16 Mar Which components of operating expenses experience the greatest
1. Which components of operating expenses experience the greatest fluctuations? Why?
2. Why do equity holders care more about ROE than about ROA?
3. If a bank is falling short of meeting its capital requirements by $1 million, what three things can it do to rectify the situation?
4. Angus Bank holds no excess reserves but complies with the reserve requirement. The required reserves ratio is 9%, and reserves are currently $27 million. Determine the amount of deposits, the reserve shortage created by a deposit outflow of $5 million, and the cost of the reserve shortage if Angus Bank borrows in the federal funds market (assume the federal funds rate is 0.25%).
5. Nice Horizon Bank has the following measures of bank profitability: EM = 14 and ROA = 1.05%. Gold Coast Bank’s measures are EM = 12.3 and ROA = 1.15%.Which bank has a higher ROE?
6. Refer to the previous problem. Calculate both banks’ net profit after taxes and equity capital if both banks’ assets are equal to $120 million.
7. A bank is considering two investment portfolios com- posed of a mix of government securities (federal and municipal securities). The first portfolio has a return of 6% with probability 0.9 and returns of 5% and 7% with 0.05 probability. The second portfolio has a return of 5% with probability 0.5 and a return of 7% with probability 0.5. Which portfolio has the best combination of return and risk?
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