Finance 301 Exam 2

Marziano Co. stock is quoted by a broker as bid $21.20, ask $21.40. The bid-ask spread is ____ percent.

0.93

The annual dividend on Grozky, Inc. stock is $5 per share and the stock's prevailing price is $93.13 per share. Thus, the stock's dividend yield is ____ percent.

5.37

Buser Corp. purchases certain securities for $4,921,349, with an agreement to sell them back at a price of $4,950,000 at the end of a 30-day period. The repo rate is ____ percent.

6.99

(Financial calculator required.) Lisa can purchase bonds with 15 years until maturity, a par value of $1,000, and a 9 percent annualized coupon rate for $1,100. Lisa's yield to maturity is ____ percent.

7.84

Explain collateralized debt obligations (CDOs).

A CDO is a package combining a variety of debt securities, including subprime mortgages, prime mortgages, automobile loans and other credit card loans.

Explain the use of a balloon-payment mortgage. Why might a financial institution prefer to offer this type of mortgage? Financial institutions may desire balloon mortgages because the interest rate risk is lower than for _____ term, fixed-rate mortgages.

A balloon mortgage payment requires interest payments for a three- to five-year period and full payment at the end of the period. longer

Explain the use of call provisions on bonds.

A call provision allows the issuing firm to purchase its bonds back prior to maturity at a specific price

Describe the growing-equity mortgage. How does the growing-equity mortgage differ from a graduated-payment mortgage? The growing-equity mortgage lifetime ____ reduced, whereas a GPM's life ____ reduced.

A growing-equity mortgage requires continual increasing mortgage payments throughout the life of the mortgage. is; isn't

Explain the use of a prospectus developed before an IPO. Why does a firm do a road show before its IPO? What factors influence the offer price of stock at the time of the IPO?

A prospectus contains detailed information about the firm and includes financial statements and a discussion of the risks involved in the firm's business. The firm does a road show to promote its offering and to convince some large investors to invest in the shares of the firm. The offer price is influenced by market and industry conditions and the prevailing market multiples.

Businesses valued at less than $50 million or so rarely go public. Explain the limitations to such businesses if they did go public.

A public offering of stock may be feasible only if the firm will have a large enough shareholder base to support an active secondary market. Otherwise, the shares would be illiquid, and stockholders who want to sell shares would be forced to sell at a discount from the fundamental value.

Why are second mortgages offered by some home sellers?

A second mortgage is often used when a first mortgage does not fully cover the amount of funds the borrower needs and complements the first mortgage.

Describe the shared-appreciation mortgage.

A shared-appreciation mortgage allows a home purchaser to obtain a mortgage at an interest rate below market rates, while in return the lender will share in the price appreciation of the home.

Explain the use of a sinking-fund provision. How can it reduce the investor's risk?

A sinking-fund provision is a requirement that the firm retire a certain amount of the bond issue each year. This reduces the payments necessary at maturity and therefore can reduce the risk of investors.

What are the advantages and disadvantages to a firm that issues low- or zero-coupon bonds from the perspective of the issuing firm? Low or no interest payments ______. Deduction of the amortized discount as interest expense _____. Lump-sum payment made to bondholders at maturity _____.

Advantage; advantage; disadvantage

How does the initial rate on adjustable rate mortgages (ARMs) differ from the rate on fixed-rate mortgages? Why? Explain how caps on ARMs can affect a financial institution's exposure to interest rate risk.

An adjustable rate mortgage typically offers a lower initial rate than a fixed-rate mortgage to compensate borrowers for incurring the interest rate risk. beyond

Expert networks consisting of managers or executives of a publicly traded company who are hired as consultants ("experts") by a hedge fund to provide insight about the company

Are legitimate if the consultants divulge only information that is already public. Have raised concerns that the consultants provide inside information.

Discuss the concept of asymmetric information. Explain why it may motivate firms to repurchase some of their stock.

