One Lesson from the Credit Crunch Is That

question 21

Multiple Choice

One lesson from the credit crunch is that

• A)in the aggregate, credit scores tend to understate the probability of default-thereby a pool of subprime mortgages is actually quite a safe investment since not every borrower defaults.
• B)moral hazard, while an issue in the market for used cars, does not seem to affect the U.S. financial system due to the effective regulatory environment.
• C)bankers seem not to scrutinize credit risk as closely when they serve only as mortgage originators and then pass it on to MBS investors rather than hold the paper themselves.
• D)none of the above

Recognize the procedures and accounting entries related to the issuance and payment of notes payable and the associated interest.

Understand how to account for sales taxes in financial transactions.

Know how to record and report current liabilities and long-term debt on a balance sheet.

Calculate and account for interest on notes payable.

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Definitions:

Prejudice

A preconceived opinion or bias against an individual or group without sufficient knowledge, thought, or reason.

Morality

Principles concerning the distinction between right and wrong or good and bad behavior.

Arbitrary

Based on random choice or personal whim, rather than any reason or system.

Learned Rules

Guiding principles acquired through experience or instruction that influence behavior and decision-making.