ECO 410 Week 4 Quiz – Strayer
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Quiz 3 Chapter 5 and 6
Chapter 5
The Continuing Global Financial
Crisis
5.1 The Credit Crisis of 2008-2009
Multiple Choice
1)
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).
2) 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
3) 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.
4) The
process of turning an illiquid asset into a liquid saleable asset is called:
A)
swapping.
B)
wrapping.
C)
securitization.
D)
creationism.
5)
Asset-backed securities (ABSs) may be securitized based on:
A) auto
loans.
B)
home-equity loans.
C)
credit card receivables.
D) all
of the above
6) 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
7) 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)
8) 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.
9)
________ 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
True/False
1)
Mortgage loans in the U.S. are classified by risk into one of three types:
prime, alt-A, and sub-prime.
2) Alt-A
mortgage loans are NOT eligible for sale to GSEs such as Fannie Mae or Freddie
Mac.
3) The
Gramm-Leach-Bliley 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.
4)
Subprime mortgages did not exceed 8% of all outstanding mortgage obligations by
2007, but by the end of 2008 they were the source of 65% of bankruptcy filings
by homeowners in the United States.
5) Even
though household debt as a percentage of disposable income rose rapidly in the
United States in early 2000s, the rate was even greater in Britain, topping out
at over 170% in 2008.
6) 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.
7) It is
pretty clear after reading this chapter that securitization in and of itself is
a poor financial idea.
8)
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.
9) The
authors make it clear that the main source of market failure with
collateralized debt obligations lay almost exclusively with the rating
agencies.
10)
Credit Default Swaps are highly regulated financial instruments as a result of
the Commodity Futures Modernization Act of 2000.
Essay/Short Answer
1) What
is a Collateralized Debt Obligation (CDO)? In your answer explain how CDOs are
generally separated into one of three tranches. What types of mistakes were
made by security rating agencies that contributed to the collapse of the CDO
market?
5.2 Global Contagion
Multiple Choice
1) Which
of the following is NOT identified by the authors as a "safe-haven"
currency?
A) the
euro
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