Using T-accounts, please record the following transactions.

1. M&B Bank PLC (“the bank”) is incorporated with equity capital of £10 million. 
2. The bank issues deposits to customers for £30 million. 
3. The bank issues bonds for £20 million.
4. The bank must maintain 10% of assets in required reserves at all times. Please discuss the role of required reserves as a monetary policy tool by central banks. 
5. After setting aside the required reserves, the bank decides to invest the remaining amount of cash. The bank invests £10 million in a coupon bond issues by UK Treasury. What is left is loaned out.
6. The coupon bond of point (e) pays a coupon of 5% per year, paid semi-annually. It has 3 years to maturity. If the current Yield-to-Maturity is 2.5% semi-annually, what is the price of the bond? 
7. A year later, the Bank of England is worried by rising inflation and announces its intention to raise interest rates. This announcement immediately sends the Yield-to-Maturity of bond in point (f) surging 200 basis points. Recalculate the price of the bond. 
8. What is the Holding Period Return recorded on the bond position over the past year? 
9. What is the Profit-and-Loss recorded on the bond position in Pound Sterling (£)?
10. Record the result of point (g) in the T-accounts. 
11. If your result is a loss, please discuss if the bank has enough equity capital to support that loss. 
12. Discuss the Basel Capital accords. Focus in particular on capital requirements and their calculation

Answer rating: 100% (QA)

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