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Homework 2 for Fin 100 (Introduction to Finance)

Chapter 3: Problem 1 and Problem 5

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?

     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.

a.From these accounts, select only the asset accounts and calculate the bank’s total assets.

b. Calculate the total liabilities for Third State Bank.

c.Based on the totals for assets and liabilities, determine the amount in the owners’ capital account.

Chapter 4 Problem 5

     5. The Friendly National Bank holds $50 million in reserves at its Federal Reserve District Bank. The required reserves ratio is 12 percent.

a.If the bank has $600 million in deposits, what amount of vault cash would be needed for            the bank to be in compliance with the required reserves ratio?

 b.If the bank holds $10 million in vault cash, determine the required reserves ratio that would be needed for the bank to avoid a reserves deficit.

c. If the Friendly National Bank experiences a required reserves deficit, what actions can it take to be in compliance with the existing required reserves ratio?