$\begin{array}{l}
\begin{array}{l}
\text { Assets} & \text { Liabilities and Equity}\
\text { Cash Required Reserves}&\$ 2 \text { million Deposits } \
\text { Loans}&\$ 10 \text { million Longterm Debt } \
&\text { Equity } \
\text { Total}&\$ 12 \text { million Total }
\end{array}
\begin{array}{l}
\
\$ 8 \text { million } \
\$ 2 \text { million } \
\$ 2 \text { million } \
\$ 12 \text { million }
\end{array}
\end{array}$ The average interest earned on the loans is 6 percent and the average cost of deposits is 5 percent.Rising interest rates are expected to reduce the deposits by $3 million.Borrowing more debt will cost the bank 5.5 percent in the short term.
What will be the size of the bank if a purchased liquidity management strategy is adopted?
A)$9 million.
B)$11 million.
C)$12 million.
D)$14 million.

Question

$\begin{array}{l}
\begin{array}{l}
\text { Assets} & \text {  Liabilities and Equity}\
\text { Cash Required Reserves}&\$ 2 \text { million Deposits } \
\text {  Loans}&\$ 10 \text { million Longterm Debt } \
&\text { Equity } \
\text { Total}&\$ 12 \text { million Total }
\end{array}
\begin{array}{l}
\
\$ 8 \text { million } \
\$ 2 \text { million } \
\$ 2 \text { million } \
\$ 12 \text { million }
\end{array}
\end{array}$ The average interest earned on the loans is 6 percent and the average cost of deposits is 5 percent.Rising interest rates are expected to reduce the deposits by $3 million.Borrowing more debt will cost the bank 5.5 percent in the short term.
What will be the size of the bank if a purchased liquidity management strategy is adopted?
A)$9 million.
B)$11 million.
C)$12 million.
D)$14 million.

Quizplus · Accepted Answer

If the bank adopts a purchased liquidity management strategy, it will replace the $3 million in lost deposits with $3 million in new debt. Therefore, the total size of the bank remains $12 million.

The Average Interest Earned on the Loans Is 6 Percent