Chapter 6. Chapter 4 – Problem 9
Step 1
Question
Brenda Olivia Adams starts her own bank, called BOA. As owner, Brenda puts in $2,000 of her own money. BOA then borrows $3,000 in a long-term loan from Brenda’s roommate, accepts $5,000 in demand deposits from her neighbors, buys $1,000 of corporate bonds, lends $6,000 to local businesses to finance new investments, and keeps the remainder of the bank’s assets as reserves at the Fed.
Show BOA’s balance sheet. What is BOA’s leverage ratio?
| BOA | |||
|---|---|---|---|
| Assets | Liabilities | ||
| Reserves | $evEwoBgju22bMUOtbnR4QE1FQFSXy28AgPU5pjYAOL4= | Deposits | $N6UPHWGDLo4Gfq2UaCz9BjBwQ4p/LQb4AAmZ90nOEwQ= |
| Loans | $sZycIPD4/5Elx7n9bZxUpFWEY1PSeq1s28jbAwaWCMc= | Debt | $evEwoBgju22bMUOtbnR4QE1FQFSXy28AgPU5pjYAOL4= |
| Securities | $2t9JHRp4B9PscF0Qzr5M/D/Cj6s2HvOEOtg1McCOPY0= | Capital | $RHbxlPISlVua8ZTsFxmz9nAroUYOpA/QzF/EYMvqtvc= |
| Total | $DWzwAAXtVPd1rxjvxvqQ0cvqnjHhm3SD8hG7aZzbW58= | Total | $DWzwAAXtVPd1rxjvxvqQ0cvqnjHhm3SD8hG7aZzbW58= |
Leverage Ratio = DYU2tVvtzEQ=
Step 2
Question
Brenda Olivia Adams starts her own bank, called BOA. As owner, Brenda puts in $2,000 of her own money. BOA then borrows $3,000 in a long-term loan from Brenda’s roommate, accepts $5,000 in demand deposits from her neighbors, buys $1,000 of corporate bonds, lends $6,000 to local businesses to finance new investments, and keeps the remainder of the bank’s assets as reserves at the Fed.
An economic downturn causes 10 percent of the local businesses to declare bankruptcy and default on their loans. Show BOA’s new balance sheet. By what percentage does the value of BOA’s assets fall? By what percentage does BOA’s capital fall?
| BOA | |||
|---|---|---|---|
| Assets | Liabilities | ||
| Reserves | $3000 | Deposits | $5000 |
| Loans | $D1Zs7eCfGQ6jfIJsNLO9x1m9Ab4zN8LTf8SiVQ6F1UA= | Debt | $3000 |
| Securities | $1000 | Capital | $2aRrSG3JnHen4RyKJmOX2eo1d73YcqRWYaaDoFnKwV4= |
| Total | $fdnOGHYx8NgIU4toyFYH7V6bUDGfhY1RdO4ui4i7TSM= | Total | $fdnOGHYx8NgIU4toyFYH7V6bUDGfhY1RdO4ui4i7TSM= |
Percentage decline in value of assets = yBhAQ+3VvjM=%
Percentage decline in value of capital = udX0h74V+w0=%