2. Consider a classical bank like the one we described in class.

Suppose the banks liabilities consist of small bills of exchange with terms of three months, a total face value of $100,000 and an annual interest rate of 12 percent. Its assets consist of large bills of exchange with terms of three months and an annual interest rate of 20 percent.

A. 1. a. What is the total face value of the banks large bills? Explain your answer.

b. 1. Calculate the market value of the banks small bills.

2. Calculate the market value of the banks large bills.

2. Write out the balance sheet of this bank. Label your balance sheet carefully. Beside each item, write its face value; then write its market value, in parentheses, under its face value.

3. a. Calculate the exact profits earned by the bank, using a method that involves calculating a difference in market values.

b. Calculate the approximate profits earned by the bank, using a method that involves calculating an interest spread.