Question

please

4. Financlal Institutions and the financial crisis Two investors put together $10 of their own funds to start an electric arc furnace company. The company needs more assets to operate effectively, and the executive applies for a loan. (a) The bank accepts the existing S10 of assets as collateral and gives them an $8.5 loan. Find the bank's haircut. (show calculations) (b) Now that the company received the loan from (al, what is its leverage at the moment (show calculations) (c) What is the difference between a commercial bank and an investment/shadow bank? d) What is bailout?

Answer 1

(a)Collateral Asset,CA=$10

Loan,L=$8.5

Let x be the value of haircut.

L=CA-x.CA

8.5=10-x.10

10x=1.5

x=.15=15%

b) After loan total assets=10+8.5=$18.5

Collateral asset=$10

Therefore leverage=18.5/10=1.85

c)The main difference between investment and commercial banks are commercial banks are primarily concerned with deposits or loans for individuals or companies whereas investment banks are concerned with trading securities (stocks,bonds) and IPO for companies or individuals.

Shadow banking is where banking activities are done unregulated whereas investment and commercial banking sectors are regulated.

d)Bailout is defined as giving financial assistance to a corporation or country facing financial failure or bankruptsy.

Thanks for the question..