INCOME STATEMENT

Suppose Melvin’s Bank starts with the balance sheet in Table 9.4A and the income statement in Table 9.2. Show how the balance sheet and income statement change in each of the following scenarios. Also calculate the new ROA, ROE, and rate sensitivity gap.

a. The bank issues $20 of new stock and uses the proceeds to make loans.

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b. Britt moves $25 from his savings account to his checking account.

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c. The bank is hired to manage the assets of a wealthy person, for which it is paid $10 a year.

d. The bank lends $5 of reserves to another bank in the federal funds market. (Assume the federal-funds rate is the same as the Treasury-bill rate.)

e. The bank replaces $10 of its loans with floating-rate loans, which pay the Treasury-bill rate plus 2 percent.

INCOME STATEMENT

For the year ended December 31, 2021

Interest Income Securities 4% ($30) $1.20

Loans 8% ($80) $6.40

Total $7.60

Noninterest Income $5.00 (letters of credit)

TOTAL INCOME $12.60

Interest Expense 4% ($50) $2.00 (savings accounts)

Noninterest Expense $6.00 (salaries, etc.)

TOTAL EXPENSE $8.00

PROFITS (Income – Expense) $4.60 ROA = profits assets = $4.60 $120 = 3.8% ROE = profits capital = $4.60 $20 = 23%

MELVIN’S BANK BALANCE SHEET

December 31, 2020

Assets

Reserves 10

Securities 30

Loans 80

Liabilities and Net Worth

Checking Deposits 50

Nontransaction Deposits 50

Net Worth 20

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