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The table below shows the balance sheet of a bank in millions of dollars

Economics Apr 19, 2021

The table below shows the balance sheet of a bank in millions of dollars. 
Assets (in millions) Liabilities (in millions) Cash $ 800 CDs $2,000 Commercial loans 2,000 Savings accounts 1,500 Consumer loans 600 Long-term debt 1,000 Prime mortgages 800 Subprime mortgages 600 Total assets $4,800 Total liabilities $4,500 
Instructions: Round your answers to the nearest dollar. 
a. The bank's net worth is $ 
million. 
b. Assume that housing prices decrease and defaults on subprime mortgages rise, causing the bank's assets in subprime mortgages to decrease from 600 to 350. 
The bank's new net worth is $ 
Total assets are now $ 
million. 
million. 
c. Using the net worth calculated in part (a), for the bank to be insolvent (that is, for liabilities to be greater than assets), the value of subprime mortgages have to fall by (Click to select) se than $ million. 
 

Expert Solution

(a) Computation of Bank's Net Worth:

Total assets = $4,800 million

Total liabilities = $4,500 million

 

Bank's Net worth = Total assets - Total liabilities

 = $4,800 million - $4,500 million 

 = $300 million

Thus,

The bank's net worth is $300 million.

 

(b)

The bank's subprime mortgages decreases from $600 to $350.

Due to this, total assets will also decrease by $250.

So,

Total assets are now $4,550 million. ($4,800-$250)

Net worth = Total assets - Total liabilities

Net worth = $4,550 million - $4,500 million = $50 million

Thus,

The bank's new net worth is $50 million.

 

 

(c)

For the bank to be insolvent, the value of subprime mortgages would have to fall by more than $200 million.

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