Final answer:
An equity multiplier of 3 signifies a high level of debt financing; bonds and bank loans both involve repayment obligations but differ in their investor base and trading. Equity in a home is calculated as the down payment made, in Fred's case, $20,000 on a $200,000 property.
Step-by-step explanation:
The equity multiplier is a financial leverage ratio that measures the proportion of a firm’s assets that are financed by its shareholders’ equity. An equity multiplier of 3 indicates that for every unit of equity, there are two units of debt, meaning the assets are three times the equity. This high multiplier suggests a high level of debt financing.
Bonds and bank loans are similar from a firm's perspective in that they both represent forms of debt that the company must repay over time. The key differences are that bonds are typically traded on the capital markets and can be bought by many investors, while a bank loan is provided by a single lending institution.
Bonds offer more flexibility in raising capital, but might come with higher interest rates than a bank loan, and they often include detailed covenants.
To calculate equity in a home:
Fred's Equity Calculation: Fred's house value: $200,000 Fred's down payment: 10% = $20,000 Fred's initial equity = Fred's down payment: $20,000