Financial Crisis Harvard Case Solution & Analysis

Financial Crisis Case Solution

Answer Number 1:

An investor would be exposed to interest rate risk when there are changes in interest rates, which could inversely affect the bond’s prices because of the direct relationship between the interest rate and value of the investment. Bonds are gradable on their market value and the market of bond is the present value of all future inflows, which is consists of interest receipts and the ultimate redemption. So, if the interest rates are reduced, it could ultimately result in the loss of market value of bond.

An investor is exposed to reinvestment (rollover) risk when their investment is about to mature and the interest rates changes negatively, so if they wish to reinvest their sum, they will get lower returns than their initial investment.

Answer number 2:

Credit default swap is a special kind of swap which is used to shift the credit exposure. The credit default swap is a very complex transaction which normally includes three parties which are the bond issuer, the buyer of CADS and the seller of CADS. The bond issuer issues the bond with a Par value of $100 with a ten year maturity period, but the issuer of bond cannot guarantee the repayment of debt. Therefore, the buyer of bond who is also the buyer of CADS and seller of CADS enters into a contract in which the C D S seller takes up the default risk in exchange for a fee.

Answer Number 3:

Federal Reserve mentioned that economic conditions would be subjected to warrant exceptionally to low interest rates for an extended period because the economy is relatively stable in the recent years and the relatively stable gold reserves which are approximately 8133.46 tons.


They are trying to present a positive image regarding their economy through the statement because lower interest rates force investors to invest in stocks rather than bonds.

Another thing which the Federal Reserve might try to achieve through the statement is that it has an excellent credit rating because lower interest rates reflect the higher credit rating.


Answer Number 4:

If the investor is only concerned in maximizing the return only, then the investor should select the single asset rather than the portfolio because the portfolio is managed to reduce the risk. However, if the investor is not concerned about the risk or the investor is risk taker, then he/she should invest in the single underlying asset.

An investor should invest in equity rather than bonds to maximize the returns because the bonds are relatively less risky than equity.

Financial Crisis Harvard Case Solution & Analysis


Answer Number 5:

Efficient Financial Market:

Under the theory of efficient financial market, it states that the stock prices reflect their current value and the share prices are based on public information as well as insider information.

All the players in the market have almost same knowledge regarding the stock price, and no investor has extra information available regarding the stock price which can benefit him/her in an unusual manner.............

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