Old Mod 3 Exam

Old Mod 3 Exam - Accounting Finance Fall 2009 INSTRUCTOR...

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Accounting & Finance Fall 2009 I N S T R U C T O R V E R S I O N 1 1. Without mortgages, all of the following except one are true about home ownership a. They would have to save until they could afford to pay the full price b. People would buy much smaller houses c. People could only get a house when their parents die d. Adults would live with their families until their 50s Ans.: C is odd one out, L1 2. The securitization of mortgages has in part led to the recent financial crisis, but what’s good about securitization is it: a. Keeps home prices down so people can afford to buy b. Permits local banks to get mortgage funds from investors who do not invest directly in the bank c. Keeps the government out of the home ownership process d. Encourages investors to own several homes and rent them out Ans.: B L1 easy because it’s the longest answer 3. Interest rates on home mortgages are cheaper than for other consumer loans such as student loans. Why? a. The interest rate is directly subsidized by the Government National Mortgage Association (“Ginnie Mae”) b. The loan is secured by the property—if the loan isn’t paid, the house can be sold and the bank that wrote the mortgage can be repaid c. Investors use “cheap money” to loan on houses d. The loans are protected by Moody’s, Standard & Poors or Fitch Ans.: B L1 4. Some mortgage loans have a low initial payment and then “reset” to a higher payment after a few years. According to lecture these loans would only be suitable for: a. Professionals at the start of their careers b. Investors who plan to “flip” the houses c. Retirees d. People who are having difficulty in coming up with the down payment Ans.: A L1 Lawyers and medical residents discussed in class —their income will rise steeply . 5. Credit default swaps are promises that firm C will pay off firm A if Bank B is in default on a debt instrument issued by B and owned by A. What systematic problem occurred? a. They were regulated by individual states as insurance contracts when in fact they were financial derivatives
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Accounting & Finance Fall 2009 I N S T R U C T O R V E R S I O N 2 b. They obligated the US government to pay off $60 trillion c. They were regulated by the SEC as financial derivatives although they were in fact insurance contracts issued by individual states d. They were not regulated either as financial derivatives or as insurance contracts Ans.: D L2 The $60 trillion figure is the total amount of contracts that had been written—equal to 1x World GDP or 4 x US GDP . 6. In September 2008 the US Treasury re-nationalized “Fannie” and “Freddie” by purchasing all their common stock although Treasury Secretary Hank Paulson had repeatedly stated that they were independent companies that could not rely on a government bailout. Why did he change his mind? a.
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Old Mod 3 Exam - Accounting Finance Fall 2009 INSTRUCTOR...

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