Accounting
Anthropology
Archaeology
Art History
Banking
Biology & Life Science
Business
Business Communication
Business Development
Business Ethics
Business Law
Chemistry
Communication
Computer Science
Counseling
Criminal Law
Curriculum & Instruction
Design
Earth Science
Economic
Education
Engineering
Finance
History & Theory
Humanities
Human Resource
International Business
Investments & Securities
Journalism
Law
Management
Marketing
Medicine
Medicine & Health Science
Nursing
Philosophy
Physic
Psychology
Real Estate
Science
Social Science
Sociology
Special Education
Speech
Visual Arts
Question
Consider an individual who plans to buy a new home. He has two options: (i) pay for mortgage insurance (that insures the lender in case the borrower defaults), or (ii) pay the lender a higher interest rate for the mortgage. Describe how these two options are related to the concept of risk premium and the lender's aversion to risk. Why does the interest rate on the mortgage differ in these two options?Answer
This answer is hidden. It contains 585 characters.
Related questions
Q:
The strong appreciation of the dollar for the last part of the 1990s: A. was a benefit to all U.S. residents but costly to most foreign producers.B. was a benefit to U.S. exporters, but put a severe strain on U.S. Importers.C. was welcomed by all U.S. manufacturers.D. played a key role in keeping inflation in check even though the economy was growing rapidly.
Q:
There was a lot of pressure on U.S. policymakers in late 1999 and into the early 2000's to decrease the value of the dollar. This pressure was coming mainly from: A. importers.B. foreign manufacturers.C. U.S. manufacturers.D. foreign central banks.
Q:
A foreign exchange intervention is: A. synonymous with a fixed exchange rate.B. the use of public statements by government officials to influence inflation expectations.C. only used in crisis situations.D. the buying/selling of currencies to affect supply or demand which impacts the exchange rate.
Q:
An expected appreciation of the dollar, everything else held constant, should cause: A. the supply of dollars to increase.B. the demand for dollars to increase.C. the demand for dollars to decrease.D. the dollar to depreciate now relative to other currencies.
Q:
An increase in the real interest rate on U.S. bonds, everything else equal, will have the following impact on the foreign exchange market: A. the demand for dollars will decrease.B. the supply of dollars will increase.C. the dollar will depreciate relative to foreign currencies.D. the demand for dollars will increase.
Q:
A country's capital account: A. is synonymous with the current account.B. will be in a deficit position when the current account is in a deficit.C. will be in a surplus position if the current account is in a deficit position.D. reflects the sum of exports minus imports.
Q:
A country's current account represents: A. the amount one country owes to another country.B. the net flow of all transactions between one country and another country.C. the amount a country imports from the rest of the world.D. the net flow of goods and services between that country and the rest of the world.
Q:
Differences in inflation rates between two countries can explain: A. short-run changes in the exchange rate but not long-run changes.B. changes in the real exchange rate over the long run, but not changes in the nominal exchange rate.C. long-run changes in the exchange rate but not short-run changes.D. changes in the exchange rate in both the short run and the long run.
Q:
The empirical evidence on purchasing power parity seems to point out that: A. purchasing power parity can explain long run movements in exchange rates but does not hold up to scrutiny for short-run changes.B. purchasing power parity does a good job of explaining short-run movements in exchange rates, but does not hold up to scrutiny over the long run.C. purchasing power parity is a good theory for international trade, but is of little use in explaining exchange rate movements.D. inflation and a country's rate of currency appreciation are positively correlated.
Q:
One reason the theory of purchasing power parity may not explain price differences between countries is: A. real exchange rates are almost impossible to calculate.B. inflation rates differ across countries.C. some products do not trade.D. nominal exchange rates are flexible.
Q:
Explain why for speculation, the purchase of an option may be more attractive than a futures contract or the outright purchase of the underlying asset.
Q:
How did CDS' contribute to the financial crisis of 2007-2009?
Q:
What is a credit-default swap?
Q:
Why do government debt managers often use interest-rate swaps?
Q:
If the current closing price in the stock of XYZ Inc., is $87.50 and the July expiration put options with a strike price of $80 are selling for $1.05, what is the intrinsic value of the option? What is the option premium?
Q:
Why does the time value of the option tend to vary directly with the time to expiration?
Q:
Explain the difference between American and European options.
Q:
Describe the condition that would have a call option in the money. Now describe the condition that has a put option out of the money.
Q:
Consider a call option; in terms of the option writer and option holder, who is the buyer? Who is the seller? Finally, who has the option? Explain.
Q:
A friend who is taking her first class in investments asks you why the regulatory bodies place so much emphasis on minimizing insider information if many of the potential problems associated with financial transactions stem from information asymmetry or a lack of information. How would you respond?
Q:
Provide an example of how a bank achieves lower cost in making a large loan to a company than could be achieved without the bank.
Q:
What are the five functions performed by financial intermediaries?
Q:
If a lender faces a potential loan applicant pool made up of equal amounts of low risks and high risks, will charging an average interest rate provide the average (expected) return? Explain.
Q:
The fact that many companies employ supervisors to oversee the actions of workers is a way to treat: A. moral hazard.B. adverse selection.C. the law of diminishing returns.D. the free-rider problem.
Q:
Which of the following statements is not true? A. Home mortgage loans are secured loans.B. Credit card loans are secured.C. Most automobile loans are secured loans.D. Secured loans usually carry less risk than unsecured loans.
Q:
Moody's, Value Line, and Dun and Bradstreet are examples of companies that: A. provide information free to investors but charge the companies for the ratings provided on the company.B. provide information free to investors but recoup expenses through advertising done by the companies being rated.C. charge investors who subscribe to the services for the information.D. duplicate information that is available to investors at no cost.
Q:
Which of the following statements is true? A. Adverse selection is a problem of monopoly and moral hazard is a problem of information asymmetry.B. Adverse selection and moral hazard are problems stemming from asymmetric information.C. Adverse selection is a problem that occurs after a transaction.D. Moral hazard is a problem that occurs before a transaction.
Q:
Adverse selection: A. increases the efficiency of most markets.B. usually causes prices to adjust faster than they otherwise would.C. makes it easier for all customers to find what they want.D. results in fewer market transactions.
Q:
Compare/contrast the Nasdaq Composite Index with the Dow Jones Industrial Average.
Q:
The Standard & Poor's 500 Index differs from the DJIA in at least two major respects. What are the two major differences?