The Causes of the Financial Crisis Paper Example

What are three reasons to be cautious in using ratios to evaluate ate firm performance?

Ratios are founded on book value: Since ratios computed on the book value of financial are calculated on the book value of the financial reports, they do not replicate the prevailing market current market or business realities. For ratios originates from historical data they may not be accurate in presenting health of an enterprise.

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Save 25%

Ratios do not present a measure for the quality of management: Analyst only use ratios to illustrate businesses' financial statements and give insight to a firm value and quality. However, ratio analysis lacks a way to measure the quality of management, which is a crucial ingredient to successful business operations.

Financial ratios also do not indicate the cause of changes to the business factors; A Businesspersons use ratios to illustrate what variations in the factors that affect operations in the course of a business cycle. However, they do not offer any explanation as to why those changes occurred. As a result, they do not offer credible framework on which future business decisions can be shaped in a way that would avert crises.

Identify and discuss the causes of the financial crisis that peaked in autumn of 2008. Why did it get worse?

The financial crisis of 2008 originated with the collapse of the subprime mortgage market in the U.S., which was followed by an unfortunate international banking catastrophe. The following are some of the reasons why the crisis occurred:

What are three factors that influence interest rates for individual securities?

• Credit Score: This is a number that has three digits that illustrates an individual credit worthiness. The score is influenced by one's repayment of credit history, quantity of credit usage, length of existing credit commitments, and the categories of one's current credit. The credit score is negatively affected by damaging activities such as late or missed payment. A negative event lowers the credit score, which consequently lowers the confidence of lenders towards the affected party. Individuals with high scores attract a favorable perception from lenders - that they can repay their loans. Therefore, they attract better interest rates as an incentive to borrow.
• The term of a loan: Term is the time that a borrower takes to repay a loan facility and the lender to equip his investment. Usually, shorter terms attract higher monthly interests. On the long-run, however, longer loans tend to have higher interests and shorter one has lower ones.
• Debt-to-income ratio: Individuals with high debt-to-income ratios ordinarily appear to be more likely to default. As such, lending such people come with a much bigger risk. People with huge debts in relation to their income attracts higher interest rates as lender tries to discourage them from borrowing subsequently lowering the risks of lending a prospective defaulter.

Identify and describe the two components of risk that make up a stock's total risk.

The risk of a stock could be either systematic or specific. The systematic risk is the risk that arises form unpredictability nature of the stock. This variability is for the whole market and is evaluated by the S&P 500 index. Specific risk, on its part, is the variability of a particular stock and not the entire market. Systematic risk is also referred to as a stock's beta risk (or value). A beta value close to 1.0 typically implies that the increase and decrease of the stock value overlaps with those of the market. As such, 2% rise or fall in the market will, on average, produce a 2% increase or decrease in the stock consecutively. A beta of less than 1.0 shows a stock is less unpredictable than the market, while a beta greater than 1.0 signifies a stock that is riskier than the market.

What's the risk premium? What's the risk-free r ate typically considered to be?

A risk premium is the return that is up and above the risk-free rate of return an investment is projected to produce. Risk-free rate, on its part, is the theoretical minimal return an investor expects an investment will provide and it originates from the fact that investors would not normally take additional risk unless they project the potential return would exceed the risk-free rate of return.

What duties does a company treasurer typically perform?

A company's treasurers manage and dictate the financial aspect of the firm's operations with the aim of leading the company towards making prudent financial decision and maximize profits. Therefore, their principal duties revolve around analysis and supervision of risk management, monetary control and reporting, corporate accounting and financial and taxation reporting. Additionally, they deal with organizational investments, oversees company's banking and credit need and manages cash assets. Treasurers also collect data from reports, hold meeting with fellow staff members, create and grow relations with banking and financial services providers. More importantly, corporate treasurers are responsible of formulating and then implementing their firm's monetary policies and financial plans as the need may arise.

Name and describe the two main methods by which informal resolutions of financial distress take place.

Informal resolutions that corporates enact in case of a financial crisis involves strategic reorganization of business operations, which predominantly involves business restructuring and financial restructuring. Business restructuring is the undertaking of a wide-ranging strategy for the purposes of reinvigorating the company's operational profitability during a time when the firms is toiling under fiscal difficulties. It involves: stabilizing, analyzing, repositioning, and reinforcing business strategic plan with the aim of steadying the business and prevent it from collapse due to financial strains. On its part, financial restructuring involves reallocation of a company's financial obligations to creditors by use of workout agreements that revise the terms of financial facilities they had previously. It also includes securing new financiers - either equity or capital investors. Financial restructuring take place because the financial distress the company is undergoing prevents from meeting its fiscal needs and obligations with its current cash flow.