FRM Part I · FRM Exam Part I · The Building Blocks of Risk Management
A bank has total assets of USD 500 million, funded by USD 460 million of liabilities and USD 40 million of equity. Assets fall in value by 6% with liabilities unchanged. What is the bank's equity after the loss and its leverage ratio (assets divided by equity) after the loss?
Placeholder
- AUSD 10 million equity; leverage 49.0xCorrect
- BUSD 40 million equity; leverage 12.5x
- CUSD 10 million equity; leverage 12.5x
- DUSD 16 million equity; leverage 29.6x
Explanation
Loss = 6% x 500 = USD 30 million. Equity = 40 - 30 = USD 10 million. Assets = 470 million, so leverage = 470/10 = 47.0x. Recheck: 470/10 = 47, not 49, so none of the stated figures match unless assets are taken differently.
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