Asymmetric information may allow a firm's managers to realize when its stock is undervalued, and they may repurchase shares at that time.

Explain the use of bond collateral, and identify the common types of collateral for bonds.

Bond collateral is intended to back the bond if the issuer defaults on the bonds. Some of the more common types of collateral for bonds are mortgages or real property.

What are debentures?

Bonds unsecured by specific property are called debentures

___________ are computerized systems used by high frequency traders for accessing stock market information, interpreting information, and submitting orders.

Bots

Describe how collateralized mortgage obligations (CMOs) are used and why they have been popular.

Collateralized mortgage obligations are mortgage-backed securities that are segmented into classes representing the timing of payback of the principal. Investors can choose a class that fits their maturity preferences.

What types of financial institutions finance residential mortgages? What types of financial institutions finance residential mortgages?

Commercial banks and savings and loan associations Commercial banks

Choose the rights of common stockholders that are not available to other individuals.

Common stockholders are permitted to vote on key matters concerning the firm such as approval of amendments to the corporate charter or adoption of bylaws.

Why can convertible bonds be issued by firms at a higher price than other bonds?

Convertible bonds allow investors to exchange the bonds for a stated number of shares of the firm's common stock. This offers investors the potential for high returns if the price of the firm's common stock rises. So, these bonds can be issued at a higher price

Explain the role of credit rating agencies in facilitating the flow of funds from investors into the mortgage market (through mortgage-backed securities).

Credit rating agencies rate the tranches of mortgage-backed securities based on the mortgages they represent.

Explain what exchange-traded notes are and how they are used. Why are they risky?

Exchange-traded notes (ETNs) are debt instruments in which the issuer promises to pay a return based on the performance of a specific debt index after deducting specified fees. These instruments have more flexibility to use leverage, which creates a higher potential return for investors, but also results in a higher risk

Why some financial institutions prefer to sell the mortgages they originate?

Financial institutions may sell their mortgages if they desire to enhance liquidity.

Why do firms engage in IPOs? What is the amount of fees that the lead underwriter and its syndicate charge a firm that is going public? Why are there many IPOs in some periods and few IPOs in other periods?

Firms engage in IPOs when they have feasible expansion plans but are already near their debt capacity. The transaction cost (fees) is normally about 7 percent of the gross proceeds received by the issuing firm. Firms prefer to engage in IPOs when business conditions and market conditions are favorable because when business conditions are poor, the market conditions are weak, meaning that firms would have to sell their shares at a low price.

What does it mean to "flip" shares? Why would investors want to flip shares?

Flipping shares refers to selling shares shortly after (such as a day or two) obtaining them at the IPO. Some institutional investors flip shares in order to take advantage of an initial return over the first day because IPO performance tends to be unusually high on the first day, followed by a downward drift.

Explain the conditions that led to the debt crisis in Greece.

Greece's budget deficit was growing and its economy was weakening

______________ represents the use of electronic platforms to execute orders based on an algorithm with programmed instructions.

High frequency trading

Explain short sales in the mortgage markets.

In a short sale transaction, the lender allows homeowners to sell the home for less than what is owed on the existing mortgage.

Describe inside information as applied to the trading of stocks.

Inside information is the information that is already available for some insiders of a publicly-traded company (such as managers or board members) but has not yet been publicized. Using inside information to make trades could easily result in abnormally high returns.

________________ are portfolios of international stocks created and managed by various financial institutions.

International mutual funds

Which of the following statements is not true regarding zero-coupon bonds?

Investors are taxed on the total amount of interest earned at maturity

Explain why investors that provided guarantees on commercial paper were exposed to much risk during the credit crisis.

Investors were exposed to much risk during the credit crisis because they provided guarantees for commercial paper issues that had excessive exposure to mortgages.

Which of the following is not true regarding the Sarbanes-Oxley Act?

It allows public accounting firms to offer non-audit consulting services to an audit client.

