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subprime mortgage crisis

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1. What are the risks that are associated with debt, and why might those risks be unacceptable to a corporation that needs money?

2. How did mortgage-backed securities contribute to the subprime mortgage crisis that has been experienced recently?

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Risk dealing with debt

1. What are the risks that are associated with debt, and why might those risks be unacceptable to a corporation that needs money?

The risks associated with debt are that debt repayments have to be made at a particular time whether the corporation has adequate cash flows or not. These risks are often unacceptable to corporations because it is forced to pay cash when it requires the money for capital and other expenditures. Not only that, the company faces the prospect that if it makes a default in repayment, the lender may file a bankruptcy suit ...

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Factors leading to the subprime mortgage crisis

First, read "New Century Brings Trouble for Subprime Mortgages" (see attached file). Answer the following questions:

1. As a reaction to problems in the subprime area, lenders tightened lending standards. What effect do you think this had on the housing market?
2. What is an adjustable rate mortgage (ARM)? Do you think this type of mortgage is more attractive to new homebuyers than traditional mortgages? Explain with reasons.
3. Which of the following factors was most influential in the crisis: low interest rate environment, loose underwriting standards, or innovations in mortgage financing? Select one and explain why.

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