Enter these losses in the space below and adjust the balance sheet to reflect the loan defaults.

You have raised $10 million from investors to open a bank.

You have raised $10 million from investors to open a bank.

Question

You have raised $10 million from investors to open a bank. You get to decide how aggressive you want to be in attracting deposits. 1. You must choose whether you want to be conservative or aggressive – you can take in $90 million or $240 million in deposits. Enter this amount on the balance sheet below (for deposits). 2. You need to hold 5% of your deposits in reserve. Enter this amount on the balance sheet below (for reserves). 3.Now you can loan the rest. Enter this amount on the balance sheet below (for loans). 4. Risk is about the random probability of possible outcomes. So now you need to roll the dice. If you get a six, congratulations, you have no losses. Otherwise, the number on your die is the percentage of loans that go bad. Enter this number in the space below. 5. Calculate the dollar amount of loan losses. Enter these losses in the space below and adjust the balance sheet to reflect the loan defaults. 6. You earn interest of 4% on producing (non-defaulted) loans. Enter this number in its space. 7. Your operating cost is 1.5% of deposits. Enter this number in the space below. 8. Profit is revenue minus expenses. You have already calculated your revenue. You have two costs to consider, operating cost and defaulted loans that you need to write off. Enter your profit in the space below. 9. Finally, on the class discussion board, post (1) whether you are aggressive or conservative, (2) your percentage of loan losses, and (3) your profit. 10. Look at all of the posts. What do you learn about the decision to be aggressive versus conservative.

____________________’s Bank Assets

Assets Liabilities

Reserves ? Deposits ?

Loans ? Capital $10

Loan loss percentage: _____?___ Loan loss in dollars: ____?_____ Loan revenue: ____?______ Operating cost: ____?_____ Profit:_____?____

CommentYou have raised $10 million from investors to open a bank. You get to decide how aggressive you want to be in attracting deposits. 1. You must choose whether you want to be conservative or aggressive – you can take in $90 million or $240 million in deposits. Enter this amount on the balance sheet below (for deposits). 2. You need to hold 5% of your deposits in reserve. Enter this amount on the balance sheet below (for reserves). 3. Now you can loan the rest. Enter this amount on the balance sheet below (for loans). 4. Risk is about the random probability of possible outcomes. So now you need to roll the dice. If you get a six, congratulations, you have no losses. Otherwise, the number on your die is the percentage of loans that go bad.Enter this number in the space below. 5. Calculate the dollar amount of loan losses. Enter these losses in the space below and adjust the balance sheet to reflect the loan defaults. 6. You earn interest of 4% on producing (non-defaulted) loans. Enter this number in its space. 7. Your operating cost is 1.5% of deposits. Enter this number in the space below. 8. Profit is revenue minus expenses. You have already calculated your revenue. You have two costs to consider, operating cost and defaulted loans that you need to write off. Enter your profit in the space below. 9. Finally, on the class discussion board, post (1) whether you are aggressive or conservative, (2) your percentage of loan losses, and (3) your profit. 10. Look at all of the posts. What do you learn about the decision to be aggressive versus conservative.

____________________’s Bank Assets

Assets Liabilities

Reserves ? Deposits ?

Loans ? Capital $10

Loan loss percentage: _____?___ Loan loss in dollars: ____?_____ Loan revenue: ____?______ Operating cost: ____?_____ Profit:_____?____

Comment

You have raised $10 million from investors to open a bank.


 

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