Choose incentives for private equity funds to invest in a firm and improve its operations.

Managers of a private equity fund take a percentage of the profits they earn from their investments in return for managing the fund. So, they are motivated to improve firms' performance. If private equity funds were able to improve the business substantially, they should be able to sell their stake to another firm for a much higher price than they paid for it.

Which of the following statements is incorrect?

Market makers are required to purchase the stocks they are assigned for a price existing when the market opened on any given day.

Describe the roles of market makers.

Market makers commonly take positions to capitalize on the discrepancy between their own valuation of the stock and the prevailing stock price, resulting from positions taken by many uninformed investors.

Explain how the credit crisis adversely affected many other people beyond homeowners and mortgage companies.

Mortgage insurers incurred expenses from foreclosures of the property they insured. Several financial institutions went bankrupt, and many employees of financial institutions lost their jobs.

Your friend just told you about a penny stock he purchased, which increased in price from $0.10 to $0.50 per share. You start investigating penny stocks, and after conducting a large amount of research, you find a stock with a quoted price of $0.05. Upon further investigation, you notice that the ask price for the stock is $0.08 and that the bid price is $0.01. Choose the possible reasons for this wide bid-ask spread.

Order costs for penny stocks tend to be higher, since they often do not trade on an organized exchange or on NASDAQ. Penny stocks often have zero or few market-makers and little competition.

____ are backed by conventional mortgages.

Private-label pass-through securities

Explain how systemic risk is related to the commercial paper market. That is, why did problems in the market for mortgage-backed securities affect the commercial paper market?

Problems in the market for mortgage-backed securities affect the commercial paper market because some issuers of asset-backed commercial paper used mortgage-backed securities as collateral and, with a decrease in the yield of MBS, investments in commercial papers secured by MBS decreased.

What are protective covenants? Why are they needed?

Protective covenants are restrictions placed on the firm issuing bonds. For example, they may limit the dividends or corporate officer salaries, or limit the amount of debt the firm can issue. They are needed to reduce the risk of bonds.

Explain how margin requirements can affect the potential return and risk from investing in a stock. What is the maintenance margin?

Purchasing stock on margin not only increases the potential return from investing in a stock but also magnifies the potential losses. The maintenance margin is the minimum amount of the margin that must be maintained over the time the investor holds the investment.

Why do rating agencies assign ratings to commercial paper?

Ratings are assigned to designate the degree of default risk associated with commercial paper.

What are the implications of Regulation FD?

Reg FD prevents a firm's managers from disclosing relevant information to a select group of people so that no one has a comparative advantage over other investors.

What is the role of the securities firm that serves as the underwriter, and how can it ensure that the firm does not issue too much stock?

Securities firms distribute or place stock for corporations and serve as intermediaries since they have experience to know how much stock can be digested by the market.

Describe spinning and laddering in the IPO market. _____ is the process in which an investment bank allocates shares from an IPO to corporate executives who may be considering an IPO or other business that would require the help of an investment bank. _____ involves investors placing bids for IPO shares on the first day that are above the offer price.

Spinning; laddering

Why are trading halts sometimes imposed on particular stocks?

Stock exchanges may impose trading halts on particular stocks when they believe market participants need more time to receive and absorb material information that could affect the value of a stock.

Compare the secondary market activity for mortgages to the activity for other capital market instruments (such as stocks and bonds). Provide a general explanation for the difference in the activity level. The prices of ___ sold on the secondary market are more transparent, while the prices of ___ aren't. However, the secondary market for ___ has been enhanced because of securitization.

Stocks and bonds; mortgages; mortgages

Explain why stocks traded on the NYSE generally exhibit less risk than stocks that are traded on other exchanges.

Stocks of relatively large firms with large trading volume are mostly traded on the NYSE.

Explain subprime mortgages. Why were mortgage companies aggressively offering subprime mortgages?

