Question

Consider the bank balance sheet below. If the bank made a 10% return on all interest-paying assets and paid no interest on transaction deposits, then the ROE (return on equity) would be: Assets Liabilities Reserves $60 Transaction Deposits $800 Bonds $400 Loans $600 Equity ______

Answer 1

The bank's ROE would be 50%.

Step-by-step explanation:

In order to calculate the bank's ROE (return on equity), we need to determine its net income and equity. Net income can be calculated by multiplying the return on assets (ROA) by the total assets. In this case, the bank made a 10% return on all interest-paying assets, which are the bonds and loans. Since the bank has $400 in bonds and $600 in loans, the total assets amount to $1,000. Therefore, the net income would be $1,000 * 10% = $100.

To calculate the equity, we subtract the liabilities from the assets. In this case, the liabilities consist of the transaction deposits, which are $800. Therefore, the equity would be $1,000 - $800 = $200.

Finally, we can calculate the ROE by dividing the net income by the equity. In this case, the ROE would be $100 / $200 = 0.5 or 50%.