Question 1

When Lehman Brothers collapsed on 15 September 2008, it had a massive effect on other financial companies such as AIG because

Accepted Answer

A)  Lehman's was an important player in the inter-bank market. 
B)  Many of them had sold CDS that provided insurance against default by Lehman's. 
C)  Governments and central banks panicked. 
D)  Redundant Lehman's employees made claims on their unemployment insurance policies, sold by these companies. 
A)  Lehman's was an important player in the inter-bank market. 
B)  Many of them had sold CDS that provided insurance against default by Lehman's. 
C)  Governments and central banks panicked. 
D)  Redundant Lehman's employees made claims on their unemployment insurance policies, sold by these companies. B

Question 2

If unexpected news raised people's expectations of a corporation's future dividends and price, then before the price changes this corporation's stock would be

Accepted Answer

A)  overvalued, so its price would rise. 
B)  overvalued, so its price would fall. 
C)  undervalued, so its price would rise. 
D)  undervalued, so its price would fall. 
A)  overvalued, so its price would rise. 
B)  overvalued, so its price would fall. 
C)  undervalued, so its price would rise. 
D)  undervalued, so its price would fall. C

Question 3

Explain the process by which mortgage defaults occurred in the mid-2000s?

Accepted Answer

Teaser rates had already tempted many homeowners to take on the burden of a mortgage but without necessarily fully understanding the financial commitments they were making. After the teaser rate period finished, the mortgages had to be restructured based on a new rate of interest. The new rate of interest not only reflected the need to claw back some of the interest not paid in the initial teaser rate period but also the fact that these borrowers were at higher risk. As mortgage rates rose, borrowers found it increasingly difficult to meet their monthly payments. In some cases, the difference between initial monthly payments and restructured payments based on new interest rates was significant; many homeowners found their monthly mortgage payments more than doubling. The sub-prime market consisted of people least able to cope with such changes and in addition those who had taken out sub-prime mortgages for second homes and the buy-to-let market also found themselves stretched.

Question 4

When buyers become too aggressive by borrowing funds for future investment in the expectation of a good return, this is called ______________.

Accepted Answer

A)  arbitrage 
B)  leveraging 
C)  day trading 
D)  buying short 
A)  arbitrage 
B)  leveraging 
C)  day trading 
D)  buying short

Question 5

What happened when inflation began to rise in the mid-2000s?

Accepted Answer

In 2006-7, the prevailing concern amongs

Question 6

In the early 2000s, an SPV would issue bonds in bundles to reflect different levels of risk. The process of splitting up the bundles of debt into these different levels of risk is called ________.

Accepted Answer

A)  insuring. 
B)  priming. 
C)  protecting. 
D)  tranching. 
A)  insuring. 
B)  priming. 
C)  protecting. 
D)  tranching.

Question 7

In the early 2000s, banks would package mortgage-backed securities into pools of debt and sell them on to investors. This practice is known as ________________.

Accepted Answer

A)  classification. 
B)  mortgage-buying. 
C)  assets-making. 
D)  securitization. 
A)  classification. 
B)  mortgage-buying. 
C)  assets-making. 
D)  securitization.

Question 8

Rather than looking at information, analyzing it rationally and then basing their decisions on the evidence available, some people just respond to the behavior of other people. This is called _____________.

Accepted Answer

A)  behavioural economics 
B)  consumer behaviour 
C)  herd mentality 
D)  consulting 
A)  behavioural economics 
B)  consumer behaviour 
C)  herd mentality 
D)  consulting

Question 9

The challenges for central banks is to be able to tell when a bubble is occurring and if it is, whether to take action and when.

Accepted Answer

A) True 
 B)False

Question 10

Positive equity allowed homeowners to be able to manage rising interest rates on their mortgages. However, when house prices began to fall and the option of remortgaging disappeared, many homeowners:

Accepted Answer

A)  bought second homes. 
B)  were able to find renters. 
C)  discovered that their monthly repayments were rising beyond their ability to pay. 
D)  discovered that their monthly repayments were falling. 
A)  bought second homes. 
B)  were able to find renters. 
C)  discovered that their monthly repayments were rising beyond their ability to pay. 
D)  discovered that their monthly repayments were falling.

Question 11

Share prices will follow a random walk if

Accepted Answer

A)  shares are overvalued. 
B)  people behave irrationally when choosing shares. 
C)  markets reflect all available information in a rational way. 
D)  shares are undervalued. 
A)  shares are overvalued. 
B)  people behave irrationally when choosing shares. 
C)  markets reflect all available information in a rational way. 
D)  shares are undervalued.

Question 12

Why did mortgage defaults lead to home foreclosures?

Accepted Answer

As mortgage rates rose, borrowers found

Question 13

Why were CDSs based on residential mortgages developed and why did they fail?

Accepted Answer

CDSs based on residential mortgages were

Question 14

Toxic debt refers to the stock of junk bonds held by banks and other financial institutions which are used to leverage further lending.

Accepted Answer

A) True 
 B)False

Question 15

According to the efficient markets hypothesis theory, asset prices reflect all ________ information about the value of an asset.

Accepted Answer

A)  confidential 
B)  insider. 
C)  publically available 
D)  sensitive. 
A)  confidential 
B)  insider. 
C)  publically available 
D)  sensitive.

