The government of Utah gives you permission to open your state bank named \"Your

Question

The government of Utah gives you permission to open your state bank named "Your Bank of the State of Utah" (YBSU). After obtaining the charter from the state, you find investors that bring $1,000 in specie to form the capital of the bank After evaluating loan requests from clients, YBSU issues $1,500 in bank notes to costumers for loans payable in 1 year with a simple 5% interest rate over the amount lent. What is the total value of YBSU's assets (do not take capital or expected profits into account when computing assets' value)? What is the total value of YBSU's liabilities? What is YBSU's reserve ratio (remember that the "reserves" part in computing the reserve ration refers to the total amount of specie that the bank has)? What is YBSU's money multiplier? Is YBSU a "partial reserve system" (a.k.a. "fractional reserve") type of bank? Why or why not? What is YBSU's expected profit if everything goes well and the principal of the loan and the interests are paid at the end of the year?

Explanation / Answer

1) The total value of Bank's equity=$ 1000(obtained from investors)

The total value of Bank's Debt=notes payable=1500(bank notes issued)

Account payable=5% of 1500=$75(the interest rate expense that is payable within 1 year)

Total Liablities of Bank=notes payable+Account payable

Total Liablities of Bank=$ 1500 + $75

Total Liablities of Bank=$ 1575

Total value of assets=Total Liablities of Bank + The total value of Bank's equity

The total value of Bank's assets=$ 1575 + $ 1000

The total value of Bank's assets=$ 2575

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