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A mark-to-market (or fair value) accounting regime requires that the marketable assets held by a company be accounted for at market value. The rationale for adopting such a rule is to enhance market transparency, thereby facilitating better investment decision-making and more efficient capital allocation. But while mark-to-market improves the information available to market participants, it also has undesirable systemic implications in times of financial turbulence.
Mark-to-market can amplify the effects of financial distress in a couple of important ways. First, when liquidity shortages and/or capital requirements force companies to sell illiquid assets, the market value of these assets diminishes. Under a mark-to-market regime, this loss of value impacts the balance sheets of all other owners of these assets as well. These mark-to-market losses can generate further contagion insofar as they lead to further forced sales and further reductions of the market value of illiquid assets.
Second, mark-to-market can result in direct balance-sheet transmission of losses. In networks of financially interconnected agents, where someone's assets are someone else's liabilities, mark-to-market can trigger a domino effect of debt deflation even in the absence of defaults. When a financial operator suffers a loss of value of some of its assets, this loss diminishes the market value of its outstanding debt. Then the holders of such debt, insofar as they mark it to market, suffer a loss that worsens their own balance sheets and shrinks the market value of their own outstanding debt. In this scenario, the transmission of losses from debt-issuers to debt-holders does not require the occurrence of defaults, as mark-to-market turns expected losses (embedded in market prices) into accounted losses.
Conversely, under a historical cost accounting regime, the transmission of losses from an agent towards his creditors occurs only in case of default. Because of this simple difference, the flow of losses that crosses a financial network, induced by an exogenous negative shock, is larger with mark-to-market accounting, exposing the financial network to elevated systemic risk.
According to the passage, a mark-to-market (or fair value) accounting regime requires that the marketable assets held by a company be accounted for at market value, and mark-to-market improves the information available to market participants. Which of the following best describes the relationship between the two highlighted statements?
  • a)
    The first describes a principle; the second explains the rationale underlying this principle.
  • b)
    The first makes a generalization; the second is a counterexample to this generalization.
  • c)
    The first contains an assertion that the writer accepts; the second disputes the accuracy of this assertion.
  • d)
    The first introduces a policy; the second questions the effectiveness of this policy.
  • e)
    The first contains an assertion that the writer rejects; the second is a faulty inference drawn from this assertion.
Correct answer is option 'A'. Can you explain this answer?
Most Upvoted Answer
A mark-to-market (or fair value) accounting regime requires that the m...
The passage discusses the mark-to-market (or fair value) accounting regime, which requires assets to be recorded at their market value. The rationale for adopting this regime is to enhance market transparency, which improves investment decision-making and capital allocation.
To address the relationship between the two highlighted statements:
  1. The first statement describes the principle of mark-to-market accounting: "A mark-to-market (or fair value) accounting regime requires that the marketable assets held by a company be accounted for at market value."
  2. The second statement explains the rationale behind this principle: "The rationale for adopting such a rule is to enhance market transparency, thereby facilitating better investment decision-making and more efficient capital allocation."
The relationship between these statements is that the first statement introduces the principle of mark-to-market accounting, and the second statement explains why this principle is adopted.
Thus, the best description of the relationship is:
A. The first describes a principle; the second explains the rationale underlying this principle.
Explanation: The first statement outlines the basic principle of mark-to-market accounting, while the second statement provides the reason or rationale for why this principle is applied—namely, to improve market transparency and decision-making.
