Final answer:
A repurchase agreement functions as a loan where Fargood Corporation is the borrower and The National Bank of Nebraska is the lender. The bank effectively lends money, secured by Treasury securities, at an implied interest. This transaction impacts the balance sheet of the borrower by altering the assets and liabilities.
Step-by-step explanation:
The repurchase agreement between Fargood Corporation and The National Bank of Nebraska is indeed a form of a loan. In this transaction, Fargood Corporation is the borrower, while The National Bank of Nebraska is the lender.
This conclusion is drawn because in a repurchase agreement, the company that sells the securities agrees to buy them back at a specified time and for a higher price, reflecting the interest on the loan. Therefore, the difference in the initial and final amounts of the securities represents the interest on the loan provided by the bank. Fargood Corporation initially sells Treasury securities to the bank for $9,987,950 and commits to repurchasing the same securities at $10,000,000. The additional amount paid upon repurchase is akin to paying interest on a loan.
When considering the balance sheet changes for Acme Bank after the Federal Reserve conducts an open market purchase of Treasury bonds, Acme Bank's reserves increase by the sale amount, while their holdings in bonds decrease. This increase in reserves leads to a higher potential for Acme Bank to issue new loans, thereby affecting the composition of its assets. The specific changes to the balance sheet would depend on Acme Bank's actions following the sale.