Exam 13: Financial Crises: Causes and Consequences

How do IBs stop depositor runs?

High interest rates can be both the cause of a bubble and the result of a burst.

Islamic banks perform worse than conventional ones during financial crises.

Changes in stock prices are the result of changes in fundamentals.

An investor borrows half the funds to invest in an asset whose price falls from $200 to $150. Ignoring the cost of borrowing, what is the effective rate of return?

Bailouts are intended to

Leverage increases both risk and return for investors.

Samantha and Jamaal both invest in a stock whose price goes from $100 to $60 after one year and $40 the next. Samantha borrowed 20% of the money to invest while Jamaal borrowed none. Find their effective rates of return on the initial price ignoring the cost of borrowing.

Which government action does NOT necessarily involve putting taxpayer money at risk?

Explain why securitization led to an erosion of lending standards.

Bubbles always end due to mistaken government intervention.

What meant by deleveraging? What role does it play in a credit crunch?

By allowing Lehman to fail, the Federal Reserve worsened the moral hazard problem between regulators and financial institutions.

IBs:

Loan calls are more likely during a panic.

The financial panic of 2007-2009 was a systemic crisis.

Lower levels of leverage can make a financial panic more severe.

Ignoring borrowing costs, an investor who borrows half the funds to invest in an asset that rises from $200 to $300 makes an effective rate of return of

During the 2007-2009 financial crisis, the government engaged in bailouts but did not act as a lender of last resort.

The housing bubble leading up to the financial crisis of 2007-2009 was exacerbated by