FIN 480 UPDATED FINAL PAPER QUESTIONS AND
SOLUTIONS GUARANTEE A+
✔✔Credit Default Swaps contributed to the financial crisis in 3 ways.. - ✔✔1. Fostering
uncertainty about who bears the credit risk on a given loan or security
2. Making the lending CDS sellers mutually vulnerable
3. Making it easier for sellers of insurance to assume and conceal risk.
✔✔The buyer of a credit default swap - ✔✔Makes payments similar to insurance
premiums to the seller.
✔✔A collateralized debt obligation is similar to - ✔✔Mortgage Backed securities and
Asset Backed Securities
✔✔Repo Market - ✔✔Somebody has extra cash and wants to put it to use, nit doesn't
want to tie it up to long (want liquidity)
Somebody needs a short termm loan
✔✔Money Market Mutual Funds - ✔✔Developed as an alternative to bank deposits
whose interest rates were capped by the government.
If an investor puts $1 into Money Market mutual fund is buying a share of lans made by
the fund- loans whose value can go up or down.
*Keeping share prices fixed at 1- known as constant NAV for net asset value seen as
crucial
✔✔Synthetic CDO - ✔✔Sells a CDS that references a number of bonds. Gets premiums
each period.
The cash flows from the premiums are similar to the cash flows in a normal CDO but
instead of bond payments, it is CDS premiums.
✔✔Originate to distribute hypothesis - ✔✔Lenders make loans then the sell them rather
than keeping them until maturity.
✔✔The ordinate to distribute hypothesis is an example of - ✔✔Moral Hazard
✔✔Quantitative Easing - ✔✔Fed announces a tapering or slowdown of purchases as it
appears the economy is improving.
Led to large changes n the amount of assets on the Fed's balance sheet.
✔✔Recession - ✔✔defined as 2 or more quarters where GDP us decreasing.
, ✔✔Too Big to Fail banks - ✔✔Large banks have an implicit subsidy from the
government, everyone knows that the gov won't let them fail because of the risk to the
financial system.
✔✔Too big to fail is an example of a - ✔✔Moral Hazard...
✔✔Moral hazard vs adverse selection - ✔✔Adverse selection occurs when there's a
lack of symmetric information prior to a deal between a buyer and a seller, whereas
moral hazard occurs when there is asymmetric information between two parties and
change in behavior of one party after a deal is struck.
✔✔Stress test - ✔✔A simulation of what would happen to a banks balance sheet under
certain circumstances. Largest banks have to undergo stress tests twice per year, one
internal test and one test by regulators.
✔✔Dodd Frank - ✔✔Required large banks and bank holding companies periodically
submit resolution plans to the Fed and FDIC commonly referred to as living will, it
describes the company's strategy for rapid and orderly resolution in the event of
material financial distress or failure of the company.
✔✔6 parts of the financial system - ✔✔1. Money 2. Financial Instruments 3. Financial
Markets 4. Financial Instruments 5. Regulatory Agencies 6. Central Banks
✔✔Five core principles of money and financial systems - ✔✔1. Time has value
2. Risk requires compensation
3. Information is the basis of decisions
4. Markets determine prices and allocation resources.
5 Stability improves welfare.
✔✔Money three characteristics - ✔✔1. means of payments
2. Unit of account
3. Store of value
✔✔The payment system - ✔✔1. Commodity and Fiat Monies
2. Checks
3. Electronic Payments
✔✔Commodity monies vs Fiat Monies - ✔✔Commodity monies are things with intrinsic
value- gold, silk, or salt
Fiat monies value comes from the government
✔✔Money eliminates the need for - ✔✔a search of double coincidence of wants
SOLUTIONS GUARANTEE A+
✔✔Credit Default Swaps contributed to the financial crisis in 3 ways.. - ✔✔1. Fostering
uncertainty about who bears the credit risk on a given loan or security
2. Making the lending CDS sellers mutually vulnerable
3. Making it easier for sellers of insurance to assume and conceal risk.
✔✔The buyer of a credit default swap - ✔✔Makes payments similar to insurance
premiums to the seller.
✔✔A collateralized debt obligation is similar to - ✔✔Mortgage Backed securities and
Asset Backed Securities
✔✔Repo Market - ✔✔Somebody has extra cash and wants to put it to use, nit doesn't
want to tie it up to long (want liquidity)
Somebody needs a short termm loan
✔✔Money Market Mutual Funds - ✔✔Developed as an alternative to bank deposits
whose interest rates were capped by the government.
If an investor puts $1 into Money Market mutual fund is buying a share of lans made by
the fund- loans whose value can go up or down.
*Keeping share prices fixed at 1- known as constant NAV for net asset value seen as
crucial
✔✔Synthetic CDO - ✔✔Sells a CDS that references a number of bonds. Gets premiums
each period.
The cash flows from the premiums are similar to the cash flows in a normal CDO but
instead of bond payments, it is CDS premiums.
✔✔Originate to distribute hypothesis - ✔✔Lenders make loans then the sell them rather
than keeping them until maturity.
✔✔The ordinate to distribute hypothesis is an example of - ✔✔Moral Hazard
✔✔Quantitative Easing - ✔✔Fed announces a tapering or slowdown of purchases as it
appears the economy is improving.
Led to large changes n the amount of assets on the Fed's balance sheet.
✔✔Recession - ✔✔defined as 2 or more quarters where GDP us decreasing.
, ✔✔Too Big to Fail banks - ✔✔Large banks have an implicit subsidy from the
government, everyone knows that the gov won't let them fail because of the risk to the
financial system.
✔✔Too big to fail is an example of a - ✔✔Moral Hazard...
✔✔Moral hazard vs adverse selection - ✔✔Adverse selection occurs when there's a
lack of symmetric information prior to a deal between a buyer and a seller, whereas
moral hazard occurs when there is asymmetric information between two parties and
change in behavior of one party after a deal is struck.
✔✔Stress test - ✔✔A simulation of what would happen to a banks balance sheet under
certain circumstances. Largest banks have to undergo stress tests twice per year, one
internal test and one test by regulators.
✔✔Dodd Frank - ✔✔Required large banks and bank holding companies periodically
submit resolution plans to the Fed and FDIC commonly referred to as living will, it
describes the company's strategy for rapid and orderly resolution in the event of
material financial distress or failure of the company.
✔✔6 parts of the financial system - ✔✔1. Money 2. Financial Instruments 3. Financial
Markets 4. Financial Instruments 5. Regulatory Agencies 6. Central Banks
✔✔Five core principles of money and financial systems - ✔✔1. Time has value
2. Risk requires compensation
3. Information is the basis of decisions
4. Markets determine prices and allocation resources.
5 Stability improves welfare.
✔✔Money three characteristics - ✔✔1. means of payments
2. Unit of account
3. Store of value
✔✔The payment system - ✔✔1. Commodity and Fiat Monies
2. Checks
3. Electronic Payments
✔✔Commodity monies vs Fiat Monies - ✔✔Commodity monies are things with intrinsic
value- gold, silk, or salt
Fiat monies value comes from the government
✔✔Money eliminates the need for - ✔✔a search of double coincidence of wants
