FIN 330 EXAM 4

Roles served by financial markets include the following
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Roles served by financial markets include the following
sharing of risk.
providing liquidity.
pooling and communicating information.
Secondary financial markets:
are financial markets where existing securities are bought and sold.
A liquid asset is
an asset that can easily and quickly be sold to raise cash.
____________ risk is associated with the transition from LIBOR to SOFR.
Legal, Valuation, and Basis
The transition from LIBOR to SOFR hit a snag when
financial institutions pushed back.
LIBOR reflects credit risk. SOFR does not.
True
A major automobile manufacturer typically has slow sales during the winter months, creating a cash flow problem for meeting payroll. In a situation like this, the automobile manufacturer may
issue commercial paper.
The yields on money market instruments are relatively low compared with the yields of other debt instruments.
True
A bond is unlike a loan in that it better spreads out the credit risk.
True
A limitation of a bond compared to a loan is that it decreases the pool of money available to the issuer.
False
The demand for U.S. government bonds is high relative to other bond issues because:the market for U.S. government bonds is more liquid than most other bond markets.Municipal bonds are usually purchased by:investors who are in high marginal tax brackets.Corporate bonds are not as liquid as government bonds because the corporate bond rating must be calculated each time they are traded.FalseEnhancing a municipal issue with insurance can increase the credit rating of the bonds.TrueHow many bond insurers did i indicate last week survived the financial crisis?1A primary financial market is:one in which newly issued securities are sold.The Standard & Poor's 500 Index actually includes more than 500 of the largest corporations in the U.S.FalseThe Nasdaq Composite Index:is made of of mainly newer, smaller firms.The Dow Jones Industrial Average:gives greater weight to shares with higher prices.Financial markets quickly eliminate unexploited profit opportunities through changes inasset prices.Stocks appear to present risk, yet many people have substantial parts of their wealth invested in them. This behavior could be explained by:investing in stocks over the long run is not as risky as short-term holdings of stocks.Which of the following could cause a stock market bubble?Investor euphoriaAccording to the theory of efficient markets, investors may be expected to earn above-average returns if they:have access to illegal, private information.________ is creating a marketable capital market instrument by bundling a portfolio of mortgage loans.SecuritizationA big advantage to the borrower of a 15-yr mortgage loan compared to a 30-yr mortgage loan is thatfar less interest will be paid over the life of the loan.When market rates are high, there is an increased proportion of cash-out refinances.TrueThe source of the most comprehensive detailed information on the mortgage market isHMDA data.The tool that has helped millions of borrowers who have insufficient funds for a 20% down payment mortgage.private mortgage insuranceA major challenge for banks with lots of mortgage loans is a lack of liquidity. The solution to this problem has been the emergence ofa secondary mortgage market.At a given point in time, the interest rate offered on a new fixed-rate mortgage is typically __________ the initial interest rate offered on a new adjustable-rate mortgage.aboveAn institution that originates and holds a fixed-rate mortgage is adversely affected by ____________interest rates; the borrower who was provided the mortgage is adversely affected by __________ interest rates.increasing; decreasingThe fee paid to the insurer to compensate for bearing specific risk is known asthe policy premium.Insurance companies look more like a [ bank / finance company ] in terms of asset transformation?BankIn order for insurance companies to generate predictable payouts, they need to:spread the risk across many policies.The type of credit insurance that landed AIG into trouble in 2008 is calledcredit default swaps.Reinsuranceallocates portion of risk to another company in exchange for a portion of the premium.In many cases, life insurance companies will require applicants to take a physical. This is done to avoid the problem of:adverse selection.Many health insurers require a deductible where the policyholder pays the first part of any loss. The use of a deductible most directly treats the problem of:moral hazard.Life insurance companies are regulated by state governments becausethey have never experienced widespread failures.You examine the balance sheet of an insurance company and note that its assets are made up mainly of U.S. Treasury bills and commercial paper. You determine that this company is more likely to be what type of insurance company?Property & CasualtyThe key factor causing life insurance companies to move into the management of pension funds was.a change in federal legislation in 1974 to encourage pension funds to turn fund management over to life insurance companies.Investment decisions for funding a defined benefit plan is largely made byEmployerMost pension plans today aredefined contribution.In a defined-contribution plan:the retirement benefits will vary with both the amount contributed and the performance of the fund.A defined-benefit pension planfixes benefits in advance.Since Social Security benefits are paid from current contributions, the system is a"pay-as-you-go" system.The assumed rate of return has been trending up for public pension plans (largely invested in equities).FalseWhich of the following is most likely to be able to meet its future obligations?Fully funded pensionIn a ________ plan, the employee makes the investment decisions for funding the pension.defined contributionIt is illegal for an employer to underfund a pension.FalseRicky purchased shares in a mutual fund through an initial public offering, and now no shares are issued and shares cannot be redeemed. He invested in a _________________ fund.close-endedIndex funds are popular among investors because of low fees and ease of diversification, which are possible because the fund manager purchases the stocks that make up the index and does not actively buy and sell shares to outperform the index.TrueWhich of the following types of equity funds is considered the most speculative?Aggressive growth fundsApproximately _______ of American households own mutual funds.45%Which of the following account for the largest portion of the U.S. mutual fund industry?Equity FundsExchange-traded funds (ETFs):are traded on an exchange, and their share price changes throughout the day.All are true about hedge fundsPrimarily for millionaires. Not heavily regulated. Generally high risk.When a corporation wishes to sell new securities, it usually employsan investment bankWhen securities firms facilitate an IPO, they attempt to price the stockhigh enough to satisfy the issuing firm. at a level that will enable the securities firms to place the entire issue. at a level that will enable institutional investors who invest in the IPO to earn reasonable returns.In a ______________ of stock, all of the shares issued may be held by a small number of institutional investors.Private placementInvestment banks sell _______________ securities to the public, and brokerage firms sell ________________ securities to the public.new; existingTasks that investment bankers perform when acting as underwriters to sell securities to the public include:pricing the security. preparing the filings required by the Securities and Exchange Commission. arranging for the security to be rated.The process of underwriting a stock or bond issue requires that the investment bank purchase the entire issue at a predetermined price and then resell it in the market.TrueThe ___________________ regulates the issuance of securities.Securities and Exchange CommissionThe __________________ can liquidate failing brokerage firms.Securities Investor Protection CorporationHMDAHome Mortgage Disclosure ActOpen Ended Mutual Fundsfunds that sell shares directly to investors and repurchase those shares whenever investors wish to sell themclosed-end mutual fundFund with a set number of shares to be issued, determined before the fund is ever establishedSecurities and Exchange CommissionRegulates issuance of securitiesSecurities Investor Protection CorporationOffers insurance on cash and securities deposited at brokerage firms. Maintains insurance fund and has line of credit with U.S. Treasury Can liquidate failing brokerage firms