Money and Banking

Session 1 - Introduction

What does it mean to the "highly leveraged"? 

Means that the borrowed assets are higher than one´s own capital base or assets 
 
Simple illustration of 'highly leveraged' position: Suppose if an institution purchases some asset using its own capital then it is not leveraged. However, if the same entity buys some equipment with 80% credit and 20% own capital, it is in a highly leveraged position. And further borrowing of funds by the entity would render it in a massively leverage position.

Leverage in a general scenario stimulates economic activity and bolsters investments. However, there is a downside to leverage as there is always an element of risk associated with future returns from investments. And in a case when future earnings do not turn out to be in line with the expected returns, companies and investors can even turn bankrupt.

Diskussion