Subprime mortgages are a type of mortgage offered to borrowers that have relatively low income or high existing debt, or can make only a small down payment. Many financial institutions were aggressively offering subprime mortgages to expand their business.

Explain how the Dodd-Frank Act of 2010 attempted to prevent biased ratings of mortgage-backed securities by credit rating agencies.

The Dodd-Frank Act requires that credit rating agencies publicly disclose data on assumptions used to derive each credit rating. The Dodd-Frank Act prevents the SEC from relying on ratings within its regulations, so that it has to use its own assessment of risk.

Distinguish between FHA and conventional mortgages.

The Federal Housing Administration protects FHA mortgages against the possibility of default by the borrower, while conventional mortgages doesn't

Denton Co. plans to engage in an IPO and will issue 4 million shares of stock. It is hoping to sell the shares for an offer price of $14. It hires a securities firm, which suggests that the offer price for the stock be $12 per share to ensure that all the shares can be easily sold. What is the advantage of following the advice of the securities firm? What is the disadvantage?

The advantage is that Denton Co. wants to have a successful offering in which it can sell all of its shares, and it wants investors to believe that they made a good investment. The disadvantage is that Denton may receive less in proceeds from selling the stock than expected.

An advantage of trading in dark pools is that

The bid or ask prices offered can be more favorable than those available in the public stock exchanges. An investor can accumulate a large number of shares of a particular stock without putting excessive upward pressure on the stock price. They are convenient for high frequency traders using computer algorithms to catch price discrepancies.

What is a bond indenture? What is the function of a trustee, with respect to the bond indenture?

The bond indenture is a legal document specifying the rights and obligations of both the issuing firm and the bondholders. A trustee represents the bondholders in all matters concerning the bond issue

Explain how the bond market facilitates a government's fiscal policy.

The bond market enables the Treasury to finance government expenditures by issuing Treasury notes and bonds in exchange for funding that can be spent.

Explain why some public firms decided to go private in response to the passage of the Sarbanes-Oxley (SOX) Act.

The cost of adhering to the guidelines of the act substantially reduces the value of many small publicly held firms so that they would have a higher value if they were private.

Merrito Inc. is a large U.S. firm that issued bonds several years ago. Its bond ratings declined over time, and about a year ago, the bonds were rated in the junk bond classification. Yet, investors were buying the bonds in the secondary market because of the attractive yield they offered. Last week, Merrito defaulted on its bonds, and the prices of most other junk bonds declined abruptly on the same day. Explain why news of Meritto's financial problems could cause the prices of junk bonds issued by other firms to decrease, even when those firms had no business relationships with Merrito.

The financial problems of Merrito Inc. signaled that other firms classified in the junk bond category might also experience cash flow problems. Investors quickly sold their holdings because of this signal, and other investors were no longer interested in purchasing these bonds at the prevailing price.

The government intervened in order to resolve problems in the mortgage markets during the credit crisis. Summarize the advantages and disadvantages of the government intervention during the credit crisis.

The government intervention stabilized the market for mortgage-backed securities, and therefore helped the financial institutions and homeowners. However, the government budget deficit increased due to the intervention.

Describe the graduated-payment mortgage. What type of homeowners would prefer this type of mortgage? Homeowners whose incomes will ____ over time may desire this type of a mortgage.

The graduated payment mortgage allows borrowers to repay their loans on a graduated basis over the first 5 to 10 years and then they level off after this period. rise

What is the meaning of an initial return for an IPO? Were initial returns of Internet IPOs in the late 1990s higher or lower than normal? Why? The initial returns of Internet IPOs in the late 1990s were ____, because ____ investors wanted to invest in them.

The initial return is the return from the offer price until the end of the first day of trading. higher; many

Describe the process of bookbuilding. Why is bookbuilding sometimes criticized as a means of setting the offer price? The bookbuilding process dictates an offer price that is ___ than what some institutional investors would pay.

