Question :
9.3 The Subprime Financial Crisis of 2007-2008
1) Financial innovations that : 1373707
9.3 The Subprime Financial Crisis of 2007-2008
1) Financial innovations that emerged after 2000 in the mortgage markets included all of the following except
A) adjustable-rate mortgages.
B) subprime mortgages.
C) Alt-A mortgages.
D) mortgage-backed securities.
2) ________ is a process of bundling together smaller loans (like mortgages) into standard debt securities.
A) Securitization
B) Origination
C) Debt deflation
D) Distribution
3) A ________ pays out cash flows from subprime mortgage-backed securities in different tranches, with the highest-rated tranch paying out first, while lower ones paid out less if there were losses on the mortgage-backed securities.
A) Collateralized debt obligation (CDO)
B) Adjustable-rate mortgage
C) Negotiable CD
D) Discount bond
4) The growth of the subprime mortgage market led to
A) increased demand for houses and helped fuel the boom in housing prices.
B) a decline in the housing industry because of higher default risk.
C) a decrease in home ownership as investors chose other assets over housing.
D) decreased demand for houses as the less credit-worthy borrowers could not obtain residential mortgages.
5) The originate-to-distribute business model has a serious ________ problem since the mortgage broker has little incentive to make sure that the mortgagee is a good credit risk.
A) principal-agent
B) debt deflation
C) democratization of credit
D) collateralized debt
6) Mortgage brokers often did not make a strong effort to evaluate whether the borrower could pay off the loan. This created a
A) severe adverse selection problem.
B) decline in mortgage applications.
C) call to deregulate the industry.
D) decrease in the demand for houses.
7) Agency problems in the subprime mortgage market included all of the following except
A) homeowners could refinance their houses with larger loans when their homes appreciated in value.
B) mortgage originators had little incentives to make sure that the mortgage is a good credit risk.
C) underwriters of mortgage-backed securities had weak incentives to make sure that the holders of the securities would be paid back.
D) the evaluators of securities , the credit rating agencies, were subject to conflicts of interest.
8) When housing prices began to decline after their peak in 2006, many subprime borrowers found that their mortgages were “underwater.” This meant that
A) the value of the house fell below the amount of the mortgage.
B) the basement flooded since they could not afford to fix the leaky plumbing.
C) the roof leaked during a rainstorm.
D) the amount that they owed on their mortgage was less than the value of their house.
9) Although the subprime mortgage market problem began in the United States, the first indication of the seriousness of the crisis began in
A) Europe.
B) Australia.
C) China.
D) South America.
10) Like a CDO, a structured investment vehicle pays off cash flows from pools of assets, however, rather than long-term debt the structured investment vehicle backs
A) commercial paper.
B) Treasury notes.
C) corporate bonds.
D) municipal bonds.
11) Which investment bank filed for bankruptcy on September 15, 2008 making it the largest bankruptcy filing in U.S. history?
A) Lehman Brothers
B) Merrill Lynch
C) Bear Stearns
D) Goldman Sachs
12) The largest bank failure in U.S. history was ________ which went into receivership by the FDIC on September 25, 2008.
A) Washington Mutual
B) Bank of America
C) J.P. Morgan
D) Wells Fargo
13) Credit market problems of adverse selection and moral hazard increased as a result of all of the following except
A) increase in housing market prices.
B) increased uncertainty from the failures of financial institutions.
C) deterioration in financial institutions’ balance sheets.
D) decline in the stock market of over 40% from its peak.
14) The Economic Recovery Act of 2008 had several provisions to promote recovery from the subprime financial crisis. These provisions included all of the following except
A) guaranteed all the deposits of the commercial banks.
B) purchase of subprime mortgage assets from troubled financial institutions by the Treasury.
C) temporarily raised the limit of the federal deposit insurance from $100,000 to $250,000.
D) guarantee of par value for money market mutual fund shares for one year by the Treasury.
15) The government bailout of troubled financial institutions occurred in the U.S. and many other countries. Which country saw their banking system collapse requiring the government to take over its three largest banks?
A) Iceland
B) England
C) Germany
D) Belgium
