Question: Washington Mutual borrowed $150 million in Fed funds from J. P. Morgan Chase Bank in New York City for 24 hours to fund a 30-day loan. The prevailing Fed funds rate on loans of this maturity stood at 7.85 percent when these two institutions agreed on the loan. The funds loaned by Morgan were in the reserve deposit that the bank keeps at the Federal Reserve Bank of New York. When the loan to Washington Mutual was repaid the next day, J. P. Morgan used $50 million of the returned funds to cover its own reserve needs and loaned $100 million in Fed funds to Texas Savings, Houston, for a two-day period at the prevailing Fed funds rate of 7.92 percent. With respect to these transactions,
(a) construct T-account entries similar to those you encountered in this chapter, showing the original Fed funds loan and its repayment on the books of J. P. Morgan, Washington Mutual, and Texas Savings; and
(b) calculate the total interest income earned by Morgan on both Fed funds loans.