FIN350 problems

1. Determine the size of the M1 money supply using the following
information.
Currency plus traveler’s checks
Negotiable CDs
Demand deposits
Other checkable deposits
$25 million
$10 million
$13 million
$12 million
 
4. Following are components of the M1 money supply at the end of
last year. What will be the size of the M1 money supply at the end of
next year if currency grows by 10 percent, demand deposits grow by
5 percent, other checkable deposits grow by 8 percent, and the
amount of traveler’s checks stays the same?
Currency
Demand deposits
Other checkable deposits
Traveler’s checks
agreements and Eurodollars
$15 million; demand deposits
$25 million; retail money market mutual funds
$60 million;
savings accounts at depository institutions $40 million; checkable
deposits at depository institutions
$35 million; large-denomination time deposits $50 million; institutional money market mutual
funds
$65 million; and small-denomination time deposits
$45 million. Using Fed definitions, determine the dollar sizes of the
$700 billion
$300 billion
$300 billion
$10 billion
 
8. Assume that a country estimates its M1 money supply at $20
million. A broader measure of the money supply, M2, is $50 million.
The country’s gross domestic product is $100 million. Production or
real output for the country is 500,000 units or products.
a. Determine the velocity of money based on the M1 money
supply.
b. Determine the velocity of money based on the M2 money
supply.
c. Determine the average price for the real output.
Money and the Monetary System 47
a. What was the average selling price for the personal computers this year?
b. What is the expected average selling price next year for
personal computers if the velocity of money remains at this
year’s turnover rate? What percentage change in price level is
expected to occur?
c. If the objective is to keep the price level the same next year
(i.e., no inflation), what percentage increase in the money
supply should the central bank plan for?
chapter 3
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. Assume that you can borrow $175,000 for one year from a local
commercial bank.
a. The bank loan officer offers you the loan if you agree to pay
$16,000 in interest plus repay the $175,000 at the end of one
year. What is the percent interest rate or effective cost?
b. As an alternative you could get a one-year, $175,000 discount
loan at 9 percent interest. What is the percent interest rate or
effective cost?
 
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 individuals $7 million; loans secured by real estate $9 million; federal
funds purchased $4 million; and bank premises $11 million.
$1.5 million
$10.0 million
$4.5 million
$2.0 million
Commercial and industrial loans: Federal funds purchased:
$18 million
$6 million
Owners’ capital: $6 million
Other long-term liabilities:
$2 million
 
10. Let’s assume that you have been asked to calculate risk-based
capital ratios for a bank with the following accounts:
Cash $5 million
Government securities $7 million
Mortgage loans $30 million
Other loans $50 million
Fixed assets $10 million
Intangible assets $4 million
Loan-loss reserves $5 million
Owners’ equity $5 million
Trust-preferred securities $3 million
Cash assets and government securities are not considered risky.
Loans secured by real estate have a 50 percent weighting factor.
All other loans have a 100 percent weighting factor in terms of
riskiness.
a. Calculate the equity capital ratio.
b. Calculate the Tier 1 Ratio using risk-adjusted assets.
c. Calculate the Total Capital (Tier 1 plus Tier 2) Ratio using
risk-adjusted assets.
Copyright © 2011 John Wiley & Sons, Inc.
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Institutions and Markets
 
11. Challenge Problem This problem focuses on bank capital
management and various capital ratio measures. Following are
recent balance sheet accounts for Prime First National Bank.
Cash assets
$ 17 million
Loans secured by
real estate
40
Commercial loans
45
Government
securities owned 16
Goodwill
5
Bank fixed assets
15
Total assets
$138 million
Demand deposits
Time & savings
deposits
Federal funds
purchased
Trust-preferred
securities
Owners’ capital
Total liabilities
and owners’
capital
All amounts are in millions of dollars.
$50 million
a. Calculate the equity capital ratio. How could the bank increase
its equity capital ratio?
b. Risk-adjusted assets are estimated using the following weightings process: cash and government securities .00; real estate
loans .50; commercial and other loans 1.00.
66
Calculate the risk-adjusted assets amount for the bank.

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