The History of U.S. Government Debt and the Financial Crisis

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Chapter 13:Saving, Investment, and the Financial System
Topic:The History of U.S. Government Debt and the Financial Crisis (page 264 - 266)
What caused the financial crisis of 2008-2009? Discuss.
The financial crisis of 2008-2009 was set off by the end of the rallying prices of the real estate in the united stated, popularly referred to as the bursting of the real estate bubble. Banks and lending organizations provided cheap mortgage interest rates, which enticed many homeowners to take out loans they could not pay.
Outdated laws that were not strictly enforced enabled lenders to be careless with their underwriting, resulting in the inability to establish or guarantee the true value of the securities. Banks started lending irresponsibly to parties that could not repay their mortgages. As the number of subprime mortgage packages increased alarmingly, with a high proportion of defaulting, lending institutions encountered financial problems, resulting in the 2008-2009 global financial crisis.
Most of the borrowers who obtained subprime mortgages later defaulted. This led to significant fiscal losses in the banking sector. After a few months, the defaulters started losing their homes through foreclosures. The impact of this bubble bursting started spreading, and the stock market was plummeting within no time. The effect spread to other financial hubs in Europe and Asia, and large corporations such as the Lehmann Brothers collapsed. Others such as the AIG counted millions of dollars in losses. Trust in the financial system eroded, and credit availability deteriorated, resulting in fewer and more cautious investments, and international commerce slowed to a near halt.
The United States government finally sprang into action and adopted the American Recovery and Reinvestment Act of 2009, which bailed out some of the corporations and stopped the wave of financial destruction.
14.Chapter 14: The Basic Tools of Finance
Review Questions: Nos. 1 thru 7 (page 284)
1 The interest rate is 7 percent. Use the concept of present value to compare $200 to be received in 10 years and $300 to be received in 20 years.
Solution.
We have two options, as we shall summarize in the table below.

Option 1

Option 2

Period

10 years

20 years

Expected Return

$200

$300

The interest rate is 7% for both options.
This task aims to find the present worth amount of a single future sum which will be received after n time at an interest rate of r compounded at the end of every interest period.
From prior knowledge:
Present Value= future Value(1+r)n[where: r = interest rate and n = time in years]:
We shall now calculate the present value for our option one as follows:
From the data: the future value for option 1 will be $200, r = 7%, n = 10 years.
Therefore:
Present Value= 200(1+0.07)10
=$101.67
Let us now proceed to calculate the present value for option 2.
Future value = $300, r = 7%, n =20 years.
Present Value= 300(1+0.07)20
= $77.52
As we have seen, the present value for option 1 is $101.67, and that of option 2 is $77.52.
Should we be prompted to choose one betwee...