Introduction to Finance

 17. 
(LO 3.8)
What is meant by bank liquidity and bank solvency?
 18. 
(LO 3.8)
Describe how assets are managed in terms of a bank’s 
liquidity risk. Also, briefl y describe how liquidity management is 
used to help manage liquidity risk.
 19. 
(LO 3.8)
Describe what is meant by liquidity risk, credit risk, and 
interest rate risk.
 20. 
(LO 3.8)
Defi ne and describe the following terms: common 
equity capital ratio, tier 1 ratio, and total capital ratio. How are these 
used by bank regulators?
 21. 
(LO 3.8)
What are the Basel Capital Accords, and what is their 
purpose? 
 22. 
(LO 3.9)
Defi ne international banking. Describe how some foreign 
banking systems diff er from the U.S. banking system.
2. 
Assume that you can borrow $175,000 for one year from a local 
commercial bank.
a. 
The bank loan offi
cer off ers you the loan if you agree to pay 
$16,000 in interest plus repay the $175,000 at the end of one year. 
What is the percent interest rate or eff ective cost?
b. 
As an alternative you could get a one-year, $175,000 discount loan 
at 9 percent interest. What is the percent interest rate or eff ective cost?
c. 
Which one of the two loans would you prefer?
d. 
At what discount loan interest rate would you be indiff erent 
between the two loans?

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Problems
75
3. 
ABE Banc has the following asset categories:
Cash $1 
million
Securities $4 
million
Loans ?
Other assets 
$2 million
Total assets 
?
a. 
What would be the bank’s total assets if loans were twice the 
size of the amount of securities?