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Banking Exercises for Finance Students

Rhinestone National Bank has a potential liquidity risk issue due to its high reliance on brokered deposits and CDs for funding rather than core deposits. If interest rates rise significantly, the bank could face losses. Management should seek to improve its funding mix by increasing core deposits and reducing its dependence on more volatile non-core funding sources. Fine-Tuned Savings Association should offer an interest rate of 2.75% on new deposits to maximize total profits, as deposits at this rate would yield the highest marginal revenue that exceeds the marginal cost of funds. New Day Bank should seek to attract $400 million in new deposits by offering an interest rate of 2.75%, as this is the volume

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Chinhoong Ong
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362 views3 pages

Banking Exercises for Finance Students

Rhinestone National Bank has a potential liquidity risk issue due to its high reliance on brokered deposits and CDs for funding rather than core deposits. If interest rates rise significantly, the bank could face losses. Management should seek to improve its funding mix by increasing core deposits and reducing its dependence on more volatile non-core funding sources. Fine-Tuned Savings Association should offer an interest rate of 2.75% on new deposits to maximize total profits, as deposits at this rate would yield the highest marginal revenue that exceeds the marginal cost of funds. New Day Bank should seek to attract $400 million in new deposits by offering an interest rate of 2.75%, as this is the volume

Uploaded by

Chinhoong Ong
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER 12

Week 8 Class Exercises

1. Rhinestone National Bank reports the following figures in its current Report of
Condition:

Assets (millions) Liabilities and Equity (millions)


Cash and interbank $50 Core deposits $50
deposits
Short-term security 15 Large negotiable CDs 150
investments
Total loans, gross 400 Deposits placed by brokers 65
Long-term securities 150 Other deposits 45
Other assets 10 Money market liabilities 195
Other liabilities 65
Equity capital 55
Total assets $625 Total liabilities and equity capital $625

a. Evaluate the funding mix of deposits and nondeposit sources of funds employed by
Rhinestone. Given the mix of its assets, do you see any potential problems? What changes would
you like to see management of this bank make? Why?

b. Suppose market interest rates are projected to rise significantly. Does Rhinestone appear to
face significant losses due to liquidity risk? Due to interest rate risk? Please be as specific as
possible.

2. Fine-Tuned Savings Association finds that it can attract the following amounts of
deposits if it offers new depositors and those rolling over their maturing CDs at the interest rates
indicated below:

Expected Volume of New Rate of Interest Offered


Deposits Depositors
$10 million 2.00%
15 million 2.25
20 million 2.50
24 million 2.75
26 million 3.00

Management anticipates being able to invest any new deposits raised in loans yielding 5.50
percent. How far should this thrift institution go in raising its deposit interest rate in order to
maximize total profits (excluding interest costs)?

12-1
Rate Exp. Diff.
Total Marginal Marginal Total
Expected Offered Marginal In Marg.
Interest Interest Revenue Profits
Inflows on New Cost Rate Rev and
Cost Cost Rate Earned
Funds Cost
$10 2.00% 0.2000 0.2000 2.00% 5.5% 3.50% $0.3500
$15 2.25%
$20 2.50%
$24 2.75%
$26 3.00%

3. New Day Bank plans to launch a new deposit campaign next week in hopes of bringing
in from $100 million to $600 million in new deposit money, which it expects to invest at a 4.25
percent yield. Management believes that an offer rate on new deposits of 2 percent would attract
$100 million in new deposits and rollover funds. To attract $200 million, the bank would
probably be forced to offer 2.25 percent. New Day’s forecast suggests that $300 million might be
available at 2.50 percent, $400 million at 2.75 percent, $500 million at 3.00 percent, and $600
million at 3.25 percent. What volume of deposits should the institution try to attract to ensure
that marginal cost does not exceed marginal revenue?

Expected Rate Total Marginal Marginal Marginal Exp. Diff. Total


Inflows Offered Interest Interest Cost Rate Revenue In Marg. Profits
on New Cost Cost Rate Rev and Earned
Funds Costs
$100 2.00%
$200 2.25%
$300 2.50%
$400 2.75%
$500 3.00%
$600 3.25%

4. The National Bank of Mayville quotes an APY of 2.75 percent on a one-year money
market CD sold to one of the small businesses in town. The firm posted a balance of $2,500 for
the first 90 days of the year, $3,000 over the next 180 days, and $3,700 for the remainder of the
year. How much in total interest earnings did this small business customer receive for the year?

Using the APY formula we can fill in the variables whose values are known and find the
unknown interest earnings. Thus:


 Interest earned   365 Days in period  
APY = 100  1 +  - 1
 Average account balance  
 

12-2
5. Describe the essential differences between the following deposit pricing methods in use
today: cost-plus pricing, conditional pricing, and relationship pricing.

12-3

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