Asset value (million) Probability $7 $9 $11 $13 $15 5% 20% 50% 20% 5% Recall from...

Transcribed Image Text:

Asset value (million) Probability $7 $9 $11 $13 $15 5% 20% 50% 20% 5% Recall from accounting: if the bank's asset value goes up (down) by one dollar, its equity value will also go up (down) by one dollar. The bank will be bankrupt if its asset value is equal to or lower than debt value. Question: what is the probability that this bank will go bankrupt if it has a leverage of 10 to 1 (L= 10)? What if 5 to 1 (L = 5)? Asset value (million) Probability $7 $9 $11 $13 $15 5% 20% 50% 20% 5% Recall from accounting: if the bank's asset value goes up (down) by one dollar, its equity value will also go up (down) by one dollar. The bank will be bankrupt if its asset value is equal to or lower than debt value. Question: what is the probability that this bank will go bankrupt if it has a leverage of 10 to 1 (L= 10)? What if 5 to 1 (L = 5)?