The housing market was one of the only markets that survived the great credit crisis of 2007-2009 with minimal loss of value.
a) True
b) False
b) False
The stock markets lost significant value.
The term "underwater" means that owners owe more on their mortgage than they would like to.
a) True
b) False
b) False
The homeowner owes more on the mortgage than the home would sell for in the open market.
Seeing as how a household's home and stock portfolio are substantial assets, when they lose value the household is worse off financially.
a) True
b) False
a) True
The principal factor determining how much a household purchases is the quality and availability of products.
a) True
b) False
b) False
Perceived wealth is the main driver of purchases.
Net worth is defined as the total value of one's assets less the total value of one's liabilities.
a) True
b) False
a) True
A large drop in wealth can lead to a reduction in consumer confidence and spending.
a) True
b) False
a) True
During the period leading up to the great credit crisis, strict regulations were in place within the financial market.
a) True
b) False
b) False
The lack of strong regulation was a major cause of the credit crisis.
When borrowers default, banks are not negatively affected, due to FDIC insurance.
a) True
b) False
b) False
FDIC insurance covers depositors, not the banks themselves.
Subprime mortgages are typically geared toward borrowers with poor credit histories and/or inadequate asset holdings.
a) True
b) False
a) True
According to the textbook, both subprime and traditional mortgages were shown to be counter-cyclical.
a) True
b) False
a) True
Once assets have been securitized, they can no longer lose value.
a) True
b) False
b) False
The securitization of assets has no effect on their subsequent valuation.
The biggest difference between mortgage-backed securities and collateralized mortgage obligations is that investors interested in mortgage-backed securities have a variety of risk tranches to choose from, while there are no such tranches provided by collateralized mortgage obligations.
a) True
b) False
b) False
CMOs provide the different tranches.
A naked credit default swap is a purely speculative asset.
a) True
b) False
a) True
A bank's leverage ratio is the ratio of its loans and investments to its capital reserves.
a) True
b) False
a) True
TARP stands for the Troubled Asset Retirement Program.
a) True
b) False
b) False
TARP stands for the Troubled Asset Relief Program.
According to the textbook, the most damaging to AIG's balance sheet was its exposure to MBSs.
a) True
b) False
b) False
The most damaging item on AIG's balance sheet were CDSs.
An important task for regulators going forward is for them to ensure that financial innovation is closely monitored and occurs only after it receives approval from the government.
a) True
b) False
b) False
Financial innovation is desirable, but it must be properly evaluated.
Which of the following correctly describes the primary issue addressed by the Basel II Agreement to clear up some of the loopholes found in the Basel I accords between the twelve leading industrial nations?
B) the need to develop models to measure "value at risk" for global institutions
The Basel II Agreement on Bank Capital Standards allows the largest banks in the world to develop models to calculate their own risk exposure and capital requirements. These models must be able to measure the "value at risk" of their asset portfolios when subject to various stress tests. The others are incorrect because the agreement did not address any of the issues described in these options.
The decades leading up to the financial crisis of 2007–2009 were largely regulated by which of the following?
I. the SEC
II. nobody
B) II only
The SEC did not regulate the financial markets. It regulated certain institutions. There was no specific body responsible for regulating the financial markets in totality.
All the following are important management tools developed for private financial institutions to deal with risk EXCEPT
C) discount window loans
Discount window loans are not risk management tools; they are short term loans of legal reserves made to depository institutions as a temporary backup source of funds.
All the following are probable future trends in the regulation of financial institutions EXCEPT
C) decreased regulation of investment banks by the SEC
In the future, it is likely that the SEC will regulate investment banks more tightly.
The Obama administration has proposed consolidating all consumer protection regulations into one new federal agency. The Consumer Financial Agency would have all of the following authorities EXCEPT
D) charge fees to financial institutions to pay for the cost of regulatory oversight
The agency’s expenses would be paid for by general tax revenues.
All the following are major trends reshaping U.S. financial markets and institutions in recent years EXCEPT
D) the use of highly sophisticated financial monitoring tools to predict the timing and magnitude of market disruptions
The crystal ball of the market forecasters has not grown clearer in the past few decade.
