chap 5

Question 1

5-1. What are the principal accounts that appear on a bank’s balance sheet (Report of
Condition)?

Answer 1

The principal asset items on a bank’s Report of Condition are loans, investments in marketable
securities, cash, and miscellaneous assets. The principal liability items are deposits and
nondeposit borrowings in the money market. Equity capital supplied by the stockholders rounds
out the total sources of funds for a bank.

Question 2

5-2. Which accounts are most important and which are least important on the asset side of a
bank’s balance sheet?

Answer 2

Rank Order Assets
1 Cash
2 Investment Securities
3 Loans
4 Miscellaneous Assets

Question 3

5-3. What accounts are most important on the liability side of a balance sheet?

Answer 3

Rank Order Liabilities and Equity Capital
1 Deposits
2 Nondeposit Borrowings
3 Equity Capital
4 Miscellaneous Liabilities

Question 4

5-4. What are the essential differences among demand deposits, savings deposits, and time
deposits?

Answer 4

demand deposit: for transitioning purposes
saving deposit: for individual- for profit
time deposit: for firm: for benefit

Question 5

5-5. What are primary reserves, and secondary reserves and what are they supposed to do?

Answer 5

Primary reserves consist of cash, including a bank’s vault cash and checkable deposits held with
other banks or any other funds such as reserves with the Federal Reserve that are accessible
immediately to meet demands for liquidity made against the bank
Secondary reserves consist of assets that pay some interest (though usually pay returns that are
much lower than earned on other assets, such as loans) but their principal feature is ready
marketability. Most Secondary reserves are marketable securities such as short term government
securities and private securities such as commercial paper.
Both primary and secondary reserves are held to keep the bank in readiness to meet demands for
cash (liquidity) from whatever source those demands may arise

Question 6

5-6. Suppose that a bank holds cash in its vault of $1.4 million, short-term government
securities of $12.4 million, privately issued money market instruments of $5.2 million, deposits
at the Federal Reserve banks of $20.1 million, cash items in the process of collection of $0.6
million, and deposits placed with other banks of $16.4 million. How much in primary reserves
does this bank hold? In secondary reserves?

Answer 6

The bank holds primary reserves of:
Vault Cash + Deposits at the Fed + Cash Items in Collection + Deposits With Other
Banks
= $1.4 mill. + $20.1 mill. + $0.6 mill. + $16.4 mill.
= $38.5 million
The bank has secondary reserves of:
Short-term Government Securities + Private Money-Market Instruments
= $12.4 mill. + $5.2 mill.
= $17.6 million

Question 7

5-7. What are off-balance-sheet items and why are they important to some financial firms?

Answer 7

Off-balance-sheet items are usually transactions that generate fee income for a bank (such as
standby credit guarantees) or help hedge against risk (such as financial futures contracts). They
are important as a supplement to income from loans and to help a bank reduce its exposure to
interest-rate and other types of risk.