FIN
Topic 7 Deciphering the Liquidity and Credit Crunch 2007-2008.pdf

The use of a purchased asset effectively as

Info icon This preview shows pages 3–4. Sign up to view the full content.

The use of a purchased asset effectively as collateral to borrow money against it is referred to as market liquidity. From a risk perspective, which of the following asset-backed security (ABS) tranches will most likely absorb the first losses in the ABS asset pool? Mezzanine tranche. Equity tranche. Senior tranche. Super-senior tranche. Investors frequently raise money to finance an investment purchase by using leverage and part of their equity to finance the purchase. During the 2007-2009 credit crisis, however, these investors were often forced to sell these investments or other assets due to a decline in their value while maintaining a constant leverage ratio. Raising
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

A) B) C) D) Question #10 of 10 Question ID: 726915 A) B) C) D) money to finance investments and the forced sale of assets due to a decline in their value while maintaining a constant leverage ratio, respectively, refer to: Raising Money to Finance Investments Forced Sale of Assets Funding liquidity Loss spiral Market liquidity Margin spiral Market liquidity Loss spiral Funding liquidity Margin spiral The creation collateralized debt obligations (CDOs) most likely involves: the CDO issuer retaining the most senior tranches to give that bank incentive to monitor the loan. slicing the cash flows from a portfolio of collected debt securities into a number of investable tranches. selling the equity tranche to institutions that desire or require instruments with high credit ratings. forming an undiversified portfolio from a small sample of debt securities.
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.
  • Fall '18
  • Debt, Collateralized debt obligation

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern