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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. 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?
Expert Solution
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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