Question

Current T-bill Rate 1.5%
Source of Funds	Dollar Amount (in millions)				Relevant Interest Rate	Expected Expenses
Demand deposits	$5,000				0%	0
Time deposits	$2,000				2%	2000*2%=$40
1-year NCDs	$3,000				1.5+1.5=3%	$90
5-year NCDs	$2,500				4%	$100
Money Market Borrowings	$2,500				1.50-1=0.50%	$1250
Total Liabilities	$15,000					$242.50
Use of Funds		LL%	Loan Loss $ Amt	Funds Earning Interest	Relevant Interest Rate	Expected Earnings                  (corrected for LL)
Cash	$1,800
Small business loans	$4,000	1.50%	$60	4.50%	4.50%	$120
Large business loans	$3,000	1	30	3	3	60
Consumer loans	$3,000	2.50	75	5.50	5.50	90
Treasury bills	$1,000	0	0	1.50	1.50	15
Treasury bonds	$1,500	0	0	3.50	3.50	52.50
Corporate bonds	$1,000	0	0	3.50	3.50	35
Total investments	$15,300					372.50

Income Statement                                            

*DPR: dividend payout ratio (portion of earnings available to common stockholders paid out as dividends), thus 1-DPR = Retention Ratio.

Entry #1	Interest Revenues	37250
Entry #2	Interest Expenses	24250
Entry #3	Non Interest Revenues	300
Entry #4	Non Interest Expenses	400
Entry #5	Loan Loss Provision	165
Entry #6	Income Before Tax	30
Entry #7	Income tax liability (34%)	10.20
Entry #8	Net Income	19.80
Entry #9	Cash Dividends (60% DPR)	11.88
Entry #10	Retained Earnings (40% RR)	7.92

Part 4: interpretive statements related to bank performance as indicated with forecasted balance sheet and income statement. [30 points total]

These four questions are worth 3 points each.

Calculate the Expected ROA and ROE for the bank. [Capital (or Equity) is implied in the data provided.] (worksheet provided to add in creating balance sheet and income statement so as to determine ROE and ROA.)

Calculate the Primary Liquidity Ratio Position to contrast with an industry average of 10% (Primary is the Vault Cash plus Reserves at the Fed).

Calculate the total Liquidity Position to contrast with an industry average of 15%. (Total Liquidity Position is the cash position plus the holding of short term US Treasuries. {T-bonds are held as collateral when the bank is designated by the FED as a Tax & Loan Facility for the Treasury, and are not held for liquidity.})

Calculate the Current Capital Ratio Position (Capital Ratio is the Equity or Capital divided by Total Assets) to contrast with a Basil Expectation of 8% for a risk-ranked institution similar to this one.

Answer 1

We have to given the worksheet provided to add in creating balance sheet and income statement

Source of funds	Amount in millions	Relevant interest rate	Expected expenses
Demand deposites	5000	0	0
Time deposite	2000	2	40
1-year NCD	3000	3	90
5-year NCD	2500	4	100
Money market borrowings	2500	050	12.5
Total liabilities	15000		242.0

Usew of funds		LL%	Loan loss amount	earnings interest	Interest rate	Expected earnings
Cash	1800
Small business loans	4000	1.50	60	4.50	4.50	120
Large business loans	3000	1	30	3	3	60
Consumer loans	3000	2.50	75	5.50	5.50	90
Treasury bills	1000	0	0	1.50	1.50	15
Treasury bonds	1500	0	0	3.50	3.50	52.50
Corporate bonds	1000	0	0	3.50	3.50	35
Total investment	15300					372.50