Question

1. By entering into the financial derivatives market Lehman Brothers essentially
   1. Reduced the riskiness of their operating activities.
   2. Added some upside risk but significantly reduced its down side risk.
   3. Kept the same business model it was following since the founding of the firm.
   4. Entered into a new line of business with increased volatility and risk.

2. The down turn in housing prices had what impact on residential mortgage backed securities (RMBS)?
   1. None since any risk was transferred to the purchasers of the RMBS.
   2. Increased the risk to the investors as the collateral backing the loans was now worth less than the amount of the loan.
   3. None, since the mortgages were insured by the government.
   4. None of the above.

3. The term “upside down” refers to which of the following situations?
   1. The fair market value of an asset subject to a loan is less than the outstanding balance of the loan.
   2. The outstanding balance of a loan is less than the fair market value of the asset purchased with the loan.
   3. More of the monthly payment is attributable to interest than to principle.
   4. More of the monthly payment is attributable to principle than to interest.

Answer 1

1. option ,Entered into a new line of business with increased volatility and risk.

2. Option , Increased the risk to the investors as the collateral backing the loans was now worth less than the amount of the loan

3. Option ,The fair market value of an asset subject to a loan is less than the outstanding balance of the loan