1. Which of the following is an example of debt overhang?
- You borrow $30,000 to go to college and obtain a job paying $50,000 per year once you graduate.
- You borrow $40,000 to purchase a new car. You total the car within three months and receive only $30,000 from the insurance company. You still owe $39,000 on the car loan.
- You buy a painting with cash for $4,000. Two years later, you are forced, due to financial hardship, to sell at a loss (of $2,000).
- You purchase stock in an Internet company, and immediately after your purchase, the value declines by 20%.
2. Proponents of an additional stimulus in the United States in the aftermath of the financial crisis of 2008 might argue that:
- an additional stimulus would help the economy, but should only be undertaken when interest rates drop lower than they were during the crisis and its aftermath.
- there is never a long-term cost to a stimulus, since the additional debt will be repaid with higher tax revenues as the economy grows.
- the current unemployment, despite the stimulus in 2009, is a sign that the size of the original stimulus was not large enough.
- an additional stimulus is necessary, but must only be undertaken by the Fed.
3. When Lehman Brothers was in danger of failing in 2008, the U.S. Treasury decided which of the following?
- The Treasury decided to bail out Lehman Brothers, using taxpayer funds. However, this provision did not pass through Congress.
- The financial system could absorb the loss of Lehman Brothers with little consequence.
- Lehman Brothers was too big to fail and had to be saved at all costs.
- The Treasury decided not to guarantee the value of the assets that Lehman Brothers held, which led deals for purchasing Lehman to fall though.
4. The financial crisis of 2008 was initiated through an asset bubble in:
- government debt.
- corporate bonds.
- stocks.
- housing.
5. Suppose that government can borrow at 2.5% interest. Typically, companies can borrow at a rate that is 2% higher than government rates. If you notice that rates for companies are 7.5%, this is an indication of:
- maturity transformation.
- an asset bubble.
- a credit crunch.
- debt overhang.