Suppose Universal Bank holds $\$ 100$ million in assets, which are composed of the following:
Required Reserves:
$\$ 10$ million
Excess Reserves:
$\$ 5$ million
Mortgage Loans:
$\$ 20$ million
Corporate Bonds:
$\$ 15$ million
Stocks:
$\$ 25$ million
Commodities
$\$ 25$ million
a. Do you think it is a good idea for Universal Bank to hold stocks, corporate bonds, and commodities as assets? Why or why not?
b. If the housing market suddenly crashed, would Universal Bank be better off with a mark-to-market
accounting system or the historical-cost system?
c. If the price of commodities suddenly increased sharply, would Universal Bank be better off with a mark-to-market accounting system or the historical-cost system?
d. What do your answers to (b) and (c) tell you about the tradeoffs between the two accounting systems?