Microeconomics 6th Edition by Robert Hall, Shirley Kuiper, Marc Lieberman

Exercise 6

Suppose you buy a home for $400,000 with a $100,000 down payment and finance the rest with a home mortgage.
a. Immediately after purchasing your home,before any change in price,what is the value of your equity in the home?
b. Immediately after purchasing your home,before any change in price,what is your simple leverage ratio on your investment in the home?
c. Now suppose that over the next three years,the price of your home has increased to $500,000. Assuming you have not borrowed any additional funds using the home as collateral,but you still owe the entire mortgage amount,what is the new value of your equity in the home? Your new simple leverage ratio?
d. Evaluate the following statement: "An increase in the value of a home,with no additional borrowing,increases the degree of leverage on the investment in the home." True or false? Explain.