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A mark-to-market (or fair valu e) accounting regime requires that the marketable assets held by a company be accounted for at market value. The rationale for adopting such a rule is to enhance market transparency, thereby facilitating better investment decision-making and more efficient capital allocation. But while mark-to-market improves the information available to market participants, it also has undesirable systemic implications in times of financial turbulence.Mark-to-market can amplify the effects of financial distress in a couple of important ways. First, when liquidity shortages and/or capital requirements force companies to sell illiquid assets, the market value of these assets diminishes. Under a mark-to-market regime, this loss of value impacts the balance sheets of all other owners of these assets as well. These mark-to-market losses can generate further contagion insofar as they lead to further forced sales and further reductions of the market value of illiquid assets.Second, mark-to-market can result in direct balance-sheet transmission of losses. In networks of financially interconnected agents, where someones assets are someone elses liabilities, mark-to-market can trigger a domino effect of debt deflation even in the absence of defaults. When a financial operator suffers a loss of value of some of its assets, this loss diminishes the market value of its outstanding debt. Then the holders of such debt, insofar as they mark it to market, suffer a loss that worsens their own balance sheets and shrinks the market value of their own outstanding debt. In this scenario, the transmission of losses from debt-issuers to debt-holders does not require the occurrence of defaults, as mark-to-market turns expected losses (embedded in market prices) into accounted losses.Conversely, under a historical cost accounting regime, the transmission of losses from an agent towards his creditors occurs only in case of default. Because of this simple difference, the flow of losses that crosses a financial network, induced by an exogenous negative shock, is larger with mark-to-market accounting, exposing the financial network to elevated systemic risk.Each option contains a pair of answers separated by a semicolon. Which pair of answers best completes the following sentence?In the second paragraph, the author focuses on loss transmission involving ________, while in the third paragraph the writer focuses on loss transmission involving _______.

A mark-to-market (or fair valu e) accounting regime requires that the marketable assets held by a company be accounted for at market value. The rationale for adopting such a rule is to enhance market transparency, thereby facilitating better investment decision-making and more efficient capital allocation. But while mark-to-market improves the information available to market participants, it also has undesirable systemic implications in times of financial turbulence.Mark-to-market can amplify the effects of financial distress in a couple of important ways. First, when liquidity shortages and/or capital requirements force companies to sell illiquid assets, the market value of these assets diminishes. Under a mark-to-market regime, this loss of value impacts the balance sheets of all other owners of these assets as well. These mark-to-market losses can generate further contagion insofar as they lead to further forced sales and further reductions of the market value of illiquid assets.Second, mark-to-market can result in direct balance-sheet transmission of losses. In networks of financially interconnected agents, where someones assets are someone elses liabilities, mark-to-market can trigger a domino effect of debt deflation even in the absence of defaults. When a financial operator suffers a loss of value of some of its assets, this loss diminishes the market value of its outstanding debt. Then the holders of such debt, insofar as they mark it to market, suffer a loss that worsens their own balance sheets and shrinks the market value of their own outstanding debt. In this scenario, the transmission of losses from debt-issuers to debt-holders does not require the occurrence of defaults, as mark-to-market turns expected losses (embedded in market prices) into accounted losses.Conversely, under a historical cost accounting regime, the transmission of losses from an agent towards his creditors occurs only in case of default. Because of this simple difference, the flow of losses that crosses a financial network, induced by an exogenous negative shock, is larger with mark-to-market accounting, exposing the financial network to elevated systemic risk.Which of the following best describes the purpose of the fourth paragraph?

