FRM Part I · FRM Exam Part I · Anatomy of the Great Financial Crisis of 2007-2009
A bank marks its assets to market and targets a constant leverage ratio of assets to equity of 20. Assets are USD 200 million and equity is USD 10 million. Assets then fall 2% in value. If the bank restores leverage to 20 by selling assets and using proceeds to repay debt, how much must it sell, in USD millions?
The bank must sell about USD 76 million, but that is not offered; the offered figure of 38 is incorrect.
- AApproximately 38.0Correct
- BApproximately 4.0
- CApproximately 80.0
- DApproximately 3.8
Explanation
Assets fall to 196, equity falls to 10 - 4 = 6. Target assets = 20 x 6 = 120. Required sales = 196 - 120 = 76? Check: that gives 76, not 38. Selling assets to repay debt keeps equity at 6, so assets must be 120, and the sale is 76.
Did you get it right without looking?
One question tells you little. A timed set on Anatomy of the Great Financial Crisis of 2007-2009 shows your real accuracy, how long you take and where you lose marks.
More Anatomy of the Great Financial Crisis of 2007-2009 questions
- A broker-dealer holds assets of USD 50 billion funded by USD 2 billion of equity and the rest by short-term repo borrowing. Asset values fal…
- A dealer borrows USD 95 million in an overnight repo against securities with a market value of USD 100 million. Which statement correctly de…
- A broker-dealer holds USD 50 billion of assets financed by USD 48.5 billion of liabilities, mostly overnight repo. Its assets then fall in v…
- Which feature of the over-the-counter credit default swap market most clearly increased systemic risk during the 2007-2009 crisis, as illust…
- Which feature of the shadow banking system most contributed to systemic vulnerability in the 2007-2009 crisis?
- A bank sponsors an off-balance-sheet conduit that holds $5 billion of long-term asset-backed securities funded by $5 billion of 90-day asset…