b. What risk do banks face when they use maturity transformation?The risk comes frommaturity transformation being used only by shadow banks and kept secret from customers, who might withdraw theirfunds if they learn it is being used.banks exposing themselves to a run and collapse, if they do not have enough deposits to cover withdrawals.deposit insurance not guaranteeing deposits when the bank uses maturity transformation.long-term loans possibly not being paid back, leading to a bank failure. 5 The Financial Sector - End of Chapter Problema. How does maturity transformation impact long-term investment spending?Maturity transformationdecreases long-term investment by limiting the use of short-term deposits to short-term loans only.increases long-term investment by making it possible to extend long-term loans even when no savers are willing tomake a long-term loan.increases long-term investment by convincing savers to promise they will not withdraw their money for the length ofthe loan.increases long-term investment by having investors take out a series of short-term loans successively, repaying eachprevious loan, until the long-term project is completed.

Maturity transformation is a financial process that involves borrowing money on a short-term basis…

b. What risk do banks face when they use maturity transformation? The risk comes from maturity transformation being used only by shadow banks and kept secret from customers, who might withdraw their funds if they learn it is being used. banks exposing themselves to a run and collapse, if they do not have enough deposits to cover withdrawals. deposit insurance not guaranteeing deposits when the bank uses maturity transformation. long-term loans possibly not being paid back, leading to a bank failure.

b. What risk do banks face when they use maturity transformation? The risk comes from maturity transformation being used only by shadow banks and kept secret from customers, who might withdraw their funds if they learn it is being used. banks exposing themselves to a run and collapse, if they do not have enough deposits to cover withdrawals. deposit insurance not guaranteeing deposits when the bank uses maturity transformation. long-term loans possibly not being paid back, leading to a bank failure.

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

8th Edition

ISBN:9781285065137

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter6: Interest Rates

Section: Chapter Questions

Problem 7Q

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