What Are the Risks Involved With Using Leverage?
• Leverage is measured by a ratio called debt-to-equity. A leverage ratio of 10 to 1 means that for every dollar raised Annaly borrows 10 dollars. All other things being equal, a high leverage ratio implies a higher level of risk because there is a bigger chance that the borrower will not be able to repay its debt. • Financial institutions typically employ more leverage than Annaly in the course of business: Commercial banks – 30:1; thrifts – 25:1; hedge funds – 20-30:1; Annaly – 8-12:1.
