medium · Private Credit & Debt underwriting-credit-analysis

If a fund's asset yield (R_A) is exactly equal to its cost of borrowing (r_b), what is the impact of increasing the leverage ratio (L) on the return on equity (R_E)?

1. The return on equity increases by the amount of the leverage ratio.
2. The return on equity decreases due to the higher volume of interest expense.
3. The return on equity increases because more assets are earning income.
4. The return on equity remains unchanged regardless of leverage.

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