Question

answer both

Why might too much leverage be a problem for an investment bank? O A. Leverage magnifies profit, but it also magnifies loss. O B. Too much leverage cannot be a problem for an investment bank. C. Too much leverage decreases the number of clients. O D. Too much leverage increases the book value against the market value of assets. Why might relying too much on short-term borrowing be a problem? O A. Too much short-term borrowing exposes the firm to high rollover risk in addition to high credit risk. O B. Relying too much on short-term borrowing reduces profitability of investment banks due to increased transaction costs. C. 0 D. Relying too much on short-term borrowing cannot be a problem. Short-term borrowing could be a problem because of the high interest rates usually charged by such loans.

Answer 1

Question 1

Leverage is a problem for investment banks. In fact, leverage is one of the reason behind the collapse of many investment banks during the financial crisis of 2008.

Too much leverage might be a problem for an investment bank because too much leverage increases the book value against the market value of assets.

Hence, the correct answer is the option (D).

Question 2

Short-term borrowing done frequently and involving huge sums can be a problem.

This is because too much short-term borrowing exposes the firm to high roll over risk in addition to high credit risk.

Hence, the correct answer is the option (A).