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Homework answers / question archive / 3) Bank of America has $2 million of extra cash at the Federal Reserve Bank of Chicago

3) Bank of America has $2 million of extra cash at the Federal Reserve Bank of Chicago

Economics

3) Bank of America has $2 million of extra cash at the Federal Reserve Bank of Chicago. Chase Bank calls bank of the west asking to borrow the entire amount (usually for a day). Show your working for (a)- (c)

a)  If the annual interest rate on federal funds rate is 10%, what is the one-day interest rate on federal funds (approximately)?

b) How many dollars of interest will Bank of America earn for lending this money for one day?]

c) How much interest will Bank of America earn if it lends this amount daily at same rate for the entire year?

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a) Computation of the one day interest rate on federal funds:-

One day interest rate = Annual rate / Number of days in a year

= 10% / 365

= 0.0274%

 

b) Computation of the daily interest:-

Daily interest = One day interest rate * Amount lent

= 0.0274% * $2,000,000

= $547.95

 

c) Computation of the annual interest:-

Annual interest = Annual rate * Amount lent

= 10% * $2,000,000

= $200,000

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