. Show how a leveraged bank can make higher profits during a boom than an unleveraged...
. Show how a leveraged bank can make higher profits during a boom than an unleveraged firm. Then, show how a leveraged bank can lose much more of its capital during a recession than an unleveraged bank.
Homework Answers
The term leverage refers to the balance between debt and equity. A leveraged firm is one which has both debt and equity and an unleveraged firm has only equity in their capital structure. The leveraged firm may make profits during boom period as the interest rates in the markets will be high and the company will earn good amount of profits. On the other hand, when there is recession the interest rate is low so the yield from debt will be low. As the interest rate is low, the amount of money that the bank will earn from the interest on loans will be less. However such a problem will not arise in unleveraged bank.
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