Chapter 13 – Managing Nondeposit Liabilities
week are projected to equal $680 million The bank also plans to acquire $420 million in
Chapter 13 – Managing Nondeposit Liabilities
Tenison National Security Bank
Assets
Liabilities and Net Worth
Reserves at Fed.
-70 million
Loans made
+70 million
Tenison National Security Bank
Assets
Liabilities and Net Worth
Reserves at Fed.
+70 million
Loans made
-70 million
Assets
Liabilities and Net Worth
Fed.
+70 million
Federal funds sold
-70 million
Tenison National Security Bank
Assets
Liabilities and Net Worth
Fed.
-70 million
Chapter 13 – Managing Nondeposit Liabilities
Masoner Savings
Assets
Liabilities and Net Worth
Deposits with
Flagg Metrocenter Bank
-11 million
Federal funds loaned
+11 million
Assets
Liabilities and Net Worth
Federal funds purchased
Masoner Savings’ Bank
deposit
Assets
Liabilities and Net Worth
Federal funds loaned
+11 million
Assets
Liabilities and Net Worth
Reserves
+11 million
Federal funds purchased
Assets
Liabilities and Net Worth
Reserves
+11 million
Federal funds loaned
-11 million
Chapter 13 – Managing Nondeposit Liabilities
Reserves
-11 million
Federal funds purchased
-11 million
Step 4 – Repaying the loan to the Masoner Savings
Masoner Savings
Assets
Liabilities and Net Worth
Deposit with Flagg
Metrocenter Bank
+11 million
Federal funds loaned
-11 million
Flagg Metrocenter Bank
Assets
Liabilities and Net Worth
Federal funds purchased
-11 million
Masoner Savings’ Bank
deposit
+11 million
13-3. Relgade National Bank secures primary credit from the Federal Reserve Bank of San
Francisco in the amount of $32 million for a term of seven days. Please show the proper entries
for granting this loan and then paying off the loan.
The correct entries are:
Assets
Liabilities and Net Worth
Reserves on deposit at
the Federal Reserve Bank
+32 million
Notes payable
Assets
Liabilities and Net Worth
Chapter 13 – Managing Nondeposit Liabilities
13–16
Step 2 – Repaying the loan to the Fed.
Relgade National Bank
Assets
Liabilities and Net Worth
Reserves on deposit at
the Federal Reserve Bank
-32 million
Notes payable
-32 million
Federal Reserve Bank of San Francisco
Assets
Liabilities and Net Worth
Loans and advances
-32 million
Bank reserve accounts
-32 million
13-4. Shad Corporation purchases a 60-day negotiable CD with a $5 million denomination
from Bait Bank and Trust, bearing a 2.95 percent annual yield. How much in interest will the
13-5. Deep Valley Bank borrows $125 million overnight through a repurchase agreement (RP)
collateralized by Treasury bills. The current RP rate is 2.50 percent. How much will the bank pay
360
13-6. Thyme Bank of New York expects new deposit inflows next month of $265
million and deposit withdrawals of $425 million The bank’s economics department has projected
Chapter 13 – Managing Nondeposit Liabilities
13–17
13-7. Wells Fargo Bank borrowed $150 million in Fed funds from JP Morgan Chase Bank in
New York City for 24 hours to fund a 30 day loan. The prevailing Fed funds rate on loans of this
maturity stood at 2.25 percent when these two institutions agreed on the loan. The funds loaned
by Morgan were in the reserve deposit that the bank keeps at the Federal Reserve Bank of New
JP Morgan Chase Bank
Assets
Liabilities and Net Worth
Day 1
Fed funds sold to Wells Fargo
Bank
+150 million
Reserves at Fed
-150 million
Day 2
Reserves at Fed
+150 million
Fed funds sold to Wells Fargo
Bank
-150 million
Fed funds sold to Bank of
America
+100 million
Reserves at Fed
-100 million
Day 4
Reserves at Fed.
+100 million
Fed funds sold to Bank of
America
-100 million
Chapter 13 – Managing Nondeposit Liabilities
13–18
Entries in the books of Wells Fargo Bank:
Wells Fargo Bank
Assets
Liabilities and Net Worth
Day 1
Reserves on deposit at Fed.
+150 million
Fed funds purchased
+150 million
Day 2
Reserves on deposit at Fed.
-150 million
Fed funds purchased
-150 million
Entries in the books of Bank of America:
Bank of America
Assets
Liabilities and Net Worth
Day 2
Reserves on deposit at Fed.
