ECO 4223 Exam 2 Actual Exam Study
Questions with 100% Correct Answers
| Brand New Version
1. Interest spread - ANSWER the difference between the interest paid and
interest earned.
2. Interest spread example - ANSWER a bank pays a 1.5% savings rate to
lenders but charges a 4.5% rate for a 30 year mortgage to borrowers. What is
the interest spread? 3%
3. How is interest spread determined? - ANSWER Market forces, when prices
are above or below equilibrium. (Shortage of funds or surplus of funds).
Downward pressure on prices (surplus) and upward pressure on interest
rates. (Shortage)
4. What happens if there is a surplus in interest spread? - ANSWER
Downward pressure on prices
5. What happens if there is a shortage in interest spread? - ANSWER Upward
pressure on interest rates
6. ARMs contribution to housing crisis - ANSWER ARMs offered teaser rates
and sometimes "interest only" loans. These loans were cheaper for subprime
borrowers, but they reset after a few years. This was okay as long as housing
prices continued to increase. Then, they could resell the house and profit.
When prices declined....
,7. Gov't policies that contributed to housing crisis - ANSWER Community
Reinvestment Act (CRA) helped propel the housing market crisis. This is
debated. Arguments on the pro side say that the CRA forced banks to make
additional loans to poorer applicants because of government regulation
(redlining). Arguments on the con side say that the law didn't force banks to
make subprime loans nor did it ask them to lower their lending standards.
They instead did that to create profitable derivatives.
8. Secondary mortgage market contribution to housing crisis - ANSWER The
secondary mortgage market is the primary culprit. It created moral hazard in
banking because lenders now were less concerned with the ability to pay
back loans. If interest rates increased, the belief was that the borrower could
sell the house to pay back the loan. The term, Collateralized Debt
Obligations (CDOs) says just that.
9. how did the repeal of Glass Steagall Act contribute to the housing crisis? -
ANSWER Repeal of Glass Steagall Act (separated commercial and
investment banking). The act, in 1999, was Gramm-Leach-Bliley Act.
10.What was the consequences of the housing crisis? - ANSWER Largest
recession since the Great Depression. This is why it is sometimes referred to
as "the Great Recession."
11.Substantial revisions to Banking Regulation—including the Dodd Frank act,
which put limits on "Too big to fail" (though not perfectly).
12.How is change going today? - ANSWER Not sure!
Interest rates are still very low
, ARMs are not as popular though they still exist.
Government and society still push homeownership as a means to prosperity
Secondary Mortgage Market still exists.
Dodd-Frank Act has established additional criteria those banks must satisfy if
deemed "too big to fail".
Collateral requirements have not increased. Still easy to get a mortgage with
little down.
13.Different types of loans a bank offers - ANSWER Commercial and
residential mortgages, car loans, student loans, interbank lending, personal
loans
14.Asymmetric information - ANSWER When one agent has more information
than the other agent
15.Two types of asymmetric information? - ANSWER Adverse selection and
moral hazard
16.Adverse selection - ANSWER Adverse selection occurs when individuals
select into a program and the program mistakenly only attracts the riskiest of
agents.
17.For insurance to work properly... - ANSWER underwriters must price in the
value of the contract the probabilities of insureds filing claims. This could
Questions with 100% Correct Answers
| Brand New Version
1. Interest spread - ANSWER the difference between the interest paid and
interest earned.
2. Interest spread example - ANSWER a bank pays a 1.5% savings rate to
lenders but charges a 4.5% rate for a 30 year mortgage to borrowers. What is
the interest spread? 3%
3. How is interest spread determined? - ANSWER Market forces, when prices
are above or below equilibrium. (Shortage of funds or surplus of funds).
Downward pressure on prices (surplus) and upward pressure on interest
rates. (Shortage)
4. What happens if there is a surplus in interest spread? - ANSWER
Downward pressure on prices
5. What happens if there is a shortage in interest spread? - ANSWER Upward
pressure on interest rates
6. ARMs contribution to housing crisis - ANSWER ARMs offered teaser rates
and sometimes "interest only" loans. These loans were cheaper for subprime
borrowers, but they reset after a few years. This was okay as long as housing
prices continued to increase. Then, they could resell the house and profit.
When prices declined....
,7. Gov't policies that contributed to housing crisis - ANSWER Community
Reinvestment Act (CRA) helped propel the housing market crisis. This is
debated. Arguments on the pro side say that the CRA forced banks to make
additional loans to poorer applicants because of government regulation
(redlining). Arguments on the con side say that the law didn't force banks to
make subprime loans nor did it ask them to lower their lending standards.
They instead did that to create profitable derivatives.
8. Secondary mortgage market contribution to housing crisis - ANSWER The
secondary mortgage market is the primary culprit. It created moral hazard in
banking because lenders now were less concerned with the ability to pay
back loans. If interest rates increased, the belief was that the borrower could
sell the house to pay back the loan. The term, Collateralized Debt
Obligations (CDOs) says just that.
9. how did the repeal of Glass Steagall Act contribute to the housing crisis? -
ANSWER Repeal of Glass Steagall Act (separated commercial and
investment banking). The act, in 1999, was Gramm-Leach-Bliley Act.
10.What was the consequences of the housing crisis? - ANSWER Largest
recession since the Great Depression. This is why it is sometimes referred to
as "the Great Recession."
11.Substantial revisions to Banking Regulation—including the Dodd Frank act,
which put limits on "Too big to fail" (though not perfectly).
12.How is change going today? - ANSWER Not sure!
Interest rates are still very low
, ARMs are not as popular though they still exist.
Government and society still push homeownership as a means to prosperity
Secondary Mortgage Market still exists.
Dodd-Frank Act has established additional criteria those banks must satisfy if
deemed "too big to fail".
Collateral requirements have not increased. Still easy to get a mortgage with
little down.
13.Different types of loans a bank offers - ANSWER Commercial and
residential mortgages, car loans, student loans, interbank lending, personal
loans
14.Asymmetric information - ANSWER When one agent has more information
than the other agent
15.Two types of asymmetric information? - ANSWER Adverse selection and
moral hazard
16.Adverse selection - ANSWER Adverse selection occurs when individuals
select into a program and the program mistakenly only attracts the riskiest of
agents.
17.For insurance to work properly... - ANSWER underwriters must price in the
value of the contract the probabilities of insureds filing claims. This could