A mark-to-market (or fair valu e) accounting regime requires that the marketable assets held by a company be accounted for at market value. The rationale for adopting such a rule is to enhance market transparency, thereby facilitating better investment decision-making and more efficient capital allocation. But while mark-to-market improves the information available to market participants, it also has undesirable systemic implications in times of financial turbulence.Mark-to-market can amplify the effects of financial distress in a couple of important ways. First, when liquidity shortages and/or capital requirements force companies to sell illiquid assets, the market value of these assets diminishes. Under a mark-to-market regime, this loss of value impacts the balance sheets of all other owners of these assets as well. These mark-to-market losses can generate further contagion insofar as they lead to further forced sales and further reductions of the market value of illiquid assets.Second, mark-to-market can result in direct balance-sheet transmission of losses. In networks of financially interconnected agents, where someones assets are someone elses liabilities, mark-to-market can trigger a domino effect of debt deflation even in the absence of defaults. When a financial operator suffers a loss of value of some of its assets, this loss diminishes the market value of its outstanding debt. Then the holders of such debt, insofar as they mark it to market, suffer a loss that worsens their own balance sheets and shrinks the market value of their own outstanding debt. In this scenario, the transmission of losses from debt-issuers to debt-holders does not require the occurrence of defaults, as mark-to-market turns expected losses (embedded in market prices) into accounted losses.Conversely, under a historical cost accounting regime, the transmission of losses from an agent towards his creditors occurs only in case of default. Because of this simple difference, the flow of losses that crosses a financial network, induced by an exogenous negative shock, is larger with mark-to-market accounting, exposing the financial network to elevated systemic risk.The passage mentions all of the following as possible advantages of mark-to-market accounting EXCEPT

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A mark-to-market (or fair value) accounting regime requires that the marketable assets held by a company be accounted for at market value. The rationale for adopting such a rule is to enhance market transparency, thereby facilitating better investment decision-making and more efficient capital allocation. But while mark-to-market improves the information available to market participants, it also has undesirable systemic implications in times of financial turbulence.Mark-to-market can amplify the effects of financial distress in a couple of important ways. First, when liquidity shortages and/or capital requirements force companies to sell illiquid assets, the market value of these assets diminishes. Under a mark-to-market regime, this loss of value impacts the balance sheets of all other owners of these assets as well. These mark-to-market losses can generate further contagion insofar as they lead to further forced sales and further reductions of the market value of illiquid assets.Second, mark-to-market can result in direct balance-sheet transmission of losses. In networks of financially interconnected agents, where someones assets are someone elses liabilities, mark-to-market can trigger a domino effect of debt deflation even in the absence of defaults. When a financial operator suffers a loss of value of some of its assets, this loss diminishes the market value of its outstanding debt. Then the holders of such debt, insofar as they mark it to market, suffer a loss that worsens their own balance sheets and shrinks the market value of their own outstanding debt. In this scenario, the transmission of losses from debt-issuers to debt-holders does not require the occurrence of defaults, as mark-to-market turns expected losses (embedded in market prices) into accounted losses.Conversely, under a historical cost accounting regime, the transmission of losses from an agent towards his creditors occurs only in case of default. Because of this simple difference, the flow of losses that crosses a financial network, induced by an exogenous negative shock, is larger with mark-to-market accounting, exposing the financial network to elevated systemic risk.According to the passage, a mark-to-market (or fair value) accounting regime requires that the marketable assets held by a company be accounted for at market value, and mark-to-market improves the information available to market participants. Which of the following best describes the relationship between the two highlighted statements?a)The first describes a principle; the second explains the rationale underlying this principle.b)The first makes a generalization; the second is a counterexample to this generalization.c)The first contains an assertion that the writer accepts; the second disputes the accuracy of this assertion.d)The first introduces a policy; the second questions the effectiveness of this policy.e)The first contains an assertion that the writer rejects; the second is a faulty inference drawn from this assertion.Correct answer is option 'A'. Can you explain this answer?
