Question 1

Most commodity prices rose in the first half of 2008 but then oil prices plummeted while other commodity prices continued to rise.

Accepted Answer

In the first half of 2008, most commodity prices, including oil, rose significantly. However, in the second half of 2008, both oil and other commodity prices generally fell due to the global financial crisis.

Question 2

Traditionally Alt-A mortgages have a default rate of less than ________ but those originated in 2006 now have a default rate in excess of ________.

Accepted Answer

Alt-A mortgages traditionally have a default rate of less than 1%, but those originated in 2006 now have a default rate in excess of 11%.

Question 3

Beginning in September 2008 and extending into the spring of 2009,the world's credit markets- lending of all kinds- nearly stopped.The corporate lending markets demonstrated which of the following complex combination of crisis conditions?

Accepted Answer

The complex combination of crisis conditions that the corporate lending markets demonstrated during the 2008-2009 credit crisis included all of the options listed in the answer choices. The risky investment banking activities in the mortgage market overwhelmed banks' commercial activities, the indebtedness of the corporate sector was tiered, and all corporate borrowers were suddenly confronted by banks reducing their access to credit.

Question 4

Which of the following do the authors suggest will aid in "pulling derivatives back from the brink"?

Accepted Answer

The authors suggest that renewed regulatory requirements, increased reporting, and greater transparency in pricing and valuation will all aid in "pulling derivatives back from the brink." Therefore, the best answer is D, as all of these options are author suggested techniques.

Question 5

The interbank market has historically operated ________.

Accepted Answer

The interbank market has historically operated without differentiating credit premiums among qualifying participating institutions, without discriminating by name for qualified participants, and as a "no-name" market, making option D the correct answer.

Question 6

The ________ was a contract,a derivative,which derived its value from the credit quality and performance of any specified asset.

Accepted Answer

The description fits the definition of a Credit Default Swap (CDS). A CDS is a contract in which one party pays a premium to another party in exchange for protection against the default of a specified asset. It is a type of derivative that derives its value from the credit quality and performance of the underlying asset.

Question 7

Many investing institutions had strict investment policy statements in place which required investment grade status (BBB and above)for purchase.Thus,there was additional pressure on rating agencies to give favorable ratings to CDOs.

Accepted Answer

This statement suggests that there was pressure on rating agencies to give favorable ratings to CDOs in order to meet the investment policy statements of many institutions, which required investment grade status.

Question 8

The TED spread is the difference between

Accepted Answer

The TED spread represents the difference between the interest rate at which banks lend to each other in the Eurodollar market (typically represented by the London Inter-Bank Offered Rate or LIBOR) and the interest rate on short-term U.S. government debt (usually represented by the three-month Treasury bill rate) or some measure of risk-less interest. The spread reflects the perceived credit risk in the economy and is used as an indicator of the health of the banking system.

Question 9

Which of the following large U.S.firms was allowed to fail in 2008 and forced to file for bankruptcy?

Accepted Answer

Lehman Brothers was allowed to fail in 2008 and forced to file for bankruptcy. Fannie Mae, Freddie Mac, and AIG were all bailed out by the U.S. government during the financial crisis.

Question 10

Many loan agreements with banks have market disruption clauses that allow banks to actually charge corporate borrowers their "real cost of funds," not just the published LIBOR.

Accepted Answer

Many loan agreements do contain market disruption clauses that allow banks to charge their "real cost of funds" instead of just the published LIBOR. This is because during times of market disruption, the LIBOR rate may not accurately reflect the bank's borrowing costs, and the bank may need to charge a higher rate to compensate for this.

Question 11

CDOs are typically sold to the market in categories representing the credit quality of the borrowers in the mortgages.Generally speaking,the ________ tranches have a credit quality of AAA.________ tranches have a quality ranging from AA to BB,and ________ tranches have ratings below BB.

Accepted Answer

The answer of CDOs are typically sold to the market...

Question 12

The Credit Default Swap

Accepted Answer

The Credit Default Swap was designed to shift the risk of default to a third party, was a way to bet whether a specific mortgage or security would either fail to pay on time or fail to pay at all, and could be used as a speculative investment or a hedge against risk. Therefore, the correct answer is D as it includes all of the above options.

Question 13

In the face of a world-wide recession,many currencies fell against the traditional three safe-haven currencies,the dollar,the euro,and the yen,

Accepted Answer

During a recession, investors tend to flock towards safe-haven currencies including the US dollar, Euro, and Japanese yen, resulting in the appreciation of these currencies against other currencies. Therefore, the statement is true.

Question 14

The central bank in most countries sets the rate it lends at,it does not dictate the rate at which banks lend either between themselves or to non-bank borrowers.

Accepted Answer

The central bank sets the interest rate at which it lends to commercial banks, but it does not directly control the interest rates charged by those same banks to their customers or to each other. These rates are influenced by a variety of factors, including market conditions, competition among lenders, and borrower creditworthiness.

Question 15

The recession of 2007 - 2009 moved through three stages in the following order:

Accepted Answer

The recession began with the failure of specific mortgage-backed securities, which then affected major financial institutions, leading to a global recession.

Question 16

One of the concerns about CDOs from the very beginning was that the CDO originator had no continuing link or responsibility to the mortgage.

Accepted Answer

This is true. Once the CDO originator sold the CDO to investors, they were no longer responsible for the underlying mortgages or the performance of the CDO.

Question 17

The CDS was completely outside the regulatory boundaries,having obtained unique protection as a result of the Commodity Futures Modernization Act of 2000.The CDS was in fact a position or play which had been outlawed for more than a century.

Accepted Answer

The statement is true, as the Commodity Futures Modernization Act of 2000 gave CDS unique protection and exemptions from regulation, even though they were a type of position that had been outlawed for over a century.

Question 18

The term ________ goes far back in financial history,and indicates that if large institutions were allowed to collapse,they would take a multitude of smaller institutions with them,both financial and non-financial.A failure ripple-effect of this magnitude is simply considered unacceptable by most governments.

Accepted Answer

The term "too big to fail" is commonly used in finance to refer to large institutions that are deemed so important to the economy that their failure would have disastrous ripple effects.

Question 19

LIBOR is an acronym for ________.

Accepted Answer

LIBOR stands for London Interbank Offered Rate, which is the benchmark interest rate at which the world's largest banks lend to one another on a daily basis. This rate is used as a reference for various financial products, including loans, mortgages, and derivatives.

Question 20

The passage of the Financial Reform Law of 2010 changed The Federal Deposit Insurance Corporation (FDIC)protection of bank deposit accounts from the previous $250,000 to $100,000 per account.This was seen as an attempt to instill market discipline on depositors.

Accepted Answer

The statement is incorrect. The Financial Reform Law of 2010 did not decrease the FDIC protection of bank deposit accounts from $250,000 to $100,000 per account. In fact, it increased the protection to $250,000 per account, which is the current limit as of 2021. The purpose of the law was to strengthen the banking system and protect consumers by providing greater accountability and oversight.

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