20 multiple choice and true or false questions

1.The margin calls on BSAM funds did not have effects beyond these funds. There was no
contagion effect of the margin calls. This was because BSAM was able to liquidate assets at bid
prices close to the value at which the assets were carried.
2. In March of 2008 the spread between the Fed Funds rate and the one month Treasury bill was:
A.186 basis points.
B.111 basis points
C.121 basis points
D.-343 basis points
3. The maximum debt equity ratio for fund HEDGE is 30. Currently the debt equity ratio is 40.
The fund has recievd a margin call. The managers must deposit at least $x of addtional coolatarl
to meet the margin call. Assets = $100
A. $0.25
4. A margin call requires the borrower to increase its equity to support its debt.
5. The maximum debt equity ratio for fund HEDGE is 30. Currently the debt equity ratio is 20.
Assets = $100.If asset values fall by 10% the fund will face a margin call.
6. During periods of financial distress investors tend to sell risky assets and buy safe assets. This
flow of funds from risky assets to safer assets;
A.Reduces the cost of borrowing for businesses and for the Federal Government.
B. Increases the cost of borrowing for businesses and for Federal Government.
C.Increases the cost of borrowing for the Federal Government.
D.Reduces the cost of borrowing for the Federal Government and increases the
cost of borrowing for the private sector
7. If numerous large financial institutions receive simultaneous margin calls when the value of
their MBS assets are rapidly declining, the margin calls will;
A. Accelerate the decline in MBS asset values.
B. Increase the supply of fed funds.
C. Increase the demand for the MBS assets to satisfy the margin calls.
D. Cause an inflow of funds to the stock market.
8. In 2008 the Federal Reserve refused to act as lender of last resort during the last crisis because
Bernanke believed that bank executives had ripped off society. In addtion Bernanke feared the
long term affects of moral hazard.
9. The decline in home values since 2007 led to serious financial distress in the household sector
and the banking sector because:
A. The decline lowered the demand for housing.
B. The decline led to a decrease in the debt/equity ratio of both households and banks.

C. The decline led to an increase in the debt/equity ratio of both households and banks
D. The decline increased the value of mortgage-backed securities and corporate bonds.
10. Once Bear Stearns collapsed the spread between the yield on 1 month commercial paper and
one treasury bills continued to steadily widen until May of 2009 when it stabilized.
11. The difference between the Fed Funds rate and the three month treasury narrowed as
investors began fearing that large banking institutions were likely to fail in the second and third
quarters of 2008. The spread widened in the fourth quarter of 2008.
12. The AAA rated class of a CDO squared has always has the same credit risk as a bond issued
by a AAA rated corporation. This is because ratings capture all credit risk. This is the point of
ratings. This was proven during the financial crisis.
13. Wachovia and Washington Mutual collapsed because depositors did not have confidence in
the FDIC and bank managers had insufficient reserves to meet depositor withdrawals.
The maximum debt equity ratio for fund HEDGE is 30. Currently the debt equity ratio is 10.
If asset values fall by 5% the fund will face a margin call.
15. On August 17th/2007 the spread between the CP rate and the Fed Funds rate was over 130
basis points and by 3/21/2008 the spared had increased to over 150 basis points. By 9/26/2008
this same spread was over 300 bp
16. Super-senior tranches of CDOs are so safe that only fools would have shorted them. After
all they were senior to AAA rated tranches
17. Alan Blinder places part of the blame for the financial crisis on Moodys but praises
Standard and Poors. He argues that Standard and Poors never gave AAA ratings to CDOs that
were backed by subprime MBS. Blinder puts the blame on the incompetence of Moodys
18. Due to margin calls in the year 2007 BSAM had to issue more debt to raise the funds to come
up with the cash. This issue of debt increased the leverage of the funds and depressed the value
of the assets under management.

19. According to Alan Blinder the compensation schemes at investment banks linked the wealth
of bankers to the risks of the assets the bank securitized. This is why the crisis of 2007-2009
never reached the same proportions as the crisis of the 1930s. In addition the partnership
structure of investment banks during the 1920s increased the principle agent problem.
20. In March of 2007 the difference between the interest rate on the Fed Funds rate and the yield
on the one month Treasury bill was less than in February of 2006:

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