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A mark-to-market (or fair value) accounting regime requires that the marketable assets held by a company be accounted for at market value. The rationale for adopting such a rule is to enhance market transparency, thereby facilitating better investment decision-making and more efficient capital allocation. But while mark-to-market improves the information available to market participants, it also has undesirable systemic implications in times of financial turbulence.Mark-to-market can amplify the effects of financial distress in a couple of important ways. First, when liquidity shortages and/or capital requirements force companies to sell illiquid assets, the market value of these assets diminishes. Under a mark-to-market regime, this loss of value impacts the balance sheets of all other owners of these assets as well. These mark-to-market losses can generate further contagion insofar as they lead to further forced sales and further reductions of the market value of illiquid assets.Second, mark-to-market can result in direct balance-sheet transmission of losses. In networks of financially interconnected agents, where someones assets are someone elses liabilities, mark-to-market can trigger a domino effect of debt deflation even in the absence of defaults. When a financial operator suffers a loss of value of some of its assets, this loss diminishes the market value of its outstanding debt. Then the holders of such debt, insofar as they mark it to market, suffer a loss that worsens their own balance sheets and shrinks the market value of their own outstanding debt. In this scenario, the transmission of losses from debt-issuers to debt-holders does not require the occurrence of defaults, as mark-to-market turns expected losses (embedded in market prices) into accounted losses.Conversely, under a historical cost accounting regime, the transmission of losses from an agent towards his creditors occurs only in case of default. Because of this simple difference, the flow of losses that crosses a financial network, induced by an exogenous negative shock, is larger with mark-to-market accounting, exposing the financial network to elevated systemic risk.According to the passage, a mark-to-market (or fair value) accounting regime requires that the marketable assets held by a company be accounted for at market value, and mark-to-market improves the information available to market participants. Which of the following best describes the relationship between the two highlighted statements?a)The first describes a principle; the second explains the rationale underlying this principle.b)The first makes a generalization; the second is a counterexample to this generalization.c)The first contains an assertion that the writer accepts; the second disputes the accuracy of this assertion.d)The first introduces a policy; the second questions the effectiveness of this policy.e)The first contains an assertion that the writer rejects; the second is a faulty inference drawn from this assertion.Correct answer is option 'A'. Can you explain this answer? for GMAT 2024 is part of GMAT preparation. The Question and answers have been prepared according to the GMAT exam syllabus. Information about A mark-to-market (or fair value) accounting regime requires that the marketable assets held by a company be accounted for at market value. The rationale for adopting such a rule is to enhance market transparency, thereby facilitating better investment decision-making and more efficient capital allocation. But while mark-to-market improves the information available to market participants, it also has undesirable systemic implications in times of financial turbulence.Mark-to-market can amplify the effects of financial distress in a couple of important ways. First, when liquidity shortages and/or capital requirements force companies to sell illiquid assets, the market value of these assets diminishes. Under a mark-to-market regime, this loss of value impacts the balance sheets of all other owners of these assets as well. These mark-to-market losses can generate further contagion insofar as they lead to further forced sales and further reductions of the market value of illiquid assets.Second, mark-to-market can result in direct balance-sheet transmission of losses. In networks of financially interconnected agents, where someones assets are someone elses liabilities, mark-to-market can trigger a domino effect of debt deflation even in the absence of defaults. When a financial operator suffers a loss of value of some of its assets, this loss diminishes the market value of its outstanding debt. Then the holders of such debt, insofar as they mark it to market, suffer a loss that worsens their own balance sheets and shrinks the market value of their own outstanding debt. In this scenario, the transmission of losses from debt-issuers to debt-holders does not require the occurrence of defaults, as mark-to-market turns expected losses (embedded in market prices) into accounted losses.Conversely, under a historical cost accounting regime, the transmission of losses from an agent towards his creditors occurs only in case of default. Because of this simple difference, the flow of losses that crosses a financial network, induced by an exogenous negative shock, is larger with mark-to-market accounting, exposing the financial network to elevated systemic risk.According to the passage, a mark-to-market (or fair value) accounting regime requires that the marketable assets held by a company be accounted for at market value, and mark-to-market improves the information available to market participants. Which of the following best describes the relationship between the two highlighted statements?a)The first describes a principle; the second explains the rationale underlying this principle.b)The first makes a generalization; the second is a counterexample to this generalization.c)The first contains an assertion that the writer accepts; the second disputes the accuracy of this assertion.d)The first introduces a policy; the second questions the effectiveness of this policy.e)The first contains an assertion that the writer rejects; the second is a faulty inference drawn from this assertion.Correct answer is option 'A'. Can you explain this answer? covers all topics & solutions for GMAT 