Question

4. Suppose a bank currently has the following T-Account (all values in USD) : Assets Liabilities + Net worth Loans 210,000 Deposits Government Securities 20,000 Cash Reserves ? Net worth 200,000 ? a. Assuming required reserves of 10% are met exactly by this bank, how much are their cash reserves? b. Assuming required reserves of 10% are met exactly by this bank, how much is its net worth? c. What is the bank's equity multiplier? d. If, in the next year, the bank receives $10,000 in interest from their investments (loans and government securities) combined, what is their return on assets? (assume zero interest on deposits for this problem) e. If, in the next year, the bank receives $10,000 in interest from their investments (loans and government securities) combined, what is their return on equity? (assume zero interest on deposits for this problem)

Answer 1

a. Cash reserves = 10% of deposits = 20000

b. Net worth = assets – liabilities = 250000 – 200000 = 50000

c. Equity multiplier = Assets / equity = 250000 / 50000 = 5

d. Interest received = 10000$

Return on assets = interest / total assets * 100 = 10000 / 250000 * 100 = 4%

e. Interest received = 10000 $

Return on equity = interest received / equity * 100 = 10000 / 50000 * 100 = 20%