We consider an example that applies to individuals and ourselves and companies. We assume that we are the owners of the property. This can be our main residence, a rental property we buy, or a company-owned manufacturing facility or warehouse. The vast majority of people who buy houses use mortgage financing. In our example, suppose we check the market value of the house, which is $300,000. We also checked our mortgage statement and found that we still owe the mortgage bank $200,000, which means that our net worth on this house is $100,000, which is half of what we owe the bank. In terms of finances, this means that our leverage ratio is 2. Discuss under what circumstances this is good, or at least acceptable, and under what circumstances you might be worried that you owe such a large amount of money to the bank. 

Discuss the risks associated with having such a high bank debt and why it can be an acceptable or even a good situation.

Answer rating: 100% (QA)

When considering the leverage ratio in finance a ratio of 2 as described in your scenario where the net worth on a property is half of what is owed to ... View the full answer