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for A mark-to-market (or fair value) accounting regime requires that the marketable assets held by a company be accounted for at market value. The rationale for adopting such a rule is to enhance market transparency, thereby facilitating better investment decision-making and more efficient capital allocation. But while mark-to-market improves the information available to market participants, it also has undesirable systemic implications in times of financial turbulence.Mark-to-market can amplify the effects of financial distress in a couple of important ways. First, when liquidity shortages and/or capital requirements force companies to sell illiquid assets, the market value of these assets diminishes. Under a mark-to-market regime, this loss of value impacts the balance sheets of all other owners of these assets as well. These mark-to-market losses can generate further contagion insofar as they lead to further forced sales and further reductions of the market value of illiquid assets.Second, mark-to-market can result in direct balance-sheet transmission of losses. In networks of financially interconnected agents, where someones assets are someone elses liabilities, mark-to-market can trigger a domino effect of debt deflation even in the absence of defaults. When a financial operator suffers a loss of value of some of its assets, this loss diminishes the market value of its outstanding debt. Then the holders of such debt, insofar as they mark it to market, suffer a loss that worsens their own balance sheets and shrinks the market value of their own outstanding debt. In this scenario, the transmission of losses from debt-issuers to debt-holders does not require the occurrence of defaults, as mark-to-market turns expected losses (embedded in market prices) into accounted losses.Conversely, under a historical cost accounting regime, the transmission of losses from an agent towards his creditors occurs only in case of default. Because of this simple difference, the flow of losses that crosses a financial network, induced by an exogenous negative shock, is larger with mark-to-market accounting, exposing the financial network to elevated systemic risk.According to the passage, a mark-to-market (or fair value) accounting regime requires that the marketable assets held by a company be accounted for at market value, and mark-to-market improves the information available to market participants. Which of the following best describes the relationship between the two highlighted statements?a)The first describes a principle; the second explains the rationale underlying this principle.b)The first makes a generalization; the second is a counterexample to this generalization.c)The first contains an assertion that the writer accepts; the second disputes the accuracy of this assertion.d)The first introduces a policy; the second questions the effectiveness of this policy.e)The first contains an assertion that the writer rejects; the second is a faulty inference drawn from this assertion.Correct answer is option 'A'. Can you explain this answer?.
Solutions for A mark-to-market (or fair value) accounting regime requires that the marketable assets held by a company be accounted for at market value. The rationale for adopting such a rule is to enhance market transparency, thereby facilitating better investment decision-making and more efficient capital allocation. But while mark-to-market improves the information available to market participants, it also has undesirable systemic implications in times of financial turbulence.Mark-to-market can amplify the effects of financial distress in a couple of important ways. First, when liquidity shortages and/or capital requirements force companies to sell illiquid assets, the market value of these assets diminishes. Under a mark-to-market regime, this loss of value impacts the balance sheets of all other owners of these assets as well. These mark-to-market losses can generate further contagion insofar as they lead to further forced sales and further reductions of the market value of illiquid assets.Second, mark-to-market can result in direct balance-sheet transmission of losses. In networks of financially interconnected agents, where someones assets are someone elses liabilities, mark-to-market can trigger a domino effect of debt deflation even in the absence of defaults. When a financial operator suffers a loss of value of some of its assets, this loss diminishes the market value of its outstanding debt. Then the holders of such debt, insofar as they mark it to market, suffer a loss that worsens their own balance sheets and shrinks the market value of their own outstanding debt. In this scenario, the transmission of losses from debt-issuers to debt-holders does not require the occurrence of defaults, as mark-to-market turns expected losses (embedded in market prices) into accounted losses.Conversely, under a historical cost accounting regime, the transmission of losses from an agent towards his creditors occurs only in case of default. Because of this simple difference, the flow of losses that crosses a financial network, induced by an exogenous negative shock, is larger with mark-to-market accounting, exposing the financial network to elevated systemic risk.According to the passage, a mark-to-market (or fair value) accounting regime requires that the marketable assets held by a company be accounted for at market value, and mark-to-market improves the information available to market participants. Which of the following best describes the relationship between the two highlighted statements?a)The first describes a principle; the second explains the rationale underlying this principle.b)The first makes a generalization; the second is a counterexample to this generalization.c)The first contains an assertion that the writer accepts; the second disputes the accuracy of this assertion.d)The first introduces a policy; the second questions the effectiveness of this policy.e)The first contains an assertion that the writer rejects; the second is a faulty inference drawn from this assertion.Correct answer is option 'A'. Can you explain this answer? in English & in Hindi are available as part of our courses for GMAT. Download more important topics, notes, lectures and mock test series for GMAT Exam by signing up for free.
