One of the solutions to the adverse selection problem associated with asymmetric information is the pledging of collateral. However, the collateral may be riskier than initially thought. As an example, explain why the collateral did not work adequately to mitigate the mortgage securitization problems associated with the financial crisis of 2007-2009?
Answer to relevant QuestionsConsider a small company run by a manager who is also the owner. If this company borrows funds, why might a moral hazard problem still exist? Deflation raises the real burden of repaying fixed-rate debt. Japan has recently experienced a long deflation.a. Plot the percent change from a year ago of consumer prices in Japan (FRED code: JPNCPIALLQINMEI) and discuss ...A bank with a two-year horizon has issued a one-year certificate of deposit for $50 million at an interest rate of 2 percent. With the proceeds, the bank has purchased a two-year Treasury note that pays 4 percent interest. ...Consider a bank with the following balance sheet. You read in the local newspaper that the bank’s return on assets (ROA) was 1 percent. What were the bank’s after-taxprofits?For many years you have been using your local, small-town bank. One day you hear that the bank is about to be purchased by Bank of America. From your vantage point as a retail bank customer, what are the costs and benefits ...
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