$$\begin{array} { l l l l }
\text { Securities (at par) } & \$ 250 & \text { Deposits } & \$ 975 \
\text { Loans (at par) } & \$ 760 & \text { Capital } & \$ 35
\end{array}$$
-If problem loans reduce the market value of the loan portfolio by 25 percent, what is the value of regulatory defined (book value) capital?

Question

$$\begin{array} { l l l l } 
\text { Securities (at par) } & \$ 250 & \text { Deposits } & \$ 975 \
\text { Loans (at par) } & \$ 760 & \text { Capital } & \$ 35
\end{array}$$
-If problem loans reduce the market value of the loan portfolio by 25 percent, what is the value of regulatory defined (book value) capital?

Quizplus · Accepted Answer

The value of regulatory defined (book value) capital is $35 million. This is because the problem loans reduce the market value of the loan portfolio by 25 percent, which means that the value of the loan portfolio is now $760 - $760 * 0.25 = $570. The value of the securities is still $250, and the value of the deposits is still $975. Therefore, the total value of the assets is $570 + $250 + $975 = $1795. The value of the liabilities is $975, so the value of the equity is $1795 - $975 = $820. The value of the regulatory defined (book value) capital is $820 - $35 = $785.

-If Problem Loans Reduce the Market Value of the Loan