Which of the following are not examples of a vicious cycle of deleveraging? Expl

Question

Which of the following are not examples of a vicious cycle of deleveraging? Explain.

a. Your university decides to sell several commercial buildings in the middle of town in order to upgrade buildings on campus.
b. A company decides to sell its large an valuable art collection because other asset prices on its balance sheet have fallen below a critical level, forcing creditors to call in their loans to the company because of provisions written into the original loan contract.
c. A company decides to issue more stock in orders t voluntarily pay off some of its debt.
d. A shadow bank must sell its holdings of corporate bonds because falling asset prices have led to a default on the terms of its loan with some creditors.

Explanation / Answer

a.This is not an example of a vicious cycle of deleveraging. The university is voluntarily selling its commercial buildings in order to improve its campus.

b.This is an example of a vicious cycle of deleveraging. If a company sells a largeholding of valuable art, this is likely to depress art prices elsewhere, leading to balancesheet effects on other firms that hold art and possibly forcing them to sellother assets in order to meet the terms of their creditors.

c.This is not an example of a vicious cycle of deleveraging. The company is voluntarilyissuing more stock because it wants to lower the amount of debt that it owes.

d.This is an example of a vicious cycle of deleveraging. The shadow bank must sellits assets (corporate bonds) because losses due to falling asset prices have led to adefault on the terms of its loans from some creditors

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