Question

QUESTION 1 their equity multiplier will be. Assuming all positive values, the larger the value of the leverage ratio for a bank, the O larger O smaller QUESTION 2 Assuming a bank has cash reserves to start with, at the moment a depositor comes in and withdraws the deposit they had previously made with the bank, the bank's cash reserves decrease. O True O False QUESTION 3 Given a one year treasury bond with a face value of $100 and a price of $97.50, what is the implied interest rate? (do not convert to a percentage and round to the nearest thousandth) 0.026 QUESTION 4 Given a 10 year treasury bond with a face value of $100 and a price of $84.50, what is the implied interest rate? (do not convert to a percentage and round to the nearest thousandth) 0.017

Answer 1

1.

As the leverage in bank increases, value of equity component relative to total assets falls. Therefore equity multiplier tends to increase as

Equity multiplier = Total Assets / Value of Equity.

As denominator becomes smaller, this will lead to increase in equity multiplier.

2. As deposits of bank has decreased, therefore cash reserves also decreases because cash reserves are made as a percentage of deposits.

Hence this statement is true.

3.

Interest rate = (2.5/97.5) *100 => 0.026

4.

Interest rate = (1 + (100 - 84.5) / 84.5) ^(1/10) -1 => 0.017.

5.

Interest rate = 1000 / 25000 => 0.04

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