I'm studying for my Econ midterm for monday and I'm having trouble solving this question. So if anyone can help I would greatly be thankful.
- Let’s say that you own a multinational bank that specializes in fixed rate home loans. Your asset sheet contains $10 Billion of fixed rate home loans. Let’s assume (to make the problem easier) that your customers (or the borrowers) all pay a fixed rate of 5%.
Let’s assume that you bank has $2 Billion of cash.
Let’s say your liabilities are $11 Billion of consumer deposits. The rate for these deposits has an expected value of 2% Let’s assume that required reserves are 10% of deposits.
Lastly, instead of dealing with the monstrous tax system we have in place let’s just say that we have a flat 10% tax rate on profits.
1a. First, calculate your expected revenue.
1b. Calculate your costs of borrowing.
1c. Next, find your expected profit. Don’t forget to calculate taxes and required reserves!
So, for expected revenue i would just $500 million?
Now this is where I get confused, does consumer deposits count as borrowings? If thats the case the cost of borrowing would be $220 Million of 11 Billion? Or do i get that after i take in the reserve ratio?
Now expected profit would just be 10 percent of $500 Million?
Thanks for the help.
Baking ;) I came in expecting a discussion about cookies and muffins.
Left disappointed.
Deposit interest is cost, the RR doesnt change that because you still have to pay interest on the RR.
and no expected profit is not 10% of 500 million
revenues - costs = EBIT - taxes = in this case profits since interest is a cost
So 500 million would be revune and 220 would be cost
So it would be 550-220=330 of 10 percent so revenue would be 33 million then?
Thanks
for the money part, the answer is $7. For the baking part, the answer is 3 servings of butter, a lil milk and some dough.
who else thought this was going to be a blastoise thread?
Revenue is $500M ($10B * .05%).
Costs of borrowing is $220M ($11B * .02)
EBIT is $280M ($500M - $220)
Tax is $28M ($280M * .10)
Net profit = $252M
What is the source of the $2B in cash? I assume after-tax retained earnings, so no cost associated here. 10% required reserves just means the money you can't lend out, so you have $13B in total cash, you have to keep $1.3B in reserves.
Haha I wasn't trying to give him the answer straight out. Plus the retained earnings doesnt count in the RR count its just on deposits.
Additionally, unless you were lending money out of your retained earnings, you would be in violation of the required reserves. For $11B in deposits with a 10% RR, you could only lend out $9.9B.
You should tell your prof. to also include a) provision for credit losses and b) interest income accruing on that cash balance.
All of the above is wrong. Quite simply, the question is impossible to answer because your teacher has stupidly decided this is a multinational bank, and that means only some of the deposits and loans are actually in dollars. FX risk is unaccounted for, and you are not accounting for your npl rate, your administration costs, maturity risk, or your insurance costs (or are you just leaving yourself open to a bank run?) and it fails to account for the effect of the discount rate, and variances across your international operations. Quite simply, it is a retarded question, and you should make that very clear.
But Chicago's answer is probably the one the teacher is looking for
Thanks a lot for the help Chicago, and too dexel yeah my professor is an "idiot" its his second year teaching and really isnt any good.
You are definitely in my NYU econ class at 11:00am with that indian lady in Silver 405 or something like that.
ok, scratch that, apparently you go to pace.
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