percent, how much in total will Sterling
receive back when this CD matures?

    6. JP Morgan Chase Bank is short cash reserves in the amount of $225 million—a
condition expected to last for the next five business days—and is weighing (a)
securing a loan in the domestic federal funds market, where the interest rate
prevailing today is 5.45 percent; (b) issuing 7-day domestic negotiable CDs at a
current market rate of 5.50 percent; or (c) tapping its foreign branch offices for
30-day Eurodollars at a market rate of 5.58 percent. The estimated noninterest
cost of all of these various funding sources is approximately the same, except
that the domestic CDs currently carry an annual FDIC insurance fee of $0.04 per
every $100 in deposits received from the public. Which source of funds would
you recommend the bank make use of? What factors should the bank’s funds
management division weigh in making this borrowing decision?

9. Commercial paper was purchased in the secondary market 30 days from maturity
at a bank discount yield of 9 percent. Ten days later, it was sold to a dealer at an
8 percent discount rate. What was the investor’s holding-period yield?

10. What is the difference in basis points between the discount rate of return (DR)
and the investment rate of return (IR) on a $10 million commercial paper note
purchased at a price of $9.85 million and scheduled to mature in 25 days?

11. A commercial paper note with $1 million par value and maturing in 60 days has
an expected discount return (DR) at maturity of 6 percent. What was its purchase
price? What is this note’s expected coupon-equivalent (investment return) yield

Question 12:

     4. Suppose that households wished to maintain $1.00 in pocket money (currency
and coin) and $10.00 in liquid savings assets (small CDs, money funds, and
savings accounts) for every $1.00 in their checking accounts (transaction
deposits). If banks choose their desired reserves to be ten cents for every dollar
of transaction deposits, what are the reserve multiplier and the money (M2)
multiplier if the Federal Reserve’s reserve requirement ratio is: (a) 8 percent;
(b) 10 percent; and (c) 12 percent?
     5. If households’ currency-deposit ratio is 1.25, and they desire to maintain $9.25
in liquid savings assets for each dollar in their checking accounts, what must
the banks’ excess reserves ratio be if the money multiplier is 10? If the banks
changed their excess reserves ratio to one dollar for every $1,000 of transaction
deposits, compute the effect this would have on the money multiplier.

    6. Suppose the Federal Reserve uses data to estimate the currency-deposit ratio to
be 0.90, the ratio of liquid savings assets to transaction deposits to be 8.00, and
the excess reserves ratio to be 0.001.

    A. If it wished to increase M2 by $10 billion, how much would it have to raise
the monetary base?

b. How far off would the Federal Reserve have been if it conducted policy as
you describe in (a), but the currency-deposit ratio turned out to be 1?

c. How far off would the Federal Reserve have been if it conducted policy as
you describe in (a), but the liquid asset to transaction deposits ratio turned out
to be 10?

D. How far off would the Federal Reserve have been if it conducted policy as
you describe in (a), but the excess reserves ratio turned out to be 0.003?

To top