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Consider the following balance sheet of a private bank. Assets Liabilities Reserves $200 | Deposits $350 Loans $700 | Debt $150 Securities $100 | Capital $500 1. What is the leverage ratio of this bank? What is its capital ratio? What do these numbe mean? 2. Consider a $50 decrease in the value of the securities held by this bank relative to thei initial value (a) Compute the new balance sheet of the bank. (b) What is the percentage change in the value of the bank's assets?

Consider the following balance sheet of a private bank. Assets Liabilities Reserves $200 | Deposits $350 Loans $700 | Debt $150 Securities $100 | Capital $500 1. What is the leverage ratio of this bank? What is its capital ratio? What do these numbe mean? 2. Consider a $50 decrease in the value of the securities held by this bank relative to thei initial value (a) Compute the new balance sheet of the bank. (b) What is the percentage change in the value of the bank's assets?

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Problem 2 Consider the following balance sheet of a private bank. Assets Liabilities Reserves $200 | Deposits $350 Loans $700 | Debt $150 Securities $100 | Capital $500 1. What is the leverage ratio of this bank? What is its capital ratio? What do these numbers mean? 2. Consider a $50 decrease in the value of the securities held by this bank relative to their initial value (a) Compute the new balance sheet of the bank. (b) What is the percentage change in the value of the bank's assets? (c) What is the percentage change in the value of the bank's capital? (d) How are the previous numbers related to the initial leverage ratio? 3. What can you conclude about the leverage ratio and the sensitivity of a bank's capital to changes in the value of the bank's assets?
Transcribed Image Text:Problem 2 Consider the following balance sheet of a private bank. Assets Liabilities Reserves $200 | Deposits $350 Loans $700 | Debt $150 Securities $100 | Capital $500 1. What is the leverage ratio of this bank? What is its capital ratio? What do these numbers mean? 2. Consider a $50 decrease in the value of the securities held by this bank relative to their initial value (a) Compute the new balance sheet of the bank. (b) What is the percentage change in the value of the bank's assets? (c) What is the percentage change in the value of the bank's capital? (d) How are the previous numbers related to the initial leverage ratio? 3. What can you conclude about the leverage ratio and the sensitivity of a bank's capital to changes in the value of the bank's assets?
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