Question

1. Consider a bank that has the following assets and liabilities:

• Loans of $100 million with a realized rate of 5%
• Security holdings of $50 million earning 10% interest income
• Reserves of $10 million
• Savings accounts of $100 million interest of 2.5%
• Checking deposits of $30 million which pay no interest

1. Determine the profits for this bank. (Hint: The bank earns income, or revenues, not only from its loans but also from any securities it holds!)

Answer 1

Solution:-

Profit of Bank=Interest Receipts-Interest Payments

Interest Receipts= Interest on loans + Interest on securities

                              =$100*5%+$50*10%

                                =$5+$5

                                =$10 Million

Interest Payments= Interest on Saving Account deposits

                                 =$100*2.5%

                                 =$2.5 Million

Profit of Bank=$10-$2.5=$7.5Million.

Hence ,the profit for this bank is $7.5 Million