Question 1

Suppose you purchase a new home for $250 000,making a down payment of 25% and taking out a mortgage on the balance.What is the return on your investment in your home if one year later the price of your home increases by 30%?

Accepted Answer

The initial investment is the down payment, which equals 25% of $250 000, or $62 500. To calculate the return on investment, we need to calculate the increase in value of the home after one year, which is 30% of $250 000, or $75 000. Therefore, the total value of the home after one year is $250 000 + $75 000, or $325 000. The return on investment is then calculated as the increase in value divided by the initial investment, or ($325 000 - $250 000)/$62 500 = $75 000/$62 500 = 1.2, or 120%. Therefore, the correct choice is D.

Question 2

Suppose you made a 5% down payment on a house on January 1,2013,and on January 1,2014 you decided to sell the house.If the price of your house decreased by 10%,the return on your investment in the house would be

Accepted Answer

The return on investment is calculated based on the initial investment. With a 5% down payment, if the house price decreases by 10%, the loss is double the initial investment, resulting in a -200% return.

Question 3

Suppose you made a 20% down payment on a house on January 1,2013,and on January 1,2014 you decided to sell the house.If the price of your house increased by 10%,the return on your investment in the house would be

Accepted Answer

If you made a 20% down payment on a house and its price increased by 10%, your overall return on investment can be calculated as follows:

Return on Investment = (Profit ÷ Initial Investment) x 100

Profit = Selling Price - Initial Price
Initial Investment = Down Payment

Assuming the initial price of the house was $100,000, the down payment would be $20,000. Then, after a 10% increase in price, the house would be worth $110,000.

Profit = $110,000 - $100,000 = $10,000
Initial Investment = $20,000

Return on Investment = ($10,000 ÷ $20,000) x 100 = 50%

Therefore, the correct answer is C) 50%.

Question 4

A situation in which many banks simultaneously experience rapid deposit withdrawals is called

Accepted Answer

A bank panic occurs when multiple banks face simultaneous withdrawals, often due to a loss of confidence in the banking system.

Question 5

The ________ the down payment made by a borrower when taking out a mortgage,the ________.

Accepted Answer

When the down payment made by a borrower is lower, the borrower is more highly leveraged on the mortgage because they have borrowed a larger percentage of the total cost of the home. This increased leverage can lead to higher interest rates and potentially a higher risk of default for the borrower.

Question 6

Suppose you purchase a new home for $150 000,making a down payment of 10% and taking out a mortgage on the balance.What is the return on your investment in your home if one year later the price of your home decreases by 20%?

Accepted Answer

The initial investment (down payment) is $15,000 (10% of $150,000). If the home value decreases by 20%, the new value is $120,000. The mortgage balance remains $135,000, so the equity is now -$15,000. The loss on the initial investment is $30,000, which is a -200% return on the $15,000 investment.

Question 7

The ________ plays an important role in preventing bank panics by insuring individual bank deposits up to $100 000 per institution.

Accepted Answer

The Canada Deposit Insurance Corporation plays an important role in preventing bank panics by insuring individual bank deposits up to $100 000 per institution. The Bank of Canada and the Federal Reserve also play important roles in maintaining financial stability, but they do not offer deposit insurance. The Federal Deposit Insurance Corporation is a US agency that insures bank deposits in the US, but it does not operate in Canada.

Question 8

Explain how a bank run can cause a bank to fail.

Accepted Answer

The answer of Explain how a bank run can cause...

Question 9

One of the key reasons that the Bank of Canada acts as a lender of last resort is to prevent ________,the process by which a run on one bank spreads to other banks,resulting in a bank panic.

Accepted Answer

Contagion is the process by which a run on one bank spreads to other banks, creating a panic among depositors who rush to withdraw their funds. By acting as a lender of last resort, the Bank of Canada can provide liquidity to banks experiencing a run, preventing the panic from spreading to other banks and triggering a larger financial crisis.

