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A bank has assets valued at $1,000,000.

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A bank has assets valued at $1,000,000. These;assets are funded with $80,000 of equity. The leverage;ratio for this institution is;1.;12.5;10.5;125/1;105/1;20;20.5;Question 2;1.;The maximum debt equity ratio for fund HEDGE is 30. Currently the debt equity ratio is;40. The fund has recievd a margin call. The managers must deposit at least $x of;addtional collateral to meet the margin call. Assets = $100.;$0.25;$0.34;$0.26;$0.30;Question 3;1. If a hedge fund finances positions in MBS using the REPO market and the fund cannot;roll over its maturing debt or meet the margin call by posting more collateral the lender;will begin to sell the collateral.;True;False;Question 4;1. A margin call requires the borrower to increase its equity to support its debt.;True;False;Question 5;Repo lenders require collateral as security. Often this security was MBS.;When the MBS began to lose value in 2008 as ratings were lowered, lenders;required borrowers to post additional collateral. As lenders sold assets to raise;1.;cash collateral values fell further requiring additional sales. This downward spiral;in debt prices is indicative of a worsening financial crisis.;True;False;Question 6;1. According to the 10-Q filed by WMI Holdings Corp on 8/11/2008 the access the bank;had to some sources of liquidity were dependent on third party credit ratings of the;companys debt obligations.;True;False;Question 7;1. In April of 2007, JP Morgan told Alan Schwartz, Bear Stearnss co-president, that the;bank would be asking the BSAM hedge funds to post additional collateral to support its;repo borrowing.;True;False;Question 8;1. According to the FCIC Market Risk Survey;Lehman was borrowing less than $400 million via the REPO market on 9/12/2008 from;money market funds.;True;False;Question 9;1. In early June, Bear met with BSAMs repo lenders to explain that BSAM lacked cash to;meet margin calls and to negotiate a 60-day reprieve. Some of these very same firms had;sold Enhanced and High-Grade some of the same CDOs and other securities that were;turning out to be such bad assets. The banks agreed to give Bear Stearns time to slowly;liquidate assets.;True;False;Question 10;1. This statement from the 10-K filed by Bear Stearns for the Fiscal year 2007 indicates that;management was aware that the firm;was exposed to a run by other banks. An inability to raise money in the long-term or;short-term debt markets;or to engage in repurchase agreements or securities lending, could have a substantial;negative effect on our liquidity.;True;False;Question 11;1. Hedge Funds were able to use AAA and AA rated tranches of CDOs as collateral;for Repo borrowing in the years leading up to the collapse of the hedge funds;managed by Ralph Cioffi of BSAM.;True;False;Question 12;1. RalphCioffimanagedtwosubprimehedgefundsforBearStearnsthathaddebtequityratiosinexcessof;60.;True;False;Question 13;1. The required debt to equity ratio is 9. Debt outstanding is $90. Asset value is $100. If;asset value falls to $91 what amount of assets must be sold to repay debt so that the;debt equity ratio is restored to 9?;$90;$81;$18;$91;Question 14;1. Shortly after BSAM froze redemptions, Merrill Lynch seized more than $850 million;of its collateral posted by Bear for its outstanding repo loans. Merrill was able to sell;just $181 million of the seized collateral at auction by July 5and at discounts to its;face value.;True;False;Question 15;1. In After the Music Stopped we learn that household debt grew from;approximately 100% of GDP in the year 2000 to about 140% by 2008.;True;False;Question 16;Due to margin calls in the year 2007 BSAM had to issue more debt to;raise the funds to come up with the cash. This issue of debt increased the leverage;of the funds and depressed the value of the assets under management.;1.;True;False;Question 17;1. AccordingtotheFCICreportasof12/31/2013theassetbaseoftheshadowbankingsystemwaslarger;thatofthetraditionalbankingsystem.;True;False;Question 18;1. According to the 2011 FCIC Hedge Fund Survey;The top quartile of hedge funds became more bullish regarding the subprime market;between June of 2006 and June of 2007.;True;False;Question 19;As MBS values declined in 2008 lenders made;margin calls on funds that had financed subprime;assets. Margin calls prompted borrowers to liquidate;the leveraged assets to bring leverage ratios back into;line. Since the market for subprime MBS was illiquid;these sales further depressed the prices of subprime;MBS and this caused more margin calls to be made as;leverage ratios declined.;1.;True;False;Question 20;1. During a June Federal Open Market Committee (FOMC) meeting, members were;informed about the subprime market and the BSAM hedge funds. The staff reported;that the subprime market was very unsettled and reflected deteriorating fundamentals;in the housing market. The liquidation of subprime securities at the two BSAM;hedge funds was compared to the troubles faced by Long-Term Capital Management;in 1998. Chairman Bernanke noted that the problems the hedge funds experienced;were a good example of how leverage can increase liquidity risk, especially in;situations in which counterparties were not willing to give them time to liquidate and;possibly realize whatever value might be in the positions.;The liquidity risk is that an owner of assets in this case hedge funds cannot realize the;value of assets immediately or that there is no agreement on the value of the assets by;buyers and sellers.;True;False;Question 21;1) A hedge fund has a leverage ratio of 20. If the;value of the assets on its balance sheet increases by;15% by what percent does the value of its equity;increase?;1.;350%;3.5%;30%;3%;300%;Question 22;The margin calls on BSAM funds did not have effects beyond these funds.;There was no contagion effect of the margin calls. This was because BSAM was;able to liquidate assets at bid prices close to the value at which the assets were;carried.;1.;True;False;Question 23;As MBS values declined in 2008 lenders made;margin calls on funds that had financed subprime;1.;assets. Margin calls prompted borrowers to liquidate;the leveraged assets to bring leverage ratios back into;line. Since the market for subprime MBS was liquid;these sales did not affect prices of subprime MBS.;True;False;Question 24;1. The decline in home values since 2007 led to serious financial distress in the;household sector and the banking sector because;The decline led to a decrease in the debt/equity ratio of both households;and banks.;The decline increased the value of mortgage-backed securities and;corporate bonds.;The decline lowered the demand for housing.;The decline led to an increase in the debt/equity ratio of both households;and banks.;Question 25;1. According to the FCIC Market Risk Survey;Lehman was borrowing more than $900 million via the REPO market on 9/5/2008 from;money market funds.;True;False;View Full Attachment

 

Paper#27056 | Written in 18-Jul-2015

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