An increase in the expected return on bonds causes the _____ bonds to shift and

Question

An increase in the expected return on bonds causes the _____ bonds to shift and equilibrium interest rates to

_____.

The housing bubble leading up to the financial crisis of 2007–2009 was exacerbated by

rising mortgage rates.

Treasury Department purchase of CDOs.

NINJA loans.

all of the above

A bank takes deposits and uses the funds to make home loans. Hence, the _____ increases.

level of capital

ROA

quantity of reserves

none of the above

A.

rising mortgage rates.

B.

Treasury Department purchase of CDOs.

C.

NINJA loans.

D.

all of the above

A bank takes deposits and uses the funds to make home loans. Hence, the _____ increases.

A.

level of capital

B.

ROA

C.

quantity of reserves

D.

none of the above

Explanation / Answer

Solution:

1.

An increase in the expected return on bonds causes the demand for bonds to shift and equilibrium interest rates to fall. As the Expected return on bond increases , People will demand more of a bonds which will cause the increase in the price of the bond. There is an inverse relationship between price of bond and interest rate. So with the increase in the price of the bond , The interest rate of bond will fall simultaneously.

2. The Housing Bubble that caused financial crisis in 2007-2009 was caused by below factors :

a. Rising mortgage rate : The subprime loans were issued by mortgaging houses of borrowers. In 2007 , as the prices of houses started declining steeply , the adjustable mortgage rates were reset to higher level

b.Treasury Department purchase of CDOs :

Collateralise debt obligations (CDOs) are type of Asset backed security which are being sold to investors in the secondary market. It is a part of securitization wherein loan are being sold by banks , wherein banks transfers the entitlement of receiving interest to investors. Since these obilgations are attached with collaterals so they are termed as " collateralised ". In case of financial crisis The treasury department was also one of investor of CDOs

c) Ninja loans:

Ninja loans are the loans where the borrower doesnt need to provide information regarding his income, job & assets , just on basis of producing mortgages such borrowers can obtain the loan.

So, The above factors led to default in loan payments and caused financial crisis in 2007-2009

3) A bank takes deposits and uses the funds to make home loans. Hence, the level of capital of bank increases

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