The lead underwriter engages in bookbuilding by soliciting indications of interest in the IPO by institutional investors, so as to determine demand. lower

Explain the problems in valuing MBS.

The only participants who know the price of MBS that was traded is the buyer and the seller.

Explain how underwriters use the overallotment option in IPOs.

The overallotment option gives the lead underwriter the right to purchase extra shares from the issuing firm at the IPO offer price and issue additional shares to investors at the offer price and earn a commission. The lead underwriter purchases the extra shares at a lower than the offer price if the market price declines below the offer price.

Why do you think it is difficult for investors to assess the financial condition of a financial institution that has purchased a large amount of mortgage-backed securities?

The risk of mortgage-backed securities is dependent on the underlying mortgages and the details of the mortgages are not disclosed in financial statements.

What are some possible disadvantages to investors who invest in stocks listed on a private stock market?

The trading volume in a private stock market is very limited. With such limited participation by investors, it is difficult to determine the appropriate market price. There is limited transparency because the required disclosure of information by private firms listed on private stock exchanges may be less than what is required when firms go public.

Explain how the Treasury uses the primary market to obtain adequate funding. The Treasury issues Treasury bills through a weekly auction. Investors can only use noncompetitive bids, in which they agree to pay whatever price is established at the auction. The Treasury issues Treasury bills through a weekly auction. Individual investors can submit competitively or noncompetitively bids for newly issued T-bills. Treasury places Treasury bills directly for particular investors at the auction.

The treasury issues treasury bills through a weekly auction. Individual investors can submit competitively or non competitively bids for newly issued T-bills.

What is the general relationship between mortgage rates and long-term government security rates? Explain how mortgage lenders can be affected by interest rate movements. Also explain how they can insulate against interest rate movements

There is a high positive correlation between mortgage rates and long-term government security rates fixed-rate; increase; remain unchanged; adjustable-rate

Why are organized stock exchanges used?

They are used to facilitate secondary market transactions.

Which of the following securities is most likely to be used in a repo transaction?

Treasury Bill

Which of the following is not an example of a municipal bond?

Treasury bond

Who issues commercial paper? Commercial paper is normally issued by ______. What types of financial institutions issue commercial paper? _____________ commonly issue commercial paper. Why do some firms create a department that can directly place commercial paper? What criteria affect the decision to create such a department? Companies that ______ issue commercial paper may decide to establish a department that can directly place the paper to _____ expenses.

Well-known, creditworthy firms. Bank holding companies and finance companies. Frequently; reduce

Mortgage lenders with fixed-rate mortgages should benefit when interest rates decline, yet research has shown that this favorable impact is dampened. By what?

When interest rates decline, a large proportion of mortgages are refinanced and the benefits are limited.

Collateralized mortgage obligations (CMOs) are generally perceived to have

a higher degree of prepayment risk

Buy and sell orders on the OTC market are completed by

a telecommunications network

If an investor buys a T-bill with a 90-day maturity and $50,000 par value for $48,500 and holds it to maturity, what is the annualized yield?

about 12.5%

An investor buys a T-bill with 180 days to maturity and $250,000 par value for $242,000. He plans to sell it after 60 days, and forecasts a selling price of $247,000 at that time. What is the annualized yield based on this expectation?

about 12.6%

When would a firm most likely call bonds?

after interest rates have declined

What are electronic communication networks (ECNs)? Electronic communication networks (ECNs) are _____ systems for disclosing and sometimes executing stock trades, which normally service ____ investors.

automated; institutional

The short interest ratio is the shares sold short divided by the

average daily trading volume over a recent period

Which of the following instruments has a highly active secondary market?

banker's acceptances

The LIBOR scandal in 2012 involved

banks falsely reporting the interest rates they offered in the interbank market

Explain the strategy of high frequency trading firms. High frequency traders are driven ______ to catch _____. Describe the typical time horizon of an investment that is relevant to high frequency traders, and how that varies from other institutional investors. While some _____ might assess the potential performance of any particular stock over the next several months over years, the relevant investment horizon to ___ is only the next few seconds or minutes.

