Whether AIG accurately assessed the default risk that it insured and reasons behind it. Concept Introduction: Insurance: Insurance refers to an amount of compensation that the government or an insurance company pays when a person incurs a loss specified in the insurance policy. Default Risk: It is a situation when a company is not able to pay its debts to the person to whom it owes the amount that is the lender.

Question

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Answer 1

Question

Chapter 20, Problem 1BCQ

To determine

Whether AIG accurately assessed the default risk that it insured and reasons behind it.

Concept Introduction:

Insurance: Insurance refers to an amount of compensation that the government or an insurance company pays when a person incurs a loss specified in the insurance policy.

Default Risk: It is a situation when a company is not able to pay its debts to the person to whom it owes the amount that is the lender.

Expert Solution & Answer

Explanation of Solution

In the given case, AIG started selling a product named CDS. It is an insurance which covers the risk of bond investors. Bond investors were careless in giving loans because they were insured against the default.

AIG was expanding its profit and market without caring for risk. It was so confident that it avoided auditing books and there it went wrong.

In 2008, a huge crisis happened due to a mortgage loan default by the U.S. households. Investors were asking for their loss from AIG and hence, AIG got bankrupt. So, the central bank had to interfere by bailout package.

AIG did not accurately assess the default risk that it has insured. It is because the banks were going through huge losses by doing transactions with the company.

The company got the financial aid from the central bank in the form of bailout package.

Conclusion:

Thus, AIG did not assess the default risk that it has insured.

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Answer 2

Question

Chapter 20, Problem 1BCQ

To determine

Whether AIG accurately assessed the default risk that it insured and reasons behind it.

Concept Introduction:

Insurance: Insurance refers to an amount of compensation that the government or an insurance company pays when a person incurs a loss specified in the insurance policy.

Default Risk: It is a situation when a company is not able to pay its debts to the person to whom it owes the amount that is the lender.

Expert Solution & Answer

Explanation of Solution

In the given case, AIG started selling a product named CDS. It is an insurance which covers the risk of bond investors. Bond investors were careless in giving loans because they were insured against the default.

AIG was expanding its profit and market without caring for risk. It was so confident that it avoided auditing books and there it went wrong.

In 2008, a huge crisis happened due to a mortgage loan default by the U.S. households. Investors were asking for their loss from AIG and hence, AIG got bankrupt. So, the central bank had to interfere by bailout package.

AIG did not accurately assess the default risk that it has insured. It is because the banks were going through huge losses by doing transactions with the company.

The company got the financial aid from the central bank in the form of bailout package.

Conclusion:

Thus, AIG did not assess the default risk that it has insured.

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Answer 3

Question

Chapter 20, Problem 1BCQ

To determine

Whether AIG accurately assessed the default risk that it insured and reasons behind it.

Concept Introduction:

Insurance: Insurance refers to an amount of compensation that the government or an insurance company pays when a person incurs a loss specified in the insurance policy.

Default Risk: It is a situation when a company is not able to pay its debts to the person to whom it owes the amount that is the lender.

Expert Solution & Answer

Explanation of Solution

In the given case, AIG started selling a product named CDS. It is an insurance which covers the risk of bond investors. Bond investors were careless in giving loans because they were insured against the default.

AIG was expanding its profit and market without caring for risk. It was so confident that it avoided auditing books and there it went wrong.

In 2008, a huge crisis happened due to a mortgage loan default by the U.S. households. Investors were asking for their loss from AIG and hence, AIG got bankrupt. So, the central bank had to interfere by bailout package.

AIG did not accurately assess the default risk that it has insured. It is because the banks were going through huge losses by doing transactions with the company.

The company got the financial aid from the central bank in the form of bailout package.

Conclusion:

Thus, AIG did not assess the default risk that it has insured.

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Answer 4

Question

Chapter 20, Problem 1BCQ

To determine

Whether AIG accurately assessed the default risk that it insured and reasons behind it.

Concept Introduction:

Insurance: Insurance refers to an amount of compensation that the government or an insurance company pays when a person incurs a loss specified in the insurance policy.

