Question

Explain the following concepts: financial innovation, mortgage-back securities, asset-price bubble, debt deflation, financial crisis.

Answer 1

Financial InnovIation:-

• Act of creating and popularising new financial instruments and technologies and markets.
• Institutional innovation relate to the creation of new financial firms.
• Advances time in financial payment system in the lending and borrowing of funds.

Financial innovation relate to new way of doing financial business including online banking and telephone banking..

• Mortgage-back securities:-
• A type of Asset backed security by a collection of mortgages.
• This security must also be grouped in two ratings as determined by credit rating agency.
• Mortgage have originated from an authorized financial institution.
• Mortgage back security can be bought and sold through a broker and varies between issuers.

This type of security is commonly used to redirect interest and principle payments..

Asset Price Bubble:-

• Refers to a market bubble,a financial bubble is trade in an Asset at a price range that exceeds the Asset's intrinsic value.
• Asset price bubble is when the price of an Asset such as stocks or gold become inflated.

These price spikes often occur when investors flock to a particular Asset.such as real estate, market etc.such a bubble is also called Asset inflation.

• Debt deflation:-
• It is a theory that Recessions and depressions are due to level of debt rising in value because of deflation.
• A situation in which the collateral used to secure a loan decreases in value.

Debt deflation is also known as worst collateral deflation.

Financial crisis:-

• A broad variety of situation in which financial Assets lose a large part of their nominal value.
• Financial crisis were associated with banking panics and Recessions related with these panics.
• A financial crisis is often associated with panic or run on the banks in which investors sell their assets or withdraw money with the expectation that the value of those Assets will fall if they remain at a financial institution.