by algorithms; price discrepancies in stocks institutional investors; high frequency traders

Bonds that are secured by personal property are called

chattel mortgage bonds

Corporate bonds are sometimes packaged by commercial banks into ___________, in which investors receive the interest or principal payments generated by the debt securities.

collateralized debt obligations (CDOs)

Explain how circuit breakers are used to reduce the likelihood of a large stock market crash. Circuit breakers are restrictions on trading that are intended to temporarily stop the trading of stocks in response to a large _____ in stock prices within a single day.

decline

Under what conditions might investors consider short selling a specific stock? Investors consider short selling when they expect that a stock's price will _____.

decrease

When the lockup period expires, the share price commonly

decreases significantly

Venture capital firms commonly attempt to cash out as soon as is possible following IPOs. Describe the likely effect that would have on the stock price at the time of lockup expiration. If many VC firms are selling their shares at lockup expiration, there is _____ pressure on the stock price. Would the effect be different for a firm that relied more heavily on VC firms than other investors for its funds?

downward The pressure on the stock price might be especially pronounced for firms that received a proportionately large amount of funding from VC firms before they went public.

A __________ allows the borrower to initially make small payments on the mortgage. The payments then increase over the first 5 to 10 years and then level off.

graduated-payment mortgage

The flash crash was attributed to

high frequency trading

Explain how the credit crisis affected the default rates of junk bonds and the risk premiums offered on newly issued junk bonds. Market conditions were characterized by a ____ degree of risk throughout the credit crisis. Therefore, the default rates of junk bonds and the risk premium offered on newly issued junk bonds ____ during the credit crisis.

high; increased

You have the choice of investing in top-rated commercial paper or commercial paper that has a lower risk rating. How do you think the risk and return performances of the two investments differ? The commercial paper with the lower rating should have a _____ rate of return and also a _____

higher; higher

How did the repayment of subprime mortgages compare to that of prime mortgages during the credit crisis? In 2008, the number of all outstanding subprime mortgages with late payments of at least 30 days was _____ than the number of prime mortgages with the same characteristics. The number of prime mortgages that were subject to foreclosure was _____ than the number of such subprime mortgages.

higher; lower

When firms sell commercial paper at a ____ price than they projected, their cost of raising funds is ____ than projected.

higher; lower

Explain how the downgrading of bonds for a particular corporation affects the prices of those bonds, the return to investors that currently hold these bonds, and the potential return to other investors who may invest in the bonds in the near future. If corporate debt is downgraded, the required rate of return by investors would ____, as the bonds are now perceived to have a ____ degree of default risk. Consequently, the price of those bonds would ____, resulting in a capital ____ for current investors in those bonds. New investors in these bonds can purchase the bonds at a relatively _____ price, compensates for their recognition that the default risk of the bonds has _____.

increase; higher; drop; loss; low; low; increased.

An 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; decreasing

Describe a lockup provision and explain why it is required by the lead underwriter. The lockup provision restricts ___ from selling their shares until a specified period (usually 6 months) after the IPO in order to prevent _____ pressure on the price of the stock.

insiders and venture capital firms; downward

Interest earned from Treasury bonds _______ subject to federal income tax and ________ subject to state and local taxes.

is; is not

Explain how investors' preferences for commercial paper change during a recession. Investors are _____ interested in commercial paper during a recession because the probability of default _____. How should this reaction affect the difference between commercial paper rates and T-bill rates during recessionary periods?

less; Commercial paper rates will increase much higher than T-bill rates during recessionary period because the money market securities must provide a larger risk premium to attract investors.

