Case Study Of A Ponzi Scheme

1448 Words 6 Pages
Question 1
New regulations make it easier for shareholders to replace company directors. If this event occurred, the volume of bank loans would increase. This would occur because consumers would feel more trust in banking and in loans and there would be more accountability to these investors.
A new law makes it a felony to default on a bank loan.If this event occurred, the volume of bank loans would decrease. This would occur because there is much higher risk for those taking out loans. Not only is there interest, but they may also be punished for committing a felony.
All the economy’s small firms are bought by large firms. If this event occurred, the volume of bank loans would decrease. This would occur because large firms tend to have a bond
…show more content…
If this event occurred, the volume of bank loans would increase. This would occur because there is a lower barrier of entry to mutual funds, which increases demand for loans.
Question 3
While similar, an asset price bubble is different from a Ponzi scheme. An asset bubble is defined by the price of an asset differing significantly from its intrinsic value. A Ponzi scheme is defined by an investor paying returns to investors based on the money earned from new investors. There are two main differences between a Ponzi scheme and an asset bubble. The first difference is that asset bubbles are caused by market trends. The second difference is that Ponzi schemes are knowingly operated by an individual or organization.
Question 8
A. In this scenario, the safe firm can sell a bond. This is true because the risky firm is so undesirable that safe bonds will be prefered by the buyers. The risky firm can likely not sell a bond in this scenario. This is true because the likeliness of returns (⅕) is much lower than potential gain ($150 relative to cost of the
…show more content…
When this list of reasons for bank consolidation is examined, it is clear that certain motives are beneficial to the stockholders of Melvin’s Bank whereas other motives are not beneficial to the stockholders of Melvin’s Bank. It should be noted that there is often overlap between reasons that a company may go through with acquisitions. This means that the exact outcome for the shareholders is highly situational and is multidimensional.
Question 5
A. In a scenario where the government guarantees the firms’ bonds (i.e, it makes the promised payment if either firms sell bonds), it must promise several payments. First, it must promise the payment even if the firms fail; this must be promised because otherwise there is no investor confidence.
B. Assuming it does so for each firm, the average cost to the government for guaranteeing a bond is different. For the safe firm, the cost is $0 dollars because the safe firm never defaults. For the risky firm, the cost is that one third of the time, the government must pay $110 to bondholders. This is the value for the risky firm because this firm may default one third of the

Related Documents