Default Risk: It is a situation when a company is not able to pay its debts to the person to whom it owes the amount that is the lender.

Expert Solution & Answer

Explanation of Solution

In the given case, AIG started selling a product named CDS. It is an insurance which covers the risk of bond investors. Bond investors were careless in giving loans because they were insured against the default.

AIG was expanding its profit and market without caring for risk. It was so confident that it avoided auditing books and there it went wrong.

In 2008, a huge crisis happened due to a mortgage loan default by the U.S. households. Investors were asking for their loss from AIG and hence, AIG got bankrupt. So, the central bank had to interfere by bailout package.

AIG did not accurately assess the default risk that it has insured. It is because the banks were going through huge losses by doing transactions with the company.

The company got the financial aid from the central bank in the form of bailout package.

Conclusion:

Thus, AIG did not assess the default risk that it has insured.

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Answer 5

Chapter 20, Problem 1BCQ

To determine

Whether AIG accurately assessed the default risk that it insured and reasons behind it.

Concept Introduction:

Insurance: Insurance refers to an amount of compensation that the government or an insurance company pays when a person incurs a loss specified in the insurance policy.

Default Risk: It is a situation when a company is not able to pay its debts to the person to whom it owes the amount that is the lender.

Expert Solution & Answer

Explanation of Solution

In the given case, AIG started selling a product named CDS. It is an insurance which covers the risk of bond investors. Bond investors were careless in giving loans because they were insured against the default.

AIG was expanding its profit and market without caring for risk. It was so confident that it avoided auditing books and there it went wrong.

In 2008, a huge crisis happened due to a mortgage loan default by the U.S. households. Investors were asking for their loss from AIG and hence, AIG got bankrupt. So, the central bank had to interfere by bailout package.

AIG did not accurately assess the default risk that it has insured. It is because the banks were going through huge losses by doing transactions with the company.

The company got the financial aid from the central bank in the form of bailout package.

Conclusion:

Thus, AIG did not assess the default risk that it has insured.

Answer 6

Chapter 20, Problem 1BCQ

To determine

Whether AIG accurately assessed the default risk that it insured and reasons behind it.

Concept Introduction:

Insurance: Insurance refers to an amount of compensation that the government or an insurance company pays when a person incurs a loss specified in the insurance policy.

Default Risk: It is a situation when a company is not able to pay its debts to the person to whom it owes the amount that is the lender.

Expert Solution & Answer

Explanation of Solution

In the given case, AIG started selling a product named CDS. It is an insurance which covers the risk of bond investors. Bond investors were careless in giving loans because they were insured against the default.

AIG was expanding its profit and market without caring for risk. It was so confident that it avoided auditing books and there it went wrong.

In 2008, a huge crisis happened due to a mortgage loan default by the U.S. households. Investors were asking for their loss from AIG and hence, AIG got bankrupt. So, the central bank had to interfere by bailout package.

AIG did not accurately assess the default risk that it has insured. It is because the banks were going through huge losses by doing transactions with the company.

The company got the financial aid from the central bank in the form of bailout package.

Conclusion:

Thus, AIG did not assess the default risk that it has insured.

Answer 7

Chapter 20, Problem 1BCQ

To determine

Whether AIG accurately assessed the default risk that it insured and reasons behind it.

Concept Introduction:

Insurance: Insurance refers to an amount of compensation that the government or an insurance company pays when a person incurs a loss specified in the insurance policy.

Default Risk: It is a situation when a company is not able to pay its debts to the person to whom it owes the amount that is the lender.

Answer 8

Expert Solution & Answer

Explanation of Solution

In the given case, AIG started selling a product named CDS. It is an insurance which covers the risk of bond investors. Bond investors were careless in giving loans because they were insured against the default.

AIG was expanding its profit and market without caring for risk. It was so confident that it avoided auditing books and there it went wrong.

In 2008, a huge crisis happened due to a mortgage loan default by the U.S. households. Investors were asking for their loss from AIG and hence, AIG got bankrupt. So, the central bank had to interfere by bailout package.

AIG did not accurately assess the default risk that it has insured. It is because the banks were going through huge losses by doing transactions with the company.