Question

Hayden owes Luther $5000. Hayden will only be able to pay this debt if he is able to sell his one-year-old Harley motorcycle, valued at $20,000. Hayden writes a check to Luther that reads, "Payable to the order of Luther the sum of $5000 as soon as my Harley motorcycle sells for a reasonable amount." This check is ______.

Answer 1

Hayden's check to Luther is a conditional instrument, not payable until the sale of a motorcycle. Comparatively, Singleton Bank's loan to Hank's Auto Supply demonstrates a straightforward financial transaction affecting both banks' balance sheets and reserve requirements.

Step-by-step explanation:

The check Hayden writes to Luther is not a standard check but rather a conditional one, dependent on the sale of Hayden's motorcycle for a reasonable amount. This type of instrument introduces uncertainty as to when the check can be cashed, as it is contingent upon a future event that may or may not happen.

This arrangement can be problematic in business as it affects the liquidity and certainty of payment, which are crucial for financial management and planning.

In comparison, when Singleton Bank lends $9 million to Hank's Auto Supply, it records the loan on its balance sheet as an asset, expecting to generate interest income. Meanwhile, First National experiences an increase in deposits and reserves, maintaining a required reserve ratio, yet it has the ability to loan out the funds that exceed this minimum reserve requirement.

Understanding the concept of checks, bank loans, assets, and the ability to issue additional loans based on reserve requirements is fundamental in grasping how modern banks operate and influence the economy.