Question 16

For financial institutions in the above 20-year period, the expectations of continued economic growth partly explain how attention turned from what might be termed 'prudent' lending to:

Accepted Answer

A)  risk free investments on the back of new financial instruments. 
B)  risk free investments on the back of existing financial instruments. 
C)  riskier investments on the back of existing financial vehicles. 
D)  riskier investments on the back of new financial instruments. 
A)  risk free investments on the back of new financial instruments. 
B)  risk free investments on the back of existing financial instruments. 
C)  riskier investments on the back of existing financial vehicles. 
D)  riskier investments on the back of new financial instruments.

Question 17

If share prices follow a random walk, it means

Accepted Answer

A)  long periods of declining prices are followed by long periods of rising prices. 
B)  the greater the number of consecutive days of price declines, the greater the probability prices will increase the following day. 
C)  share prices are unrelated to random events that shock the economy. 
D)  share prices are just as likely to rise as to fall at any given time. 
A)  long periods of declining prices are followed by long periods of rising prices. 
B)  the greater the number of consecutive days of price declines, the greater the probability prices will increase the following day. 
C)  share prices are unrelated to random events that shock the economy. 
D)  share prices are just as likely to rise as to fall at any given time.

Question 18

Explain how problems in the sub-prime market led to the global banking crisis in 2007-09?

Accepted Answer

In 2007, the problems facing banks began

Question 19

Some critical observers of the stock market argue that the global economic crisis of 2007-09 is evidence that:

Accepted Answer

A)  markets will always have winners and losers. 
B)  there is little rational behaviour in financial markets. 
C)  people will continue to buy houses. 
D)  no one knows when a bubble will next occur. 
A)  markets will always have winners and losers. 
B)  there is little rational behaviour in financial markets. 
C)  people will continue to buy houses. 
D)  no one knows when a bubble will next occur.

Question 20

The tolerance of moral hazard means that:

Accepted Answer

A)  Key banks are protected from failure because they are too big to fail. 
B)  Bankers have a duty to conduct their activities in an ethical way. 
C)  Risk seeking behaviour may be encouraged. 
D)  The risks of trading in the bond market are perceived as too high. 
A)  Key banks are protected from failure because they are too big to fail. 
B)  Bankers have a duty to conduct their activities in an ethical way. 
C)  Risk seeking behaviour may be encouraged. 
D)  The risks of trading in the bond market are perceived as too high.

Exam 26: Issues in Financial Markets

When Lehman Brothers collapsed on 15 September 2008, it had a massive effect on other financial companies such as AIG because

If unexpected news raised people's expectations of a corporation's future dividends and price, then before the price changes this corporation's stock would be

Explain the process by which mortgage defaults occurred in the mid-2000s?

When buyers become too aggressive by borrowing funds for future investment in the expectation of a good return, this is called ______________.

What happened when inflation began to rise in the mid-2000s?

In the early 2000s, an SPV would issue bonds in bundles to reflect different levels of risk. The process of splitting up the bundles of debt into these different levels of risk is called ________.

In the early 2000s, banks would package mortgage-backed securities into pools of debt and sell them on to investors. This practice is known as ________________.

Rather than looking at information, analyzing it rationally and then basing their decisions on the evidence available, some people just respond to the behavior of other people. This is called _____________.

The challenges for central banks is to be able to tell when a bubble is occurring and if it is, whether to take action and when.

Positive equity allowed homeowners to be able to manage rising interest rates on their mortgages. However, when house prices began to fall and the option of remortgaging disappeared, many homeowners:

Share prices will follow a random walk if

Why did mortgage defaults lead to home foreclosures?

Why were CDSs based on residential mortgages developed and why did they fail?

Toxic debt refers to the stock of junk bonds held by banks and other financial institutions which are used to leverage further lending.

According to the efficient markets hypothesis theory, asset prices reflect all ________ information about the value of an asset.

For financial institutions in the above 20-year period, the expectations of continued economic growth partly explain how attention turned from what might be termed 'prudent' lending to:

If share prices follow a random walk, it means

Explain how problems in the sub-prime market led to the global banking crisis in 2007-09?

Some critical observers of the stock market argue that the global economic crisis of 2007-09 is evidence that:

The tolerance of moral hazard means that:

What Is Economics

Thinking Like an Economist

The Market Forces of Supply and Demand

Elasticity and Its Applications

Background to Demand: Consumer Choices

Background to Supply: Firms in Competitive Markets

Consumers, Producers and the Efficiency of Markets

Supply, Demand and Government Policies

The Tax System

Public Goods, Common Resources and Merit Goods

Market Failure and Externalities

Information and Behavioural Economics

Firms Production Decisions

Market Structures I: Monopoly

Market Structures Ii: Monopolistic Competition

Market Structures Iii: Oligopoly

The Economics of Factor Markets

Income Inequality and Poverty

Interdependence and the Gains From Trade

Measuring a Nations Well-Being

Measuring the Cost of Living

Production and Growth

Unemployment

Saving, Investment and the Financial System

The Basic Tools of Finance

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Business Cycles

Keynesian Economics and the Is-Lm Analysis

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Trade-Off Between Inflation and Unemployment

Supply-Side Policies

Common Currency Areas and European Monetary Union

The Financial Crisis and Sovereign Debt

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