The most recent credit boom the United States was a dramatic increase in households

Subject: Business    / Finance
Question
QUESTION 1

The most recent credit boom the United States was a dramatic increase in households issuing debt to purchase real estate. The mistake that banks made was that they did not secure their landing with the purchased real estate.

True

False

5.55556 points

QUESTION 2

A financial institution finances its assets with $10 of debt for every $90 of equity. Asset values fall by 2%. This leads to a 2.22% drop in equity value.

True

False

5.55556 points

QUESTION 3

When information about an asset is costly and one party has an advantage in securing this information the market for the asset will be relatively illiquid.

True

False

5.55556 points

QUESTION 4

A financial institution is permitted to use leverage u to a maximum debt equity ratio of 20. Currently the bank finances its $100 of assets with $4.5 of equity and $95.5 of debt. If asset values fall to $91 the bank will have a capital shortage of $5.5

True

False

5.55556 points

QUESTION 5

When all is known by all interested parties about a financial asset or there is nothing worth knowing, then the market for that asset will be relatively liquid.

True

False

5.55556 points

QUESTION 6

According to the FCIC report Ralph Cioffi of Bearn Stearns co-managed two hedge funds that invested in sub-prime related assets. The leverage ratios of the hedge funds were extraordinary. Each fund was operated with financial leverage in excess of 75/1.

True

False

5.55556 points

QUESTION 7

Leverage magnifies losses associated with declines in asset values but not with gains in asset values. This asymmetry is why bank regulators have outlawed leverage by banks that benefit from FDIC insurance.

True

False

5.55556 points

QUESTION 8

Securitization is the process of transforming bank liabilities into bank assets.

True

False

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QUESTION 9

According to Gorton, an important misunderstanding revealed by the financial crisis of 2007-2009 was that regulators were confused about the which institutions were banks in function rather than form and which financial liabilities served as money or near money.

True

False

5.55556 points

QUESTION 10

Asset-backed securities served as collateral in repo transactions. Because the ABS created in the securitizations were believed to be simple transparent ad relatively safe a shock that revealed that the ABS ere in fact complex and illiquid was disruptive to the REPO markets.

True

False

5.55556 points

QUESTION 11

It is unusual for private credit booms to be associated with financial crises.

True

False

5.55556 points

QUESTION 12

Nearly one in 10 mortgage borrowers in 2005 and 2006 took out “option ARM” loans, which meant they could choose to make payments so low that their mortgage balances rose every month. Choosing to defer interest payments was a way of increasing leverage and thus the risk of default.

True

False

5.55556 points

QUESTION 13

A financial institution is permitted to use leverage u to a maximum debt equity ratio of 20. Currently the bank finances its $100 of assets with $4.5 of equity and $95.5 of debt. If asset values fall to $91 the bank will have a capital shortage of $9.

True

False

5.55556 points

QUESTION 14

A financial institution finances its assets with $90 of debt for every $10 of equity. Asset values fall by 2%. This leads to a 20% drop in equity value.

True

False

5.55556 points

QUESTION 15

According to the FCIC report the five major investment banks were operating with leverage ratios in excess of 50/1 going into the financial crisis of 2007-2009.

e bank will have a capital shortage of $5.5

True

False

5.55556 points

QUESTION 16

In March of 2008 the Federal Reserve introduced the Term Securities Lending Facility as a way of substituting “secret-prone” assets in the banking system for treasury securities about which there were no secrets. This was a way of getting the REPO market to work more effectively during the financial crisis of 2007-2009.

True

False

5.55556 points

QUESTION 17

Mortgage debt per capita in the USA declined between 1980 and 2006. This is because households were using credit cards to borrow and credit card debt is unsecured.

True

False

5.55556 points

QUESTION 18

On the spectrum of liquidity it is true that a financial asset is more liquid if its value can be realized on short notice without loss than if the owner must accept a discount from fair value for an immediate sale.

True

False

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