KOC3436: Financial Crisis Causes
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Questions and Answers

What was a significant consequence of the Stock Crash of 1929?

  • Increase in commodity prices
  • Rapid growth in stock investments
  • The onset of the Great Depression (correct)
  • Global economic stability

Which factor is commonly associated with causing banking panics?

  • Increase in government spending
  • Consistent economic growth
  • Decline in interest rates
  • Speculation and over-leveraging (correct)

The Asian Financial Crisis of 1997–1998 is an example of what type of economic event?

  • Stock market stability
  • Subprime mortgage success
  • Financial bubble burst (correct)
  • Economic boom

What was a common feature of the financial crises of the 19th, 20th, and 21st centuries?

<p>Frequent banking panics (D)</p> Signup and view all the answers

Which of the following is NOT a direct example of a financial crisis?

<p>Increase in asset prices (A)</p> Signup and view all the answers

What can a rapid selloff in the stock market lead to?

<p>Decrease in investor confidence (C)</p> Signup and view all the answers

What impact did rumors of bank failures typically have on individuals?

<p>Hastened withdrawals from savings (C)</p> Signup and view all the answers

Which of the following financial events is most directly linked to a recession?

<p>Financial bailouts (B)</p> Signup and view all the answers

What is typically reflected as a low credit score?

<p>A credit score below 580 (A)</p> Signup and view all the answers

What characterizes subprime lending?

<p>Higher interest rates for borrowers with poor credit ratings (C)</p> Signup and view all the answers

Which country was NOT significantly affected during the Asian financial crisis of 1997–1998?

<p>Vietnam (A)</p> Signup and view all the answers

What happens to borrowers with bad credit when seeking loans?

<p>They face higher difficulty in obtaining loans (A)</p> Signup and view all the answers

What was a significant economic consequence of the Asian financial crisis?

<p>Massive devaluation of the Thai baht (D)</p> Signup and view all the answers

Which lending practice has contributed to financial crises in the past?

<p>Subprime lending (A)</p> Signup and view all the answers

During the Asian financial crisis, which region experienced significant economic impacts?

<p>East Asia and a part of Japan (D)</p> Signup and view all the answers

Which of the following is a feature of borrowers identified as subprime?

<p>A history of not paying bills on time (A)</p> Signup and view all the answers

What typically happens during a financial crisis?

<p>Financial institutions experience liquidity shortages. (B)</p> Signup and view all the answers

Which of the following is NOT commonly associated with a financial crisis?

<p>Rapid economic growth (B)</p> Signup and view all the answers

Which of the following factors does NOT contribute to a financial crisis?

<p>Rational investor behavior (C)</p> Signup and view all the answers

What best describes a situation that might lead to a financial crisis?

<p>Investors withdrawing money due to fear of asset devaluation (C)</p> Signup and view all the answers

Which scenario illustrates herd behavior that can cause a financial crisis?

<p>A mass sell-off of investments driven by fear. (D)</p> Signup and view all the answers

Which economic outcome may result from a financial crisis?

<p>Liquidity shortages for financial institutions (A)</p> Signup and view all the answers

What type of market behavior is characterized by overvaluation of assets?

<p>Speculative bubbles (A)</p> Signup and view all the answers

Which of the following is a potential result of a financial crisis on a global scale?

<p>Worldwide economic recession (A)</p> Signup and view all the answers

Flashcards

Banking Panics

Sudden widespread fear and withdrawal of funds from banks, often sparked by rumors of bank failures.

Financial Crisis

A widespread disruption in financial markets, often involving stock market crashes, credit crunches, or currency crises.

Stock Market Crash of 1929

A severe stock market collapse in 1929, triggered by speculation and excessive borrowing, leading to the Great Depression.

Commodity Oversupply

A situation where the amount of agricultural products is higher than demand leading to lower prices.

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Asset Prices

The value of financial and physical assets, such as stocks, bonds, or real estate.

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Speculation

Believing something will increase in value, sometimes taking on excessive risk.

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Credit Crunch

A significant reduction in the availability of credit.

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Recession

A period of temporary economic decline marked by falling production and employment.

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Asset Price Decline

A significant drop in the value of financial assets, like stocks, bonds, or real estate.

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Bank Run

A scenario where many depositors withdraw their funds from a bank simultaneously, fearing the bank's stability.

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Speculative Bubble

A situation where asset prices rise rapidly due to excessive speculation and optimism, often exceeding their actual value.

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Overvalued Assets

Assets with prices that are significantly higher than their actual worth, often based on unrealistic expectations.

