Question

Question 12 10 pts M&M bank has $30 million in checking deposits and another $70 million in savings deposits. M&M has lent out $80 million in long-term, fixed interest loans and has invested $25 million in short-term treasury bonds while maintaining reserves of $15 million. a) What items make up the bank's assets? What is total amount of assets? b) What items make up the banks' liabilities? What is the total amount of liabilities? c) What is the amount of capital? d) If the bank made a profit of $2 million last year, what is M&M's return on assets? What is their return on equity? (make sure to show how you calculated your answer) e) What items would be impacted, and in what way, if the bank had $2 million of loans default. B I VA - A - Ix E I I NVX beteren vv HTML Editores IX X 5 E T 12pt Paragra

Answer 1

Answer a)

Bank's assets consist of Long term, fixed interest loans of $80 million, Short term treasury bonds of $25 million and Reserves of $15 million. Total value of these assets is $120 million(80+25+15).

Loans are the assets of the bank as others owe it to bank. Treasury bonds are banks investment. Reserves are the cash or other liquid asset with the bank. So they all consists Bank's assets.

Answer b)

Checking deposits of $30 million and Saving deposits of $70 million are the liabilities of the bank because these are deposited by the public in the bank and they can withdraw it. Total amount of Liabilities is $100 million.

Answer c)

Assets =Capital +Liabilities, Therefore when assets are $120 million and liabilities are 100 Million then Capital can be calculated as $20 million.

Answer d)

With a profit of $2 million return on asset is 2%. ($2million/$100 million*100).

Equity is capital of the Bank, i.e. $20 million and profits are given as $2 million. So the return on equity is 10%($2 million/$20 million*100)

Answer e)

If there is loan default of $2 million then the amount loans will decline by $ 2 million and will be shown as $78 million in the asset whereas Capital will be reduced by $2 million because default on loan reduces the capital of the bank.