Week 2 Complete

Book:   Melicher, Ronald W., and Edgar A. Norton Introduction to Finance: Markets, Investments, and Financial Management, Enhanced eText. Wiley Global Education US, 2016. [Savant Learning Systems].
Complete: a minimum of 1,000 words (total assignment) and three scholarly sources.
1.  Assume that Bank A receives a primary deposit of $100,000 and that it must keep reserves of 10 percent against deposits.

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a. Prepare a simple balance sheet of assets and liabilities for the bank immediately after the deposit is received.
b. Assume Bank A makes a loan in the amount that can be safely lent. Show what the bank’s balance sheet of assets and liabilities would look like immediately after the loan.
c. Assume that a check in the amount of the derivative deposit created in (b) was written and sent to another bank. Show what Bank A’s (the lending bank’s) balance sheet of assets and liabilities would look like after the check is written.
2.  Assume the interest rate on a one-year U.S. government debt security is currently 9.5 percent compared with a 7.5 percent on a foreign country’s comparable maturity debt security. If the U.S. dollar value of the foreign country’s currency is $1.50, what is the expected exchange rate one year from now based on interest rate parity?
3.  As an advisor to the U.S. Treasury, you have been asked to comment on a proposal for easing the burden of interest on the national debt. This proposal calls for the elimination of federal taxes on interest received from Treasury debt obligations. Comment on the proposal.
4.  You have been asked to create a forecast regarding the shape of next year’s term structure of interest rates. Using the three term structure theories discussed in Chapter 8, explain what data you would need and how you would use the data to estimate changes in the term structure between this year and the next.