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 increase in the value of the securities held by this bank. (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?
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 increase in the value of the securities held by this bank. (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?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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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 increase in the value of the securities held by this bank.
(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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