An FI has $5 million in cash reserves with the Fed in excess of its reserve requirements,$5 million in T-Bills,and a credit line of $10 million to borrow in the repo market.It currently has lent $2 million in the Fed Funds market and borrowed $1 million from the Federal discount window to meet its seasonal needs.

Assume that the T-Bills can only be sold at a 10 percent discount,what is the net liquidity of the bank given this information?

Question

Assume that the T-Bills can only be sold at a 10 percent discount,what is the net liquidity of the bank given this information?

Quizplus · Accepted Answer

If T-bills take a haircut of 10%, their market value is (5 * 0.90) = $4.5 million, a reduction in liquidity of $0.5 million
Net Liquidity = Sources of liquidity - Uses of liquidity
 Net liquidity = 21.5 - 1 = $20.5 million.

An FI Has $5 Million in Cash Reserves with the Fed