+100 million
Fed funds purchased
+100 million
Day 4
Reserves on deposit at Fed
-100 million
Fed funds purchased
-100 million
(b) Interest earned by JP Morgan Chase Bank on-
1. Wells Fargo Bank loan:
1
$150,000,000 × 0.0225 × $9,375
360
=
2. Bank of America loan:
2
$100,000,000 × 0.024 × = $13,333.33
360
13-8. Blue Skies Bank of Florida issues a three-month (90-day) negotiable CD in the amount of
$20 million to ABC Insurance Company at a negotiated annual interest rate of 2.75 percent (360
day basis). Calculate the value of this CD account on the day it matures and the amount of
13–19
13-9. Banks and other lending affiliates within the holding company of Best-of-Times
Financial are reporting heavy loan demand this week from companies in the southeastern United
States that are planning a significant expansion of inventories and facilities before the beginning
of the fall season. The holding company plans to raise $775 million in short-term funds this
week, of which about $700 million will be used to meet these new loan requests. Fed funds are
currently trading at 2.25 percent, negotiable CDs are trading in New York at 2.40 percent, and
Eurodollar borrowings are available in London at all maturities under one year at 2.30 percent.
One-month maturities of directly placed commercial paper carry market rates of 2.35 percent,
while the primary credit discount rate of the Federal Reserve Bank of Richmond is currently set
at 2.75 percent — a source that Best-of-Times has used in each of the past two weeks.
Noninterest costs are estimated at 0.25 percent for Fed funds, discount window borrowings, and
CDs; 0.35 percent for Eurodollar borrowings; and 0.50 percent for commercial paper. Calculate
the effective cost rate of each of these sources of funds for Best-of-Times and make a
management decision on what sources to use. Be prepared to defend your decision.
$775 × 0.0225 + $775 × 0.0025 × 100 = 2.768%
$700
Effective CD cost rate:
$775 × 0.024 + $775 × 0.0025 × 100 = 2.934%
$700
Effective Eurodollar cost rate:
$775 × 0.023 + $775 × 0.0035 × 100 = 2.934%
$700
Effective Commercial Paper cost rate:
$775 × 0.0235 + 775 × 0.005 × 100 = 3.155%
$700
Effective cost of borrowing from the Fed:
$775 × 0.0275 + 775 × 0.0025 × 100 = 3.321%
$700
The cheapest source of all would be borrowing from the Fed Funds Market. However, since the
inventory expansion for the companies is not a loan which is going to be repaid in a day or two,
the bank can also consider funding through CD or Eurodollar, both of which cost the same.
13-10.Surfs-Up Security Savings is considering the problem of trying to raise $80 million in
Federal funds, average for week just concluded
1.98%
Discount window of the Federal Reserve bank
2.25%
CDs (prime rated, secondary market):
One month
2.52%
Chapter 13 – Managing Nondeposit Liabilities
13–20
Three months
2.80%
Six months
3.18%
Eurodollar deposits (three months)
3.00%
Commercial paper (directly placed):
One month
2.33%
Three months
2.70%
Unfortunately, Surfs-Up’s economics department is forecasting a substantial rise in money
market interest rates over the next six weeks. What would you recommend to its funds
management department regarding how and where to raise the money needed? Be sure to
consider such cost factors as legal reserve requirements, regulations, and what happens to the
13-11. June Bug Bank and Trust has received $750 million in total funding, consisting of $200
million in checkable deposit accounts, $400 million in time and savings deposits, $100 million in
Chapter 13 – Managing Nondeposit Liabilities
noninterest costs. Management estimates the cost of stockholders’ equity capital at 12 percent
before taxes. (The bank is currently in the 35-percent corporate tax bracket.) When reserve
requirements are added in, along with uncollected dollar balances, these factors are estimated to
Chapter 13 – Managing Nondeposit Liabilities
13–22
Source of Funds
Amount
($millions)
Interest
Rate
Noninterest
Cost Rate
Total
Interest
Expenses
Total
Noninterest
Expenses
Time deposits
$325
1.75%
0.45%
$5.69
$1.4625
Noninterest-bearing transaction deposits
125
2.00%
0.00
2.5000
Total
$450
$5.69
$3.9625
Projected pooled-funds marginal costs:
All expected operating expenses 100
All new funds expected
Or
( )
3.9625 + 5.69 × 100 2.144%
450
=
Hurdle rate for the association can be calculated using:
All expected operating expenses 100
Amount available to place in earning assets
or
( )
3.9625 + 5.69 × 100 = 2.4125%
400