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Questions from chapter 1 test bank

60%

Financial assets represent ______ of total assets of US households

10%

Net worth represents ______ of the liabilities an net worth of commercial banks

D

Active trading in markets and competition among securities analysts helps ensure that:

I. security prices approach informational efficiency
II. riskier securities are priced to offer higher potential returns
III. investors are unlikely to be able to consistently find under or overvalued securities

A. I only
B. I and II only
C. II and III only
D. I, II, and III

D

The material wealth of society is determined by the economy's _______, which is a function of the economy's _______

A. investment bankers, financial assets
B. investment bankers, real assets
C. productive capacity, financial assets
D. productive capacity, real assets

D

_______ are examples of financial intermediaries.

A. Commercial banks
B. insurance companies
C. investment companies
D. All of these

A

Which one of the following best describes the purpose of derivatives markets?

A. transferring risk from one party to another
B. investing for a short time period to earn a small rate of return
C. investing for retirement
D. earning interest income

GNMA

____ was the first to introduce mortgage pass-through securities?

A

______ is a mechanism to mitigate potential agency problems

A. Tying income of managers to success of the firm
B. Directors defending top management
C. Anti takeover strategies
D. Straight voting method of electing the board of directors

C

In a capitalist system, capital resources are primarily allocated by:

A. governments
B. SEC
C. financial markets
D. investment bankers

D

A bond issue is broken up so that some investors will receive interest payments while other will receive principal payments. This is an example of:

A. bundling
B. credit enhancement
C. securitization
D. unbundling

D

Financial markets allow for all BUT which one of the following?

A. shift consumption through time from higher income periods to lower
B. Price securities according to their riskiness
C. Channel funds from lenders of funds to borrowers of funds
D. Allow most participants to routinely earn high returns with low risk

B

Firms that specialize in helping companies raise capital by selling securities to the public are called:

A. pension funds
B. Investment banks
C. savings banks
D. REITs

ADRs

______ are an indirect way US investors can invest in foreign companies.

A

Security selection refers to:

A. choosing specific securities within each asset-class
B. deciding how much to invest in each asset-class
C. deciding how much to invest in the market portfolio versus the riskless asset
D. deciding how much to hedge

B

An example of a derivative security is ________

A. a common share of General Motors
B. a call option on Intel stock
C. a Ford bond
D. a US Treasury Bond

C

Which one of the following firms falsely claimed to have a $4.8 billion bank account at Bank of America and vastly understated its debts, eventually resulting in the firm's bankruptcy?

A. WorldCom
B. Enron
C. Parmalat
D. Global Crossing

B

Debt securities promise:

I. a fixed streamof income
II. a stream of income that is determined according to a specific formula
III. a share in the profits of the issuing entity

A. I only
B. I and II only
C. I and III only
D. II or IIIonly

C

The SOX act tightened corporate governance rules by requiring all BUT which one of the following:

A. required corporations to have more independent directors
B. required the CFO to personally vouch for the corporation's financial statements
C. Required that firms could no longer employ investment bankers to sell securities to the public
D. the creation of a new board to oversee the auditing of public companies

D

An example of a real asset is:

I. a college education
II. customer goodwill
III. a patent

A. I only
B. II only
C. I and III only
D. all of these

C

Which of the following is NOT a financial intermediary?

A. a mutual fund
B. an insurance company
C. a real estate brokerage firm
D. a savings and loan company

D

Which of the following is not an example of a financial intermediary?

A. Goldman Sachs
B. Allstate Insurance
C. First Interstate Bank
D. IBM

D

Money Market securities are characterized by:

I. maturity less than one year
II. Safety of the principal investment
III. low rates of return

A. I only
B. I and II only
C. I and III only
D. I, II and III

B

After much investigation, an investor finds that Intel stock is currently under priced. This is an example of:

A. asset allocation
B. security analysis
C. top down portfolio management
D. Passive management

A

After considering current market conditions, an investor decides to place 60% of their funds in equities and the rest in bonds. This is an example of:

A. asset allocation
B. security analysis
C. top down portfolio management
D. passive management

B

Suppose an investor is considering one of two investments which are identical in all respects except for risk. If the investor anticipates a fair return for the risk of the security they invest in they can expect to:

A. earn no more than the Treasury Bill rate on either
B. pay less for the security that has higher risk
C. pay less for the security that has lower risk
D. earn more if interest rates are lower

C

Securitization refers to the creation of new securities by:

A. selling individual cash flows of a security or loan
B. repackaging individual cash flows of a security or loan into a new payment pattern
C. taking an illiquid asset and converting it into a marketable security
D. selling financial services overseas as well as in the U.S.

B

Brady bonds were an example of:

A. securitization
B. mortgagization
C. bundling
D. pass through securities

A

Accounting scandals can often be attributed to a particular concept in the study of finance known as the:

A. agency problem
B. risk-return trade-off
C. allocation of risk
D. securitization

A

An intermediary that pools and manage funds for many investors is called a/an _____

A. investment company
B. savings and loan
C. investment banker
D. ADR

B

Financial institutions that specialize in assisting corporations in primary market transactions are called ______

A. mutual funds
B. investment bankers
C. pension funds
D. globalization specialists

C

WEBS allow investors to:

A. invest in US mortgage backed securities
B. invest in an individual foreign stock
C. invest in a portfolio of foreign stocks
D. avoid an exposure to foreign exchange risk

B

In 2008, the largest corporate bankruptcy in the US history involved the investment banking firm of:

A. goldman sachs
B. lehman brothers
C. morgan stanley
D. merrill lynch

C

The inability of shareholders to influence the decisions of managers, despite overwhelming shareholder support, is a breakdown in what process or mechanism?

A. auditing
B. public finance
C. corporate governance
D. public reporting

B

A major cause of mortgage market meltdown in 2007 and 2008 was linked to _______.

A. globalization
B. securitization
C. negative analyst recommendations
D. online trading

B

The process of securitizing poor quality bank loans made to developing nations resulted in:

A. pass-throughs
B. brady bonds
C. WEBS
D. FHLMC participation certificates

A

US Treasury bonds pay interest every six months and repay the principal at maturity. The US Treasury routinely sells individual interest payments on these bonds to investors. This is an example of:

A. unbundling
B. bundling
C. securitization
D. security selection

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