Access to the Discount Window of the Federal Reserve Is

question 64

Multiple Choice

Access to the discount window of the Federal Reserve is unlikely to deter bank runs because

• A)discount loans are meant to provide temporary liquidity for inherently solvent banks.
• B)borrowing is not automatic, that is, banks gain access only on a "need to borrow" basis.
• C)a bank needs high-quality liquid assets to pledge as collateral.
• D)discount window advances to undercapitalized banks that eventually fail requires the Federal Reserve to compensate the FDIC for incremental losses caused by keeping the bank open for an additional period of time.
• E)All of the options.

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Definitions:

WACC

Weighted Average Cost of Capital, a calculation used to estimate the average rate of return a company is expected to pay its security holders to finance its assets.

MM Model

Refers to the Modigliani-Miller theorem, which proposes that under certain market conditions and assumptions, the value of a firm is unaffected by its capital structure.

Bankruptcy Risk

The likelihood that a company will be unable to meet its financial obligations and may have to declare bankruptcy.

Debt Financing

Raising funds through borrowing, typically by issuing bonds or taking out loans, which must be repaid at a later date, usually with interest.