The Average Interest Earned on the Loans Is 6 Percent

question 26

Multiple Choice

$\begin{array}{l}\begin{array}{l}\text { Assets} & \text { Liabilities and Equity}\\\text { Cash Required Reserves}&\$ 2 \text { million Deposits } \\\text { Loans}&\$ 10 \text { million Longterm Debt } \\&\text { Equity } \\\text { Total}&\$ 12 \text { million Total }\end{array}\begin{array}{l}\\\$ 8 \text { million } \\\$ 2 \text { million } \\\$ 2 \text { million } \\\$ 12 \text { million }\end{array}\end{array}$ The average interest earned on the loans is 6 percent and the average cost of deposits is 5 percent.Rising interest rates are expected to reduce the deposits by $3 million.Borrowing more debt will cost the bank 5.5 percent in the short term.
What will be the cost of using a strategy of purchased liquidity management to meet the expected decline in deposits? Assume that the bank intends to keep $2 million in cash as liquidity precaution.

• A)$10,000.
• B)$15,000.
• C)$30,000.
• D)$40,000.

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Definitions:

Adjusted Trial Balance

A compilation of all accounts along with their balances, updated after adjustment entries, which is utilized for the creation of financial reports.

Balance Sheet Account

An account reported on the balance sheet that includes assets, liabilities, and shareholders' equity at a specific point in time.

Income Statement Account

Accounts that participate in the composition of the income statement, including revenues, expenses, gains, and losses.

Proper Adjustments

Corrections or updates made to financial records to ensure they accurately reflect the company's financial position.