4. (a) Suppose a new homeowner puts 20% down and borrows 80% of the value of...

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4. (a) Suppose a new homeowner puts 20% down and borrows 80% of the value of the new home. If the house initially costs $600,000, what is the homeowner's equity in the house? (b) If the price of the house falls by 10%, what is the percentage loss of the home- owner's equity? (c) Answer the same question if the price of the house falls by 20%. (d) Does leverage (the ratio of assets to capital) magnify the losses on investments? Compare the percentage losses on equity above with a situation in which the leverage ratio is 1. (e) Did high leverage by financial institutions contribute to the financial crisis? De- fend your answer. 4. (a) Suppose a new homeowner puts 20% down and borrows 80% of the value of the new home. If the house initially costs $600,000, what is the homeowner's equity in the house? (b) If the price of the house falls by 10%, what is the percentage loss of the home- owner's equity? (c) Answer the same question if the price of the house falls by 20%. (d) Does leverage (the ratio of assets to capital) magnify the losses on investments? Compare the percentage losses on equity above with a situation in which the leverage ratio is 1. (e) Did high leverage by financial institutions contribute to the financial crisis? De- fend your answer.

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a Homeowners Equity Homeowners Equity Down Payment 20 Home Value Homeowners Equity b Percentage Loss ... View the full answer