Heather Marks is a trader on the principal investing desk at Barclay’s Bank.

She buys 1,000 units a 7-year, 7% annual fixed coupon mortgage-backed security at par ($1,000). She finances 50% of the purchase with the bank’s equity and the rest through the repo market. She holds the securities for one year and then resells them at even par after receiving the coupon. Assume that the implied average “repo” rate was 3% for the year.

1) What is the net profit (loss) in dollars, ROA (%), and ROE (%) for this particular deal?

2) Same question but now assume that, instead of 50%, Heather finances the bonds with only 10% equity.

3) Same question and assumption as in 2), but now further assume that, instead of reselling the securities at $1,000, she sells them at$1,050 each.

4) Same as above, but now bonds are resold at $900.

5) How can your results from this problem partly explain the 2008 financial crisis?