ECO 316 Week 3 DQ 2 Should I Expect a Bail Out/UOPHELP
For more course tutorials visit www.uophelp.com Should I Expect a Bail Out? From the end of Chapter 15, complete problem 19: Suppose that you manage a small S&L that has a net worth of –$50 million. You fear that within two years, regulators will discover that your firm is insolvent and will shut you down. You have two possible investment strategies: (a) continue to operate as you have been, offering market interest rates on CDs to finance mortgage loans, or (b) offer higher than market interest rates on CDs and use the
For more course tutorials visit
www.uophelp.com
Should I Expect a Bail Out?
From the end of Chapter 15, complete problem 19: Suppose that you manage a small S&L that has a net worth of –$50 million. You fear that within two years, regulators will discover that your firm is insolvent and will shut you down. You have two possible investment strategies: (a) continue to operate as you have been, offering market interest rates on CDs to finance mortgage loans, or (b) offer higher than market interest rates on CDs and use the
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<strong>ECO</strong> <strong>316</strong> <strong>Week</strong> 3 <strong>DQ</strong> 2 <strong>Should</strong> I <strong>Expect</strong> a <strong>Bail</strong> <strong>Out</strong><br />
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<strong>DQ</strong>-2-<strong>Should</strong>-I-<strong>Expect</strong>-a-<strong>Bail</strong>-<strong>Out</strong>-(Ash-Course)<br />
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<strong>Should</strong> I <strong>Expect</strong> a <strong>Bail</strong> <strong>Out</strong>?<br />
From the end of Chapter 15, complete problem 19: Suppose that you<br />
manage a small S&L that has a net worth of –$50 million. You fear that<br />
within two years, regulators will discover that your firm is insolvent and<br />
will shut you down. You have two possible investment strategies: (a)<br />
continue to operate as you have been, offering market interest rates on<br />
CDs to finance mortgage loans, or (b) offer higher than market interest<br />
rates on CDs and use the increased funds to speculate in junk bonds and<br />
real estate. Your analysis tells you that strategy (a) has a 10% chance of<br />
losing $10 million and a 90% chance of gaining $20 million, with an<br />
expected return of $17 million. Strategy (b) has an 80% chance of losing<br />
$50 million and a 20% chance of gaining $75 million, with an expected<br />
return of –$25 million. What strategy should you follow? Why? What<br />
are the consequences of your choice? What should a regulator do in this<br />
situation? How might your behavior change if you expect a government<br />
bail out? Your 200 word answer should focus on selecting your most
elevant thoughts and organizing them in a coherent fashion. Respond to<br />
at least two of your classmates’ postings.
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