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4. Suppose that the First Bank has the following balance-sheet position (in millions of dollars) and that the desired reserve ratio on deposits is 10% and the bank has net profits (after taxes) of $2.5 million Reserves Loans Securities Assets $20 $150 $80 Liabilities Deposits $200 Bank Capital $50 (a) Define the term 'return on assets'. What is its numerical value? (3 marks) (b) Define the term 'return on equity'. What is its numerical value? (3 marks) (c) Even though this bank has net profits of $2.5 million, it also has a bad loan'(defaulting) of $10 million. Show the balance sheet of this bank after it has taken a 'write-off' for this bad loan. What is the value of the return on equity after the adjustments are made due to the bad loan? Explain/show your calculations. (4 marks) (d) Given the initial balance sheet above, assume 60% of the total assets are considered fixed rate assets and the bank has $150 million of rate-sensitive liabilities. Explain and calculate what will happen to the banks net income if interest rates increase by 3% points. Show all your work for full credit. (5 marks) 4. Suppose that the First Bank has the following balance-sheet position (in millions of dollars) and that the desired reserve ratio on deposits is 10% and the bank has net profits (after taxes) of $2.5 million Reserves Loans Securities Assets $20 $150 $80 Liabilities Deposits $200 Bank Capital $50 (a) Define the term 'return on assets'. What is its numerical value? (3 marks) (b) Define the term 'return on equity'. What is its numerical value? (3 marks) (c) Even though this bank has net profits of $2.5 million, it also has a bad loan'(defaulting) of $10 million. Show the balance sheet of this bank after it has taken a 'write-off' for this bad loan. What is the value of the return on equity after the adjustments are made due to the bad loan? Explain/show your calculations. (4 marks) (d) Given the initial balance sheet above, assume 60% of the total assets are considered fixed rate assets and the bank has $150 million of rate-sensitive liabilities. Explain and calculate what will happen to the banks net income if interest rates increase by 3% points. Show all your work for full credit

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