finance problems

Question # 00004332 Posted By: neil2103 Updated on: 12/01/2013 10:47 PM Due on: 12/31/2013
Subject Finance Topic Finance Tutorials:
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1. Determine the size of the M1 money supply using the following
Currency plus traveler’s checks $25 million
Negotiable CDs $10 million
Demand deposits $13 million
Other checkable deposits $12 million

2. 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 $700 billion
Demand deposits $300 billion
Other checkable deposits $300 billion
Traveler’s checks $10 billion

3. 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
b. Determine the velocity of money based on the M2 money
c. Determine the average price for the real output.

4. The One Product economy, which produces and sells only
personal computers (PCs), expects that it can sell 500 more, or 12,500
PCs, next year. Nominal GDP was $20 million this year, and the
money supply was $7 million. The central bank for the One Product
economy plans to increase the money supply by 10 percent next year.

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?
d. How would your answer in (c) change if the velocity of money
is expected to be three times next year? What is it now?

5. 1. The following three one-year “discount” loans are available to
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?

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.

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
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

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 Demand deposits $50 million
Loans secured by Time & savings
real estate 40 deposits 66
Commercial loans 45 Federal funds
purchased 15
Government Trust-preferred
securities owned 16 securities 2
Goodwill 5
Bank fixed assets 15 Owners’ capital 5
Total assets $138 million Total liabilities $138 million
and owners’
All amounts are in millions of dollars.
Note: The bank has loan-loss reserves of $10 million. The real estate
and commercial loans shown on the balance sheet are net of the
loan-loss reserves.
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.
Calculate the risk-adjusted assets amount for the bank.
c. Calculate the Tier 1 Ratio based on the information provided
and the risk-adjusted assets estimate from Part b.
d. Calculate the Total Capital (Tier 1 plus Tier 2) Ratio based on
the information provided and the risk-adjusted assets estimate
from Part b.
e. What actions could the bank management team take to
improve the bank’s Tier 1 and Total Capital ratios?
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Tutorials for this Question
  1. Tutorial # 00004130 Posted By: neil2103 Posted on: 12/01/2013 10:50 PM
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    The solution of finance problems...
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