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Finance 1

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1. Banks may be willing to borrow funds from other banks at a higher rate than they can borrow from the FED. There are 2 reasons. First, the borrowing bank may find it easier with less requirements to borrow from another bank, as long as they can make a profit via their lending. For instance, When a bank borrows from the FED it often has to put forward collateral. Borrowing in an inter-bank market may be accomplished on an unsecured basis thereby requiring a higher rate but without a need for a pledge of collateral. Secondly, the borrowing bank may need the money immediately for an investment or immediate lending and borrowing at a higher rate from another bank could be much more quickly than borrowing from the Fed 2. Commercial loans(3rd) Securities(2nd) Reserves(1st) Physical capital (4th) 3. The answer is depends o other risks that the bank are exposed to. In this case the president is telling us that the bank has a very low liquidity risk that it has never had to call in loans, sell securities, or borrow as a result of a deposit outflow. However, financial institutions are also exposed to other risks such as profitability risk, interest rate risk, capital adequacy risk, credit risks, and foreign exchange risk. We will need to analyze deeper and look at other risks before we decide to buy or not. 4. No. When you turn a customer down, we are forgoing income from loan , which is extremely costly. Instead, we should go out and borrow from other banks, corporations, or the Fed to obtain funds so that you can make the customer loans. Alternatively, we could go to money market and sell negotiable CDs or some of your securities to acquire the necessary funds. 5. As a device for meeting withdrawals and satisfying reserve requirements, overnight loans are an alternative to holding excess reserves. As overnight loans become cheaper and easier to use, banks

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