Solutions 1. (a) $12 million. (b) The balance sheet for Tarheel National: Assets Liabilities Reserves $11 mil. $100 mil. Deposits Loans $100 mil. $8 mil. Borrowings Securities $9 mil. $12 mil. Capital (c) $12 million. (d) ROA = 2%. ROE = 20%. 2. (a) Excess reserves equal $6 million. (b) The balance sheet after the deposit outow: Assets Liabilities Reserves $1 mil. $90 mil. Deposits Loans $100 mil. $8 mil. Borrowings Securities $9 mil. $12 mil. Capital (c) $3.5 million. (d) Borrow from another bank or corporation; sell securities; borrow from the Fed; reduce its loans. (e) i. If Tarheel National borrows reserves from another bank: Assets Liabilities Reserves $4.5 mil. $90 mil. Deposits Loans $100 mil. $11.5 mil. Borrowings Securities $9 mil. $12 mil. Capital ii. If Tarheel National sells securities: Assets Liabilities Reserves $4.5 mil. $90 mil. Deposits Loans $100 mil. $8 mil. Borrowings Securities $5.5 mil. $12 mil. Capital iii. If Tarheel National borrows from the Fed: 1 Assets Liabilities Reserves $4.5 mil. $90 mil. Deposits Loans $100 mil. $11.5 mil. Borrowings Securities $9 mil. $12 mil. Capital iv. If Tarheel National reduces its lending: Assets Liabilities Reserves $4.5 mil. $90 mil. Deposits Loans $91 mil. $8 mil. Borrowings Securities $9 mil. $12 mil. Capital 3. (a) $3,548.4 billion. (b) $10,279.9 billion; 2.92%. (c) $14,359.5; 7.67%. (d) Cash assets rose from $1,939.1 billion in March 2013 to $2,769.3 billion in March 2014. This is largely due to the Federal Reserves expansionary policies increasing the reserve component of cash reserves, but this is not apparent from Page 2 of H.8. (e) 7.68; 9.12. 4. (a) The payo table: Asset 1 Asset 2 Asset 3 Senior CDO Mezzanine CDO Junior CDO $100 $100 $100 $100 $100 $100 $100 $100 $0 $100 $100 $0 $100 $0 $100 $100 $100 $0 $100 $0 $0 $100 $0 $0 $0 $100 $100 $100 $100 $0 $0 $100 $0 $100 $0 $0 $0 $0 $100 $100 $0 $0 $0 $0 $0 $0 $0 $0 (b) $87.5. The senior CDO pays o 87.5% percent of the time. (c) $50. The mezzanine CDO pays o 50% percent of the time. (d) $12.5. The junior CDO pays o 12.5% percent of the time. (e) $50: The same expected payo as each of the underlying assets. 2