Question 10

Suppose you purchase a new home for $75 000,making a down payment of 20% and taking out a mortgage on the balance.What is the return on your investment in your home if one year later the price of the home increases by 5%? What if the price of the home decreases by 5%?

Accepted Answer

The answer of Suppose you purchase a new home for...

Question 11

For a public firm,net worth is called shareholder's equity; for a bank,net worth is often referred to as

Accepted Answer

For a bank, net worth is often referred to as capital. This includes both equity capital and debt capital, and represents the amount of money that the bank has available to use for lending and other activities. Capital is an important measure of a bank's stability, as it allows the bank to absorb losses and continue operating even in difficult economic conditions. Banks are required to maintain a certain level of capital in order to meet regulatory requirements and ensure their long-term viability.

Question 12

The more leveraged an investment,the ________ the potential gain and the ________ the potential loss from that investment.

Accepted Answer

The statement means that the potential gain and loss are directly proportional to the level of leverage. Therefore, the greater the leverage, the greater the potential gain and the greater the potential loss. Option A) correctly reflects this relationship.

Question 13

What is the difference between a bank run and a bank panic? How might a bank run and asymmetric information lead to a bank panic?

Accepted Answer

The answer of What is the difference between a bank...

Question 14

Canada,like nearly all countries,has a fractional reserve banking system,meaning

Accepted Answer

Canada, like most countries, has a fractional reserve banking system in which banks are required to keep only a fraction of their deposits as cash reserves, typically around 10%. The remainder can be lent out, creating new deposits and expanding the money supply. Reserve requirements can vary, but are typically set by the central bank.

Question 15

When the value of a bank's or another firm's assets declines to less than the value of its liabilities,the firm

Accepted Answer

If the value of a firm's assets declines to less than the value of its liabilities it becomes insolvent, meaning it cannot meet its financial obligations. This is a serious financial issue and can result in bankruptcy or liquidation.

Question 16

When multiple banks have to sell the same assets,such as securitized loans,the prices of these assets are likely to decline.This process is called

Accepted Answer

When multiple banks have to sell the same assets, it creates an oversupply in the market, leading to a decline in prices, which is known as asset deflation. Securitization refers to the process of converting assets into tradable securities, whole-selling refers to the bulk sale of goods, and syndication refers to the process of multiple lenders pooling their capital to lend it to a single borrower.

Question 17

Suppose you purchase a new home for $300 000,making a down payment of 50% and taking out a mortgage on the balance.What is the return on your investment in your home if one year later the price of your home increases by 50%?

Accepted Answer

If the original price of the home was $300,000 and the down payment was 50%, then the down payment was $150,000. This means that the mortgage was for $150,000.

If the value of the home increases by 50% in one year, then the new value of the home is $450,000.

Therefore, the return on investment would be calculated as follows:

Return on investment = (new value - initial investment) / initial investment * 100%

Return on investment = ($450,000 - $300,000) / $300,000 * 100%

Return on investment = $150,000 / $300,000 * 100%

Return on investment = 50%

Therefore, the answer is D) 100%.

Question 18

The text lists five policy responsibilities of most central banks,including the Bank of Canada.What are those five policy responsibilities?

Accepted Answer

The answer of The text lists five policy responsibilities of...

Question 19

By acting as a lender of last resort during a banking panic,a central bank allows commercial banks to

Accepted Answer

By acting as a lender of last resort during a banking panic, the central bank can provide commercial banks with the necessary funds to satisfy customer withdrawal needs. This can help restore the public's faith in the banking system, as depositors are reassured that they can withdraw their funds if needed. This can ultimately prevent a run on the banks and help stabilize the financial system. Options A, C, and D are not accurate descriptions of the central bank's role in a banking panic.

Question 20

What would happen to the availability of credit if banks chose to either increase or decrease the percentage of deposits they hold as reserves?

Accepted Answer

The answer of What would happen to the availability of...

Quiz 3: The Canadian Financial System