The average interest earned on the loans is 7 percent and the average cost of deposits is 6 percent. Rising interest rates are expected to reduce the deposits by $ 1.5 million. Borrowing (Incurring) more debt will cost the bank 8 percent in the short term. Liabilities and Equity $8 million Assets $2 million | Deposits $10 million Long-term Debt Equity $12 million Total Cash Required Reserves Loans $2 million $2 million Total $12 million What will be the cost of using a strategy of purchased liquidity management to meet the expected decline in deposits? Assume that the bank intends to keep $2 million in cash as liquidity precaution.
The average interest earned on the loans is 7 percent and the average cost of deposits is 6 percent. Rising interest rates are expected to reduce the deposits by $ 1.5 million. Borrowing (Incurring) more debt will cost the bank 8 percent in the short term. Liabilities and Equity $8 million Assets $2 million | Deposits $10 million Long-term Debt Equity $12 million Total Cash Required Reserves Loans $2 million $2 million Total $12 million What will be the cost of using a strategy of purchased liquidity management to meet the expected decline in deposits? Assume that the bank intends to keep $2 million in cash as liquidity precaution.
Chapter16: Working Capital Policy And Short-term Financing
Section: Chapter Questions
Problem 14P
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