Suppose an investment bank is buying $50 million in long-term mortgage-backed securities,and finances the investment by borrowing 80% and paying for the other 20% out of equity.What is the bank's leverage?

Question

Quizplus · Accepted Answer

Leverage is calculated as the ratio of total assets to equity. The bank's total assets are $50 million, and equity is 20% of $50 million, which is $10 million. Therefore, leverage is $50 million / $10 million = 5.

Suppose an Investment Bank Is Buying $50 Million in Long-Term