Deck 5: Current Multinational Financial Challenges: the Credit Crisis of 2007-2009

Question 1

Mortgage loans in the U.S. are classified by risk into one of three types: prime, alt-A, and sub-prime.

Answer 1

True

Question 2

Investment banks and stock brokerages have traditionally been regulated by the

A)Federal Reserve System (FED).
B)Federal Deposit Insurance Corporation (FDIC).
C)Securities and Exchange Commission (SEC).
D)Internal Revenue Service (IRS).

Answer 2

Securities and Exchange Commission (SEC).

Question 3

________ is the method of making investments more attractive to prospective buyers by reducing their perceived risk.

A)Subordination
B)Credit enhancement
C)Derivation
D)Deregulation

Answer 3

Credit enhancement

Question 4

The typical TED spread, the difference between the LIBOR and the interest rate swap index, is typically about ________ basis points.

A)350
B)180
C)120
D)80

Question 5

Securitization may degrade credit quality because the process severs the link of lending and repayment (risk and reward)between the originator of the loan and the borrower.

Question 6

The Glass-Steagall Act of 1933

A)separated commercial banking activities from investment banking activities.
B)created the Federal Reserve System.
C)developed the system of commercial bank deposit insurance.
D)all of the above

Question 7

The authors make it clear that the main source of market failure with collateralized debt obligations lay almost exclusively with the rating agencies.

Question 8

Credit Default Swaps are highly regulated financial instruments as a result of the Commodity Futures Modernization Act of 2000.

Question 9

The process of turning an illiquid asset into a liquid saleable asset is called ________.

A)swapping
B)wrapping
C)securitization
D)creationism

Question 10

Which of the following is NOT identified by the authors as a "safe-haven" currency?

A)The euro.
B)The British pound.
C)The U.S. dollar.
D)The Japanese yen.

Question 11

The accounting procedure whereby assets are revalued to market value basis on a daily basis is known as ________.

A)FASB rule 62
B)market value accounting
C)marked-to-market
D)none of the above

Question 12

Asset-backed securities (ASBs)may be securitized based on ________.

A)auto loans
B)home-equity loans
C)credit card receivables
D)all of the above

Question 13

A ________ is a securitized financial instrument that is sold to the market in tranches representing different levels of default risk.

A)guaranteed security asset (GSA)
B)mortgaged backed security (MBS)
C)credit default swap (CDS)
D)collateralized debt obligation (CDO)

Question 14

Alt-A mortgage loans are NOT eligible for sale to GSEs such as Fannie Mae or Freddie Mac.

Question 15

The Financial Services Modernization Act of 1999 explicitly allowed corporate combinations of commercial banks with other types of financial institutions such as insurance companies and investment banking firms.

Question 16

Which of the following statements concerning credit default swaps is FALSE?

A)As of year-end 2008, CDSs are completely outside of regulatory boundaries.
B)A CDS is a derivative security that may be used for hedging risk or for speculative purposes.
C)In order be a party to a CDO, at least one of either the buyer or seller must own the underlying asset.
D)CDSs allow banks to severe their links to their borrowers, thereby reducing their incentive to screen and monitor the ability of borrowers to repay.

Question 17

A ________ is a financial intermediation device that allowed the participant to borrow short and lend long.

A)sub-prime loan
B)structured investment vehicle
C)non-conforming loan
D)all of the above

Question 18

From 1990 through 2007, the amount of securitized loans outstanding dropped from over $25 trillion to less than $5 trillion and was a key element in the loss of market liquidity.

Question 19

It is pretty clear after reading this chapter that securitization in and of itself is a poor financial idea.

Question 20

Which of the following is NOT another term for a prime mortgage loan?

A)Conventional loan.
B)Top-qual loan.
C)Conforming loan.
D)All of the above are suitable terms for a prime mortgage loan.

Question 21

Near the end of the U.S. housing boom many of the mortgages classified as Alt-A were in fact sub-prime.

Question 22

Future financial market regulation must include all of the following EXCEPT:

A)renewed regulatory requirements.
B)increased reporting.
C)greater transparency in pricing and valuation.
D)Regulation must include all of the above.

Question 23

The authors conclude the chapter with a specific road map for future financial regulation.

Question 24

Securitization is likely to be declared illegal in the U.S. though it may still exist elsewhere in the world.

Question 25

Baring the (hopefully temporary setback of 2008)capital is more mobile today than ever before.

Question 26

Portfolio theory relies on combining assets with ________ return correlation exclusively to reduce risk.

A)highly positive
B)low
C)zero
D)none of the above

Question 27

The international credit crisis began in full force in September 2008.

Question 28

LIBOR stand for the London Interbank Offered Rate.

Question 29

In finance, a liquid asset:

A)sells quickly.
B)sells at or near its market value.
C)both A and B
D)none of the above

Question 30

Bear-Stearns is the largest single bankruptcy in U.S. history.