The Contagion Effect

question 13

Multiple Choice

The contagion effect

• A)stems from the positive correlation in FI returns.
• B)results when interest rate risk increases credit risk and liquidity risk exposures.
• C)occurs when liquidity risk problems at bad banks damages well-run banks.
• D)occurs when a computer virus infects the computerized electronics payments systems.
• E)is completely eliminated by government provided deposit insurance against bank runs.

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Definitions:

Financial Assets

Assets that derive value because they represent a claim on future cash flows or other financial benefits, such as stocks, bonds, or bank deposits.

Mutual Fund

An investment vehicle made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments, and other assets.

Double Taxation

The imposition of taxes on the same income, asset, or financial transaction at two different levels, such as corporate income and then again as shareholder dividends.

Corporate Form

A legal structure for organizations that allows them to operate as separate legal entities from their owners, with the ability to hold assets, sue, and be sued.