Reference no: EM13342612

Question 11
The Federal Reserve refused to act as lender of last resort during the last crisis because Bernanke believed that bank executives had ripped off society. In addtion Bernanke feared the long term affects of moral hazard.
True or False?

Question 12
According to Alan Blinder the compensation schemes at investment banks linked the wealth of bankers to the risks of the assets the bank securitized. This is why the crisis of 2007-2009 never reached the same proportions as the crisis of the 1930s. In addition the partnership structure of investment banks during the 1920s increased the principle agent problem.
True or False?

Question 13
The reason the financial crisis of 2007 was so much worse than the crisis of 1907 was that depositors withdrew money in the fall of 2007 when the market for asset-backed securities collapsed.
True or False?

Question 14
Sub-prime mortgage originators such as New Century were net lenders in the Repo market. When the Repo market collapsed this hurt an important source of revenue for New Century.
True or False?

Question 15
During periods of financial distress investors tend to sell risky assets and buy safe assets. This flow of funds from risky assets to safer assets;
a.Reduces the cost of borrowing for businesses and for the Federal Government.
b.Increases the cost of borrowing for businesses and for Federal Government.
c.Reduces the cost of borrowing for the Federal Government and increases the cost of borrowing for the private sector.
d.Increases the cost of borrowing for the Federal Government.

Question 16
Repo lenders require collateral as security. Often this security was MBS. When the MBS began to lose value in 2008 as ratings were lowered; lenders required borrowers to post additional collateral. As lenders sold assets to raise cash collateral values fell further requiring additional sales. This downward spiral in debt prices is indicative of a worsening financial crisis.
True or False?

Question 17
The spread between yields on Aaa rated corporate debt and Baa corporate debt were at their peak in:
a.1942
b.1932
c.1929
d.2008

Question 18
A credit default swap seller (short) makes a commitment to pay the buyer (long) if a credit event occurs. The buyer pays a periodic premium to the seller.
True or False?

Question 19
A financial institution is insolvent when the market value of its assets is less than the market value of its liabilities.
True or False?

Question 20
The decline in home values since 2007 led to serious financial distress in the household sector and the banking sector because:
a.The decline led to a decrease in the debt/equity ratio of both households and banks.
b.The decline led to an increase in the debt/equity ratio of both households and banks.
c.The decline lowered the demand for housing.
d. The decline increased the value of mortgage-backed securities and corporate bonds.