Question: Wells Fargo Bank borrowed 150 million in Fed funds from

Wells Fargo Bank borrowed $150 million in Fed funds from JP Morgan Chase Bank in New York City for 24 hours to fund a 30 day loan. The prevailing Fed funds rate on loans of this maturity stood at 2.25 percent when these two institutions agreed on the loan. The funds loaned by Morgan were in the reserve deposit that the bank keeps at the Federal Reserve Bank of New York. When the loan to Wells Fargo was repaid the next day, JP Morgan used $50 million of the returned funds to cover its own reserve needs and loaned $100 million in Fed funds to Bank of America, Charlotte, for a two day period at the prevailing Fed funds rate of 2.40 percent. With respect to these transactions,
(a) Construct T-account entries similar to those you encountered in this chapter, showing the original Fed funds loan and its repayment on the books of JP Morgan, Wells Fargo, and Bank of America and
(b) Calculate the total interest income earned by JP Morgan on both Fed funds loans.

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