Here you can find the meaning of A mark-to-market (or fair value) accounting regime requires that the marketable assets held by a company be accounted for at market value. The rationale for adopting such a rule is to enhance market transparency, thereby facilitating better investment decision-making and more efficient capital allocation. But while mark-to-market improves the information available to market participants, it also has undesirable systemic implications in times of financial turbulence.Mark-to-market can amplify the effects of financial distress in a couple of important ways. First, when liquidity shortages and/or capital requirements force companies to sell illiquid assets, the market value of these assets diminishes. Under a mark-to-market regime, this loss of value impacts the balance sheets of all other owners of these assets as well. These mark-to-market losses can generate further contagion insofar as they lead to further forced sales and further reductions of the market value of illiquid assets.Second, mark-to-market can result in direct balance-sheet transmission of losses. In networks of financially interconnected agents, where someones assets are someone elses liabilities, mark-to-market can trigger a domino effect of debt deflation even in the absence of defaults. When a financial operator suffers a loss of value of some of its assets, this loss diminishes the market value of its outstanding debt. Then the holders of such debt, insofar as they mark it to market, suffer a loss that worsens their own balance sheets and shrinks the market value of their own outstanding debt. In this scenario, the transmission of losses from debt-issuers to debt-holders does not require the occurrence of defaults, as mark-to-market turns expected losses (embedded in market prices) into accounted losses.Conversely, under a historical cost accounting regime, the transmission of losses from an agent towards his creditors occurs only in case of default. Because of this simple difference, the flow of losses that crosses a financial network, induced by an exogenous negative shock, is larger with mark-to-market accounting, exposing the financial network to elevated systemic risk.According to the passage, a mark-to-market (or fair value) accounting regime requires that the marketable assets held by a company be accounted for at market value, and mark-to-market improves the information available to market participants. Which of the following best describes the relationship between the two highlighted statements?a)The first describes a principle; the second explains the rationale underlying this principle.b)The first makes a generalization; the second is a counterexample to this generalization.c)The first contains an assertion that the writer accepts; the second disputes the accuracy of this assertion.d)The first introduces a policy; the second questions the effectiveness of this policy.e)The first contains an assertion that the writer rejects; the second is a faulty inference drawn from this assertion.Correct answer is option 'A'. Can you explain this answer? defined & explained in the simplest way possible. Besides giving the explanation of A mark-to-market (or fair value) accounting regime requires that the marketable assets held by a company be accounted for at market value. The rationale for adopting such a rule is to enhance market transparency, thereby facilitating better investment decision-making and more efficient capital allocation. But while mark-to-market improves the information available to market participants, it also has undesirable systemic implications in times of financial turbulence.Mark-to-market can amplify the effects of financial distress in a couple of important ways. First, when liquidity shortages and/or capital requirements force companies to sell illiquid assets, the market value of these assets diminishes. Under a mark-to-market regime, this loss of value impacts the balance sheets of all other owners of these assets as well. These mark-to-market losses can generate further contagion insofar as they lead to further forced sales and further reductions of the market value of illiquid assets.Second, mark-to-market can result in direct balance-sheet transmission of losses. In networks of financially interconnected agents, where someones assets are someone elses liabilities, mark-to-market can trigger a domino effect of debt deflation even in the absence of defaults. When a financial operator suffers a loss of value of some of its assets, this loss diminishes the market value of its outstanding debt. Then the holders of such debt, insofar as they mark it to market, suffer a loss that worsens their own balance sheets and shrinks the market value of their own outstanding debt. In this scenario, the transmission of losses from debt-issuers to debt-holders does not require the occurrence of defaults, as mark-to-market turns expected losses (embedded in market prices) into accounted losses.Conversely, under a historical cost accounting regime, the transmission of losses from an agent towards his creditors occurs only in case of default. Because of this simple difference, the flow of losses that crosses a financial network, induced