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117 views3 pagesB8308 Debt Markets Spring 2011 Problem Set 1 - Reviewing Bond Math
problem set from columbia business school debt markets class, bonds, financial markets, derivatives. highballs (LSB 54)
manipulating the schedule by rushing people out of the store (LSB 41)
psychological warfare (F&U 134)
sweetener (LSB 52)
good cop/bad cop (LSB 54)
indirect assessment (LSB 36)
snow job (LSB 59)
trip wires (F&U 101)
developed a decent BATNA (F&U 103)
“planned out” (LSB 49)
final offers (LSB 46)
screen my position (LSB 37)
perception modification (LSB 39)
bogey, (LSB 55)
intimidation? (LSB 57)
commitment link with an outside base from the foot traffic (LSB 48)
pattern of concessions (LSB 44)
assume the close (51)
initial concession (LSB 42)
refusing to negotiate (F&U 138)
resistance point (LSB 35)
ambiguous authority figure (F&U 132)
calculated delay (F&U 141)
attempting to modify or call attention to the other side’s BATNA (F&U 104)
manipulate the cost of delay (LSB 39)
negotiate the rules of the game (F&U 130),
Phil Matricardi
Financial Markets and the Economy
Problem Set 5
3. An unanticipated decline in the price level deteriorates firms’ net worth by increasing the burden of their indebtedness, making them less able to lend. This is due to the common practice of long term fixed-rate borrowing; in a deflationary environment, these liabilities increase in real value, while assets remain anchored in nominal value.
4. A decline in real estate prices affects the value of assets used as collateral. Collateralized loans like mortgages, MBS, and CDOs backed by either one also decline in value. The decline in collateral has a proportionate affect on the amount of available credit. The decline also increases financial frictions, dries up liquidity and necessitates deleveraging.
6. After the failure of a major financial institution, short term lending rates increase dramatically due to the expectation that other similar firms may have similar catastrophic problems. In the increased rate environment, only truly desperate firms will be willing to borrow, while healthy firms will stay on the sidelines. Moreover, troubled firms have an incentive to use high-rate loans to gamble on their continued survival—it doesn’t matter how much they have to pay, because even a bad chance of survival due to a high rate loan is better than their current prospects.
8. Governments with bad fiscal imbalances can see the rate of interest on their debt in the market climb steadily. This should lead them to curb their spending, but often they instead turn to domestic banks and use their power as regulators, connections, direct power over the banks or other forms of pressure to get the bank to buy their debt. When investors see that the govt. is able to borrow undisciplined by the market, they may sell their bonds, decreasing the price, and causing large losses for the banks holding them. This in turn causes an increase in financial frictions.
10. Weak financial regulation and supervision can allow financial institutions to make bad loans, where borrowers’ creditworthiness is exaggerated or falsified. Relaxed regulation can also lead to large foreign capital inflows. Both of these lead to a lending boom, which eventually ends in a crash and crisis.
14. When financial intermediaries originate loans knowing that they will be able to sell them off in the near term, it decreases their incentives to do expensive due diligence on borrowers and to forgo risky loans. When it comes time to sell the loan, the institution is likely to trade on its good name and keep the buyer uninformed about the real risk in the loan. It will do this out of ignorance if it truly does not know that the loan is bad, and as a matter of survival if it knows that it must get it off its books before the bust comes around.
18. During a financial crisis, the value of collateral (agency debt, for example) can become much more volatile or decline in value. This decreases its desirability and leads lenders to require a much
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117 views3 pagesB8308 Debt Markets Spring 2011 Problem Set 1 - Reviewing Bond Math
problem set from columbia business school debt markets class, bonds, financial markets, derivatives. highballs (LSB 54)
manipulating the schedule by rushing people out of the store (LSB 41)
psychological warfare (F&U 134)
sweetener (LSB 52)
good cop/bad cop (LSB 54)
indirect assessment (LSB 36)
snow job (LSB 59)
trip wires (F&U 101)
developed a decent BATNA (F&U 103)
“planned out” (LSB 49)
final offers (LSB 46)
screen my position (LSB 37)
perception modification (LSB 39)
bogey, (LSB 55)
intimidation? (LSB 57)
commitment link with an outside base from the foot traffic (LSB 48)
pattern of concessions (LSB 44)
assume the close (51)
initial concession (LSB 42)
refusing to negotiate (F&U 138)
resistance point (LSB 35)
ambiguous authority figure (F&U 132)
calculated delay (F&U 141)
attempting to modify or call attention to the other side’s BATNA (F&U 104)
manipulate the cost of delay (LSB 39)
negotiate the rules of the game (F&U 130),
Phil Matricardi
Financial Markets and the Economy
Problem Set 5
3. An unanticipated decline in the price level deteriorates firms’ net worth by increasing the burden of their indebtedness, making them less able to lend. This is due to the common practice of long term fixed-rate borrowing; in a deflationary environment, these liabilities increase in real value, while assets remain anchored in nominal value.
4. A decline in real estate prices affects the value of assets used as collateral. Collateralized loans like mortgages, MBS, and CDOs backed by either one also decline in value. The decline in collateral has a proportionate affect on the amount of available credit. The decline also increases financial frictions, dries up liquidity and necessitates deleveraging.
6. After the failure of a major financial institution, short term lending rates increase dramatically due to the expectation that other similar firms may have similar catastrophic problems. In the increased rate environment, only truly desperate firms will be willing to borrow, while healthy firms will stay on the sidelines. Moreover, troubled firms have an incentive to use high-rate loans to gamble on their continued survival—it doesn’t matter how much they have to pay, because even a bad chance of survival due to a high rate loan is better than their current prospects.
8. Governments with bad fiscal imbalances can see the rate of interest on their debt in the market climb steadily. This should lead them to curb their spending, but often they instead turn to domestic banks and use their power as regulators, connections, direct power over the banks or other forms of pressure to get the bank to buy their debt. When investors see that the govt. is able to borrow undisciplined by the market, they may sell their bonds, decreasing the price, and causing large losses for the banks holding them. This in turn causes an increase in financial frictions.
10. Weak financial regulation and supervision can allow financial institutions to make bad loans, where borrowers’ creditworthiness is exaggerated or falsified. Relaxed regulation can also lead to large foreign capital inflows. Both of these lead to a lending boom, which eventually ends in a crash and crisis.
14. When financial intermediaries originate loans knowing that they will be able to sell them off in the near term, it decreases their incentives to do expensive due diligence on borrowers and to forgo risky loans. When it comes time to sell the loan, the institution is likely to trade on its good name and keep the buyer uninformed about the real risk in the loan. It will do this out of ignorance if it truly does not know that the loan is bad, and as a matter of survival if it knows that it must get it off its books before the bust comes around.
18. During a financial crisis, the value of collateral (agency debt, for example) can become much more volatile or decline in value. This decreases its desirability and leads lenders to require a much
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Phil MatricardiCopyright
© Attribution Non-Commercial (BY-NC)
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