Final answer:
When a bank pays interest to its bondholders who are also depositors, it decreases its reserves because this represents an outflow of cash. The payment does not change the bank's liabilities but does affect its cash assets.
Step-by-step explanation:
When a bank pays interest to bondholders who are also depositors in the same bank, it effectively decreases its reserves. This is because the interest payment is an outflow of cash from the bank to the bondholders. In accounting terms, when this payment is made, the bank's liabilities remain the same, as it owes the deposit amount to the depositor, but its cash reserves, which are part of its assets, decrease as a result of the payment.
The relationship between a bank's assets and liabilities is an important aspect of its financial stability. Banks must carefully manage their interest rates to maintain profitability, particularly regarding the interest they pay to depositors versus the interest they receive from loans. When a bank experiences a rise in interest rates there is a risk that the bank might start paying more in interest to depositors than it is receiving from borrowers, which could lead to financial instability.
Answer: d) It decreases its reserves