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Irrational Investor Behavior

When investors make decisions based on emotions, fear, or herd mentality, rather than rational analysis.

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Herd Mentality

The tendency of investors to mimic each other's behavior, often leading to irrational market movements.

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Default

Failure to repay debt obligations, often leading to financial distress for individuals, businesses, or governments.

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What is a subprime borrower?

A borrower with poor credit history, often with lower credit scores. They frequently struggle to repay their debts on time.

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How does a subprime loan differ from a prime loan?

Subprime loans are offered to borrowers with poor credit history at higher interest rates than prime loans. They present higher risk for lenders.

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What is a credit score?

A numerical representation of an individual's creditworthiness, reflecting their past borrowing and repayment history.

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What is debt-to-GDP ratio?

A measure of a country's total debt compared to its annual economic output (GDP). A high ratio indicates a large amount of debt relative to the economy's size.

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How did the Asian Financial Crisis of 1997-1998 impact currencies?

The crisis led to the devaluation of many East Asian currencies, particularly the Thai baht, as investors lost confidence and pulled out their money.

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What were the key countries impacted by the Asian Financial Crisis of 1997-1998?

Indonesia, South Korea, and Thailand were the most severely affected. Hong Kong, Laos, Malaysia, and the Philippines were also considerably impacted.

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What is the relationship between subprime lending and financial crises?

Subprime lending, involving high-risk borrowers and loans, has often contributed to financial crises, as defaults on these loans can trigger a domino effect of economic instability.

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How did the Thai baht's collapse trigger the Asian Financial Crisis?

It was the catalyst that sparked the crisis, as investors lost confidence in the Thai economy and pulled out investments, escalating to other East Asian economies.

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Study Notes

Course Code and Title

  • KOC3436: Practice Ethics and Financial Communication (Prinsip dan Etika Komunikasi Kewangan)

Financial Crisis/Krisis Kewangan

  • In a financial crisis, asset prices fall sharply, businesses and consumers struggle to pay debts, and financial institutions face liquidity issues.
  • A financial crisis is often linked to a panic or bank run where investors sell assets rapidly due to fear of devaluation.
  • Other possible causes include bursting financial bubbles, stock market crashes, sovereign defaults, and currency crises.
  • Financial crises can impact individual banks, a single economy, a region, or multiple economies.

What Causes a Financial Crisis?

  • Overvalued institutions or assets
  • Irrational investor behavior, like rapid sell-offs leading to lower asset prices
  • Banking panics dating back to the 19th, 20th, and 21st centuries, frequently linked to recessions or depressions
  • Stock market crashes, credit crunches, bursting bubbles, currency crises

Financial Crisis Examples

  • Stock Crash of 1929: A speculative boom followed by a sharp decline in share prices, leading to the Great Depression. Oversupply of commodities triggered this decline.
  • Asian Crisis of 1997–1998: The Thai baht's collapse triggered massive devaluation across East Asian economies, affecting Indonesia, South Korea, and Thailand.
  • 2007–2008 Global Financial Crisis: A subprime mortgage crisis in the US spread globally, leading to bank failures and a severe recession. This was the worst economic crisis since the 1929 crash.

Value Investing

  • Value investing is a method of buying undervalued stocks based on good fundamentals, trading below their intrinsic value.
  • Value stocks are often found in large, stable companies with strong fundamentals, good products, and a leading market position.

Warren Buffett Investment Tips

  • Develop an investment mindset
  • Understand what an investment truly is
  • Invest in what you understand
  • Buy better-performing companies than glamorous ones
  • Don't panic during economic downturns
  • Buy high-performing companies
  • Buy undervalued stocks (cheap)
  • Invest long-term

Warren Buffett Techniques for Investing in Stocks

  • Avoid companies experiencing significant changes in their business model or product offerings.
  • Avoid companies requiring extensive research and development to keep pace with evolving technology.
  • Focus on companies offering products/services in high demand, regardless of economic conditions.
  • Ensure the company has a clear competitive edge, allowing it to increase its market value.

How Benjamin Graham Chooses High Value Shares

  • Identify companies with positive earnings per share (EPS) that have grown over the last 5 years, without incurring losses.
  • Prioritize companies that consistently pay dividends.
  • Don't always seek the "best" company, aiming instead for solid, reasonably priced options.

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KOC3436 Notes 4 PDF

Description

Explore the key factors leading to financial crises in this quiz. Understand the role of asset valuation, investor behavior, and historical banking panics intimately linked to economic downturns. Test your knowledge on the events and theories surrounding financial communication ethics.

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