Reference no: EM133053405

1. What does it mean when we say, "Banks borrow short and lend long?" Explain what interest rate risk is and how borrowing short and lending long exposes banks to interest rate risk. Explain how interest rate swaps can protect a bank from interest rate risk.

2. A small business owner of two restaurants in Brooklyn needs to borrow $100,000 to renovate her restaurants so she goes to a bank for a loan. Why are banks the source of funds for small businesses rather than the bond or money markets? When banks give out loans they are exposed to adverse selection and moral hazard. Define adverse selection and moral hazard and explain two ways that banks protect themselves from adverse selection and two ways they protect themselves from moral hazard when lending out money.

3. Many factors contributed to the housing/financial crisis of 2007-2008-2009. Securitization was one of those factors. Explain how securitization and two other factors (10 each) contributed to the crisis.