Describe The Financial Crisis: What Were The Primary Causes

Describe the financial crisis of . What were the primary causes of this financial crisis?

Part 1: Essay - Describe the financial crisis of . What were the primary causes of this financial crisis?

Part 2: 1. Ira Schwab opens up a Schwab IRA and places $2,000 in his retirement account at the beginning of each year for 10 years. He believes the account will earn 5 percent interest per year, compounded quarterly. How much will he have in his retirement account in 10 years? 2. The city of Glendale borrows $48 million by issuing municipal bonds to help build the Arizona Cardinals football stadium. It plans to set up a sinking fund that will repay the loan at the end of 10 years. Assume a 4 percent interest rate per year. What should the city place into the fund at the end of each year to have $48 million in the account to pay back their bondholders?

Part 3 : Matthew is considering several possible compensation alternatives for services he has provided as a consultant: Option A : Matthew could receive $8,000 today. Option B : Matthew could receive $2,500 at the end of each of the next four years. Option C : Matthew could receive $12,000 five years from now. Required : 1. Calculate the present value for each option assuming that Matthew can earn 7 percent on any investment funds. 2. Which option results in the greatest financial benefit to Matthew? 3. If Matthew earns 10 percent, will that change your answer to # 2 above? Please explain.

Part 4: Tom and Mary James just had a baby. They heard that the cost of providing a college education for this baby will be $100,000 in 18 years. Tom normally receives a Christmas bonus of $4,000 every year in the paycheck prior to Christmas. He read that a good stock mutual fund should pay him an average of 10 percent per year. Tom and Mary want to make sure their son has $100,000 for college. Consider each of the following questions. a. How much does Tom have to invest in this mutual fund at the end of each year to have $100,000 in 18 years? b. Tom’s father said he would provide for his grandson’s education. He puts $10,000 in a government bond that pays 3 percent interest. His dad said this should be enough. Do you agree? c. If Mary has a savings account worth $50,000, how much must she withdraw from savings and set aside in this mutual fund to have the $100,000 for her son’s education in 18 years?

Part 5: Essay - Some suggest that a firm should seek to maximize the welfare of all its stakeholders, such as employees, customers and the community in which it operates. How would this objective conflict with the one of maximizing shareholder value? Do you believe such an objective is feasible?

Part 6: Joe Downey is currently 65 years of age. He is currently drawing $20,000 a year out of his IRA. He expects to live to 100 and wants to know what he needs now to insure himself that he will be able to draw the $20,000 at the beginning of each year for the next 35 years. He believes the account will earn 6 percent compounded annually for the next 35 years. How much money does he need in his account today?

Part 7: Growth Enterprises believes its latest project, which will cost $80,000 to install, will generate a perpetual growth stream of cash flows. Cash flow at the end of the first year will be $5,000, and cash flows in future years are expected to grow indefinitely at an annual rate of 5 percent. A. If the discount rate for this project is 10%, what is the project NPV? B. What is the project IRR?

Paper For Above instruction

The global financial crisis of 2007-2008 stands out as one of the most severe economic downturns since the Great Depression. It was characterized by a collapse of major financial institutions, a significant decline in consumer wealth, and a downturn in economic activity worldwide. The primary causes of this crisis trace back to a combination of factors that interconnected to produce a systemic failure within the financial system.

One of the foremost catalysts was the proliferation of complex financial products, notably mortgage-backed securities (MBS) and collateralized debt obligations (CDOs), which were often poorly understood by investors and even financial institutions themselves. Banks aggressively issued subprime mortgages to borrowers with weak credit histories, motivated by the belief that housing prices would continue to rise indefinitely. This led to a significant increase in high-risk loans, exposing lenders to substantial credit risk.

As housing prices peaked and then declined, many homeowners faced foreclosures, which compounded the problem. Banks and financial institutions that heavily invested in MBS and CDOs suffered enormous losses. The interconnectedness of financial institutions through these securities caused contagion, leading to a tightening of credit markets. Notably, the collapse of Lehman Brothers in September 2008 exemplified the crisis’s severity, causing panic and a freeze on credit flows that impacted global economies.

Regulatory failures also played a critical role. Oversight was inadequate concerning the risks associated with derivatives and the leverage used by financial firms. The deregulation trend in the early 2000s led to an environment where excessive risk-taking was rampant, with little consideration for systemic stability. The reliance on poorly rated credit agencies further obscured the true riskiness of financial products, attracting institutional and retail investors alike into high-risk investments.

Furthermore, macroeconomic factors such as low interest rates, which encouraged borrowing, and the proliferation of easy credit, significantly contributed. The Federal Reserve's policy of keeping rates low after the dot-com bubble burst and the 2001 recession fueled a housing bubble. When the bubble burst, asset prices plummeted, and financial institutions faced insolvencies, leading to a recession that spread globally.

In conclusion, the financial crisis of 2007-2008 was primarily caused by excessive risk-taking prompted by financial innovation, poor regulation, and macroeconomic factors that created an environment prone to collapse. Its aftermath prompted widespread regulatory reforms aimed at increasing transparency, risk assessment, and stability in the financial system.

References

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