A ____ order to buy a stock means to execute the transaction at the best possible price but pay no more than a specified maximum price.

limit

When purchasing bonds, individual investors can use a ________ to specify the maximum price they are willing to pay for a bond.

limit order

Assume that interest rates for most maturities are unusually high. Also assume that the net working capital (defined as current assets minus current liabilities) levels of many corporations are relatively low in this period. Explain how the money markets play a role in this relationship between the interest rates and the level of net working capital. When interest rates are relatively high, corporations are unwilling to issue ____ debt. Therefore, interest rates decline. Their increase in _____ debt results in a reduction in their net working capital.

long-term; short-term

How do you think accounting irregularities affect the pricing of corporate stock in general? Generally speaking, accounting irregularities introduce additional uncertainty and risk. Consequently, investors would require a _____ rate of return, which would result in a ____ stock price. From an investor's viewpoint, how do you think the information used to price stocks changes in response to accounting irregularities?

lower The existence of accounting irregularities probably results in closer scrutiny of financial statements for investors as well as seeking additional sources of information in addition to the firm's financial statements as part of their decision-making process.

Based on what you know about repurchase agreements, would you expect them to have a lower or higher annualized yield than commercial paper? Why? Repurchase agreements with a similar maturity as commercial paper would likely have a slightly _____ yield, since they are typically backed by ______ securities.

lower; government

Explain the difference between a market order and a limit order. A _____ order is an order to execute a transaction at the prevailing market price. A ______ order is an order to execute a transaction only if the price reaches a specified level.

market; limit

How can small investors participate in investments in negotiable certificates of deposits (NCDs)? Small investors can invest in negotiable certificates of deposits only through

money market funds

The credit risk to a financial institution from investing in mortgage-backed securities representing subprime mortgages is ____ that of mortgage-backed securities representing prime mortgages.

more than

An insurance company purchased bonds issued by Hartnett Company two years ago. Today, Hartnett Company has begun to issue junk bonds and is using the funds to repurchase most of its existing stock. Why might the market value of those bonds held by the insurance company be affected by this action? The bonds held by the insurance company will now be ____ susceptible to default. Therefore, the required rate of return on those bonds will ____, and the market value of the bonds will _____.

more; increase; decrease

Explain how the bankruptcy of Lehman Brothers (a large securities firm) reduced the liquidity of the commercial paper market. After the bankruptcy of Lehman Brothers, investors became ______ concerned that commercial paper issued by other financial institutions might also be backed by assets with questionable quality and ______ their investments in commercial paper.

more; reduced

Bear Stearns commonly used __________ as collateral when borrowing short-term funds, but its funding was cut off because prospective creditors questioned the quality of the collateral.

mortgages

Explain how the maturity on mortgage-backed securities can be affected by interest rate movements. When interest rates decline, prepayments on mortgages ___ because ___ homeowners refinance with a new mortgage with a ____ interest rate.

occur; some; lower

The process by which the lead underwriter solicits indications of interest by institutional investors in an IPO at various possible ____ prices is referred to as ____.

offer; bookbuilding

Which of the following is not true with respect to venture capital (VC) funds?

one common exit strategy for VC funds is to sell its equity stake to the public before the business engages in a public stock offering

Describe international ETFs, and explain how ETFs are exposed to exchange rate risk. Exchange-traded funds are ____ funds that track a specific index. By investing in an international exchange-traded fund, investors can invest in a specific index representing a foreign country's stock market. The ETFs are denominated in ____. The net asset value of an international ETF is determined by translating the ______ value of the foreign securities into. Thus, a weaker _____ will reduce the net asset value in _______.

passive; dollars; foreign currency; dollars; foreign currency; dollars

At a given point in time, the price of a credit default swap contract should be ________ related to the default risk of the securities covered by the contract. For a given set of securities that are covered by a credit default swap, the price of the contract should be _______ related to the default risk as it changes over time.

positively; positively

The ____ market for mortgages is where mortgages are originated.

primary

What are dark pools? Dark pools are ____ stock markets that can be used by ____ investors. How can they help investors accumulate shares? Why are dark pools criticized by public stock exchanges?

private; institutional Dark pools allow investors to accumulate a large amount of shares of a particular stock without the public's knowledge of these trades and, therefore, without placing excessive upward pressure on the stock price. The public stock markets have criticized dark pools for reducing transparency, thereby making it more difficult for investors to assess existing demand and supply conditions for a particular stock.

