Consider XYZ Bank that is established with $1500bn of deposits and $I000bn of equity. Its assets are some investments that are expected to pay off $2750bn in 1 years time. Suppose the rate of interest on safe assets is 10% a year and there is no risk premium to hold risky assets like XYZ Bank's investments.

1. Suppose very shortly after being established the bank finds that it has been too optimistic And now expects its investments to pay off $2475bn in 1 year time. What is the return to equity in the bank? A. -25% B. -50% C. -87.5% D. -100% E. None of A-D

2. Suppose instead that the bank's liabilities were initially $2000bn of deposits with the rest Being equity. Now what is the return to equity if the expected pay off of its investments falls to $2475bn in 1 year time? A. -25% B. -50% c. -87.5% D. -100% E. None of A-D

3. Now suppose in the scenario of question 2 that very shortly after being established the Bank finds that it has been too optimistic and now expects its investments to pay off $2475bn In 1 year time and that the market now requires a premium of 10% a year to hold risky assets Like XYZ Banks's investments. Now what is the return to equity? A. -25% B. -50% c. -87.5% D. -100% E. None of A-D

4. Now suppose in the case Of question 3 that 'the bank's investment 'falls further, so that very Shortly after being established the bank finds that it now expects its investments to pay Off $2200bn in 1 year time and that the market now requires a premium of 10% a year to Hold risky assets like XYZ Bank's investments, suppose now that the owners of the bank Have an investment opportunity that will cost $500bn today and was certain to pay off value $1000bn in one year's time. Would the risk neutral owners of the bank choose to put this? Investment through the bank or would they prefer to invest in the project themselves using Their own private funds? A. Not undertake the investment B. Undertake investment through 'the bank C. Undertake investment using private funds D. None of A-C