Question 3. (2 pts each) For each statement below, answer whether the statement

Question

Question 3. (2 pts each) For each statement below, answer whether the statement is true or false for the U.S. economy. Briefly explain your answer.

(1) The capital requirement is a requirement on the ratio of bank capital to the bank’s debt.

(2) A higher bank capital reduces the likelihood of a bank run by increasing the bank’s reserves.

(3) A higher leverage of a bank necessarily reduces the rate of return to depositors.

(4) It is not always optimal for a bank to increase the leverage. 2

(5) A higher downpayment on a mortgage reduces the loan to value ratio.

(6) With a typical 30-year fixed rate mortgage, less than a half of the loan is paid off after 15 years.

(7) In every year in a fixed rate mortgage, the home equity is equal to the difference between the original price of the property and the remaining balance of the mortgage.

(8) If the downpayment is positive, then home equity is always positive in the length of a mortgage.

(9) A mortgage borrower with FICO above 750 is automatically qualified for a con- forming mortgage.

(10) The increasing property price between 1996 and 2006 was not the only reason why the mortgage market increased substantially in that period.

Explanation / Answer

1.

The statement is true.

Capital requirement is the capital adequacy in the form of equity over its debts in a bank or financial institution.

Therefore, capital requirement ratio = Equity / Debt

Higher capital requirement ratio indicates greater solvency.

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