by an exogenous negative shock, is larger with mark-to-market accounting, exposing the financial network to elevated systemic risk.According to the passage, a mark-to-market (or fair value) accounting regime requires that the marketable assets held by a company be accounted for at market value, and mark-to-market improves the information available to market participants. Which of the following best describes the relationship between the two highlighted statements?a)The first describes a principle; the second explains the rationale underlying this principle.b)The first makes a generalization; the second is a counterexample to this generalization.c)The first contains an assertion that the writer accepts; the second disputes the accuracy of this assertion.d)The first introduces a policy; the second questions the effectiveness of this policy.e)The first contains an assertion that the writer rejects; the second is a faulty inference drawn from this assertion.Correct answer is option 'A'. Can you explain this answer?, a detailed solution for A mark-to-market (or fair value) accounting regime requires that the marketable assets held by a company be accounted for at market value. The rationale for adopting such a rule is to enhance market transparency, thereby facilitating better investment decision-making and more efficient capital allocation. But while mark-to-market improves the information available to market participants, it also has undesirable systemic implications in times of financial turbulence.Mark-to-market can amplify the effects of financial distress in a couple of important ways. First, when liquidity shortages and/or capital requirements force companies to sell illiquid assets, the market value of these assets diminishes. Under a mark-to-market regime, this loss of value impacts the balance sheets of all other owners of these assets as well. These mark-to-market losses can generate further contagion insofar as they lead to further forced sales and further reductions of the market value of illiquid assets.Second, mark-to-market can result in direct balance-sheet transmission of losses. In networks of financially interconnected agents, where someones assets are someone elses liabilities, mark-to-market can trigger a domino effect of debt deflation even in the absence of defaults. When a financial operator suffers a loss of value of some of its assets, this loss diminishes the market value of its outstanding debt. Then the holders of such debt, insofar as they mark it to market, suffer a loss that worsens their own balance sheets and shrinks the market value of their own outstanding debt. In this scenario, the transmission of losses from debt-issuers to debt-holders does not require the occurrence of defaults, as mark-to-market turns expected losses (embedded in market prices) into accounted losses.Conversely, under a historical cost accounting regime, the transmission of losses from an agent towards his creditors occurs only in case of default. Because of this simple difference, the flow of losses that crosses a financial network, induced by an exogenous negative shock, is larger with mark-to-market accounting, exposing the financial network to elevated systemic risk.According to the passage, a mark-to-market (or fair value) accounting regime requires that the marketable assets held by a company be accounted for at market value, and mark-to-market improves the information available to market participants. Which of the following best describes the relationship between the two highlighted statements?a)The first describes a principle; the second explains the rationale underlying this principle.b)The first makes a generalization; the second is a counterexample to this generalization.c)The first contains an assertion that the writer accepts; the second disputes the accuracy of this assertion.d)The first introduces a policy; the second questions the effectiveness of this policy.e)The first contains an assertion that the writer rejects; the second is a faulty inference drawn from this assertion.Correct answer is option 'A'. Can you explain this answer? has been provided alongside types of A mark-to-market (or fair value) accounting regime requires that the marketable assets held by a company be accounted for at market value. The rationale for adopting such a rule is to enhance market transparency, thereby facilitating better investment decision-making and more efficient capital allocation. But while mark-to-market improves the information available to market participants, it also has undesirable systemic implications in times of financial turbulence.Mark-to-market can amplify the effects of financial distress in a couple of important ways. First, when liquidity shortages and/or capital requirements force companies to sell illiquid assets, the market value of these assets diminishes. Under a mark-to-market regime, this loss of value impacts the balance sheets of all other owners of these assets as well. These mark-to-market losses can generate further contagion insofar as they lead to further forced sales and further reductions of the market value of illiquid assets.Second, mark-to-market can result in direct balance-sheet transmission of losses. In