t is systemic risk? What role did it play in the financial crisis and the decisions of Treasury Secretary Hank Paulson? What are credit default swaps?…

Short-Essay Questions / Problems

What is systemic risk?  What role did it play in the financial crisis  and the decisions of Treasury Secretary Hank Paulson?

What are credit default  swaps?  What role did they play in the financial  crisis?

Free market capitalism dictates  that markets create efficient solutions and businesses that fail should be left  to fail.  Secretary Paulson was concerned  about “moral hazard” after helping Bear Stearns.  What did this mean?

Assume you are given the following information about current interest rates:

4-Year Treasury Yield  5.8%

3-Year Treasury Yield  5.0%

Based on the Pure Expectations Theory of interest rates, determine the yield on a 1-Year Treasury three years from now.

A triple-AAA rated corporate 10-year bond is currently paying a yield of 5.25%.  You can also purchase a triple-AAA rated municipal 10-year bond with a yield of 4.35%.  Assume the bonds are equally liquid.

Assuming my tax rate is 15%, I would prefer the ________________ bond.

Assuming my tax rate is 39%, I would prefer the ________________ bond.

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