1) A bank with a leverage ratio of 15 has a cost of debt of...

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Finance

1) A bank with a leverage ratio of 15 has a cost of debt of 2%paand a portfolio of assets with an expected yield of 4%pa. What arethe expected ROA net of debt funding costs and the expected ROE ofthe bank, using the approach to defining leverage taken in thelecture slides? Show your workings.

2) What will the ROA and ROE actually be if the yield on assetsturns out to be 3%? Show your workings. (1 mark)

3) What will the ROA and ROE actually be if the yield on assetsturns out to be 1%? Show your workings.

4) What is the unweighted bankâ€™s capital (or E/A) ratio (i) for aleverage ratio of 20 and (ii) for a leverage ratio of 30? Show yourworkings. (1 mark)

5) Redo the above calculations in parts 1) and 3) for a leverageratio of 25. What affect does the higher leverage ratio have onyour answers? Show your workings.

6) What is the relationship between a bankâ€™s capital ratio and therisks and returns faced by (i) its shareholders and (ii) itscreditors? Explain your answers.

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4.2 Ratings (856 Votes)

1 Leverage ratio 15 This means bank is using 100 own capital and 1400 Borrowed capital This makes them to do business of 15 times by having capital of 1 Overall Assets involved 1500 See Answer

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