networks of financially interconnected agents, where someones assets are someone elses liabilities, mark-to-market can trigger a domino effect of debt deflation even in the absence of defaults. When a financial operator suffers a loss of value of some of its assets, this loss diminishes the market value of its outstanding debt. Then the holders of such debt, insofar as they mark it to market, suffer a loss that worsens their own balance sheets and shrinks the market value of their own outstanding debt. In this scenario, the transmission of losses from debt-issuers to debt-holders does not require the occurrence of defaults, as mark-to-market turns expected losses (embedded in market prices) into accounted losses.Conversely, under a historical cost accounting regime, the transmission of losses from an agent towards his creditors occurs only in case of default. Because of this simple difference, the flow of losses that crosses a financial network, induced by an exogenous negative shock, is larger with mark-to-market accounting, exposing the financial network to elevated systemic risk.According to the passage, a mark-to-market (or fair value) accounting regime requires that the marketable assets held by a company be accounted for at market value, and mark-to-market improves the information available to market participants. Which of the following best describes the relationship between the two highlighted statements?a)The first describes a principle; the second explains the rationale underlying this principle.b)The first makes a generalization; the second is a counterexample to this generalization.c)The first contains an assertion that the writer accepts; the second disputes the accuracy of this assertion.d)The first introduces a policy; the second questions the effectiveness of this policy.e)The first contains an assertion that the writer rejects; the second is a faulty inference drawn from this assertion.Correct answer is option 'A'. Can you explain this answer? theory, EduRev gives you an ample number of questions to practice A mark-to-market (or fair value) accounting regime requires that the marketable assets held by a company be accounted for at market value. The rationale for adopting such a rule is to enhance market transparency, thereby facilitating better investment decision-making and more efficient capital allocation. But while mark-to-market improves the information available to market participants, it also has undesirable systemic implications in times of financial turbulence.Mark-to-market can amplify the effects of financial distress in a couple of important ways. First, when liquidity shortages and/or capital requirements force companies to sell illiquid assets, the market value of these assets diminishes. Under a mark-to-market regime, this loss of value impacts the balance sheets of all other owners of these assets as well. These mark-to-market losses can generate further contagion insofar as they lead to further forced sales and further reductions of the market value of illiquid assets.Second, mark-to-market can result in direct balance-sheet transmission of losses. In networks of financially interconnected agents, where someones assets are someone elses liabilities, mark-to-market can trigger a domino effect of debt deflation even in the absence of defaults. When a financial operator suffers a loss of value of some of its assets, this loss diminishes the market value of its outstanding debt. Then the holders of such debt, insofar as they mark it to market, suffer a loss that worsens their own balance sheets and shrinks the market value of their own outstanding debt. In this scenario, the transmission of losses from debt-issuers to debt-holders does not require the occurrence of defaults, as mark-to-market turns expected losses (embedded in market prices) into accounted losses.Conversely, under a historical cost accounting regime, the transmission of losses from an agent towards his creditors occurs only in case of default. Because of this simple difference, the flow of losses that crosses a financial network, induced by an exogenous negative shock, is larger with mark-to-market accounting, exposing the financial network to elevated systemic risk.According to the passage, a mark-to-market (or fair value) accounting regime requires that the marketable assets held by a company be accounted for at market value, and mark-to-market improves the information available to market participants. Which of the following best describes the relationship between the two highlighted statements?a)The first describes a principle; the second explains the rationale underlying this principle.b)The first makes a generalization; the second is a counterexample to this generalization.c)The first contains an assertion that the writer accepts; the second disputes the accuracy of this assertion.d)The first introduces a policy; the second questions the effectiveness of this policy.e)The first contains an assertion that the writer rejects; the second is a faulty inference drawn from this assertion.Correct answer is option 'A'. Can you explain this answer? tests, examples and also practice GMAT tests.
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