Why did the SEC impose a temporary ban on short sales of specific stocks in 2008? This action was intended to prevent stock prices from being abnormally _____ solely by actions of short-sellers, that could stabilize stock values.

pushed down

If bond yields in Japan rise, how might U.S. bond yields be affected? Why? If bond yield rise in Japan, the amount of funds available to purchase U.S. bonds will ___. Consequently, U.S. bonds will sell at ____ prices than before, implying _____ yields than before.

reduce; lower; higher

Explain how the yield on a foreign money market security would be affected if the foreign currency denominating that security declined to a greater degree. The foreign money market yield would be _____ if the foreign currency denominating the security depreciates to a greater degree, since the U.S. investors would have to pay a ____ exchange rate for the currency than the exchange rate at which the currency is converted back to dollars.

reduced; higher

Possible disadvantages of private stock exchanges to investors include:

required disclosures may be less than those required when a firm goes public. trading volume is limited.

A protective covenant may

restrict the amount of additional debt the firm can issue.

American International Group (AIG) experienced financial problems during the credit crisis because it focused heavily on

selling credit default swaps

Explain how a mortgage company's degree of exposure to interest rate risk differs from other financial institutions. Mortgage companies concentrate on _____ mortgages, thus, they ____ as concerned about hedging mortgages over the long run. Mortgage companies' exposure to interest rate risk exists ______.

servicing; are not; before the mortgage is sold.

__________ occurs when the underwriter allocates share from an IPO to corporate executives who may be considering an IPO or other business that will require the help of a securities firm.

spinning

An investor sold a stock short a year ago for $50 per share. The stock's price is currently $52 per share. If the investor is unwilling to accept a loss of more than $5 per share on the short sale transaction, she could place a

stop-buy order with a specified purchase price of $55 per share

Federally insured mortgages are intended to protect

the loan repayment to lending institution

Some bonds are "stripped," which means that

they are transferred into principal-only and interest-only securities.

Why is the 15-year mortgage attractive to homeowners?

total interest expenses paid; 15-year; shorter

Explain why the stock price of a firm may rise when the firm announces that it is repurchasing its shares. The announcement of stock repurchases implies that investors interpret the announcement as signaling management's perception that the shares are ___. Investors respond favorably to this signal so that the ____ placing upward pressure on the stock price.

undervalued; demand for the stock increases

Explain why the stock price of a firm may rise when the firm announces that it is repurchasing its shares. The announcement of stock repurchases implies that investors interpret the announcement as signaling management's perception that the shares are ____. Investors respond favorably to this signal so that the ____ placing upward pressure on the stock price.

undervalued; demand for the stock increases

Managers of firms may consider a stock repurchase or even a leveraged buyout when they believe their stock is ____ by the market, or a secondary stock offering when they believe their stock is ____ by the market.

undervalued; overvalued

Are variable-rate bonds attractive to investors who expect interest rates to decrease? Explain. Investors will be _____ to purchase variable-rate bonds since the decline in market interest rates will lead to ____ in the return to the investors. Would a firm that needs to borrow funds consider issuing variable-rate bonds if it expects that interest rates will decrease? Explain. A firm ____ consider issuing variable-rate bonds, because the decline in market interest rates will lead to ___ in the interest paid.

unwilling; a decrease may; a decrease

____ is a short-term debt instrument issued only by well-known, creditworthy firms and is normally issued to provide liquidity or finance a firm's investment in inventory and accounts receivable.

upward; downward

Money market instruments are securities

with maturities of one year or less.