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Assume that an investment bank is at its maximum desired leverage of 20: it has $10mil of its own equity (net worth) and has borrowed $190mil to buy assets of $200mil. The price of the bank's assets falls and reduces their mark-to-market value to $195mil. What has happened to the bank's equity and leverage? How much must the bank reduce their assets to restore leverage to its desired level? How will it affect the bank's efforts to return to their desired leverage if other financial institutions are attempting to de-lever at the same time?

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Financial Management, Finance

Category:- Financial Management
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