Moral hazard or its reduction explain the following except: O A. Collateral requirements for loans. O B. The Enron and Tyco scandals. O C. The success of zero commission trading. O D. Covenants requiring borrowers to provide information periodically.
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- Which of the following does not relate to credit risks? Select one: A. Credit risk is the possibility of a loss resulting from a borrower's failure to repay a loan or meet contractual obligations B. Credit risk also describes the risk that an insurance company will be able to pay a claim. C. It refers to the risk that a lender may not receive the owed principal and interest D. Credit risk describes the risk that a bond issuer may fail to make payment when requested E. Credit risk is the possibility of losing a lender takes on due to the possibility of a borrower not paying back a loanWhich of the following does not relate to credit risks? a. Credit risk is the possibility of losing a lender takes on due to the possibility of a borrower not paying back a loan b. It refers to the risk that a lender may not receive the owed principal and interest c. Credit risk also describes the risk that an insurance company will be able to pay a claim. d. Credit risk is the possibility of a loss resulting from a borrower's failure to repay a loan or meet contractual obligations e. Credit risk describes the risk that a bond issuer may fail to make payment when requestedrefers to the possibility that the debtors supported by bank credit are unable or unwilling to repay the debts on time as stipulated in the contract for various reasons, causing losses to the bank. (A) Credit risk (B) Market risk (C) Operational risk (D) Liquidity risk
- Which of the following is NOT a reason for sales discounts to be offered to the debtors(customers)? A. Increase the amount paid by the debtors B. Improve the liquidity by turning the accounts receivable into cash C. Encourage earlier settlement of debts by debtors D. Reduce the level of bad debtsA deposit institution can offset its liquidity risk to reduce its net deposit drains by reducing its assets through all of the following methods except: a. Borrowing funds or issuing equity. b. Calling back its loans. c. Use cash reserve. d. Selling securities.Assume that banks aim to hold no excess reserves. The AAA bank responds to the change in its reserve position in part (b) by maximizing its loan portfolio. Under this assumption, show AAA's T-Account after it has fully adjusted to the change in its reserve position. Explain what actions occurred that caused the balance sheet to change. AAA Bank Assets Liabilities
- Overdrafts are a result of a.loans made against certificates of deposit b.banks paying wire transfers made during one business day c.banks extending credit beyond the amount specified in a line of credit d.banks paying on checks or wire transfers drawn on uncollected balances. Loan participations are: a. parts of loans that are sold to banks b. participation in the underwriting c. parts of securitized investments d. downstream investment Convenience use of credit cards refers to a. the line of credit may be raised as needed b. amounts owed being paid in full when billed c. the open-end use of the card d. none of the aboveCustomer loans are classified on a Depository Institution (DI)'s balance sheet as Select one: A. liabilities, because the customer may default on the loan. B. assets, because the DI earns servicing fees on the loan. C. assets, because the DI's major asset is its client base. D. assets, because DIs originate and monitor loan portfolios. E. liabilities, because the DI must transfer funds to the borrower at the initiation of the loan.Adverse selection is a problem associated with equity and debt contracts arising from the lender's relative lack of information about the borrower's potential returns and risks of his investment activities. the lender's inability to legally require sufficient collateral to cover a 100 percent loss if the borrower defaults. the borrower's lack of incentive to seek a loan for highly risky investments. 4. none of the choices.
- Loan covenants are used for which of the following reasons?a. To protect the lender from the borrower’s substantially weakening of the latter’s financial position.b. To protect the borrower from the lender’s calling the loan early.c. To protect the auditors from false information by the borrower.d. To protect shareholders from management taking on too much debt.5) Systemic risk is a) credit risk. b) an insurance contract against the default of one or more borrowers. c) firm-specific risk. d) default risk. e) the potential breakdown of the financial system when problems in one market spill over and disrupt others.Which of the following situations are likely to result in higher loan defaults? Mortgages are held by originating institutions in their portfolios. Borrowers have higher equity in their homes. Lenders who require documentation of income, liabilities and asset ownership. Borrowers with low credit scores.
