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

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Definitions:

General Ledger

A complete record of all financial transactions over the life of a company.

Accounting Information System

A system designed to collect, store, manage, process, retrieve, and report financial data for business operations.

General Ledger

The primary accounting record of a company that uses double-entry bookkeeping, summarizing all transactions over a period.

Cash Receipts Journal

A dedicated accounting journal used to record all cash inflows or receipts of a business.