Question

How do I solve them Question 1

The reserve requirement is 0 percent on the first $8 million in transaction deposits, 3 percent on amounts between $8 million and $50 million, and 10 percent on amounts above $50 million. A bank with transaction deposits totaling $83 million has required reserves equal to

		$2.49 million.
		$4.56 million.
		$6.54 million.
		$8.30 million.

Use the capital-asset pricing model to predict the return next year of a stock with a beta of 0.5, if you expect the return to holding stocks to be 8 percent on average, and the interest rate on three-month T-bills will be 3 percent. What is the expected return to this stock?

		2.5 percent
		3.5 percent
		5.5 percent
		7.0 percent

Answer 1

Reserve Requirement

Total deposits = $83 million

0 - $8 million = 0

$8 million to 50 million = 3 % * ($50 million - $8 million) = $1.26 million

Above $50 million = 10% * ( $83 million - $50 million ) = $3.3 million

Total reserve requirement = $3.3 million + $1.26 million = $4.56 million.

Therefore, the right option is 2nd - $4.56 million.

Capital-asset pricing model

Expected return = T-bill rate * [ beta ( return on holding stocks - T-bills rate ) ] = 3% + [ 0.5 ( 8% - 3% ) ] = 5.5%.

Therefore, the right option is 3rd - 5.5 percent.