Finance 322 Exam 1 reading questions
New electronic trading platforms such as MarketAxess, now exist directly to connect
buyers and sellers
Direct Search Market
buyers and sellers seek each other out and transact with each other
Electronic trading networks where participants can anonymously buy or sell large blocks of securities are called
dark pools
Because options provide payoffs that depend on the values of other securities or values, they are considered
derivative assets
The material wealth of society, is
determined by the productive capacity of the economy is a function of real assets of the economy
The types of financial assets include
fixed income, equity, and derivatives
A market is
said to be efficient when prices reflect all available information concerning the values of securities
Common stocks represent
ownership shares in a corporation
A(n) discount broker provides a
"no-frills" service that is limited to security trading and custody, margin loans, and short selling.
Both treasury notes and treasury bonds may be issued in increments of --- but are typically traded in denominations of -----.
$100; $1,000
Which statements are true about underwriters?
-They are investment bankers that market stocks and bonds. -They may receive shares of common stock or other securities of the firm. -They purchase the securities from the issuing company and then resell to the public.
Which statements are true of money market instruments?
-They have relatively low credit risk -They can be purchased indirectly through mutual funds
Which statements are true about municipal bonds?
-Capital gains taxes must be paid if they are sold for more than the investor's purchase price -Their interest income is exempt from federal income taxation -Their interest income is usually exempt from state and local taxation in the issuing state
The following are mechanisms to mitigate potential agency problems:
-Compensation plans tie to the income of managers to the success of the firm -Poor or bad performers may be subjected to the threat of a takeover -Boards of directors can force out management teams that are underperforming
Which of the following are true of short futures position?
-Convey the obligation to deliver the asset -Increase in value when asset falls in price -Specify a transaction price -Potential losses are unlimited
Which of the following statements are true about high-frequency trading?
-High-frequency strategies often attempt to profit from bid-ask spreads. -Trade execution times for high-frequency traders are measured in milliseconds or less. -High-frequency traders co-locate at exchanges because the speed of light is too slow for them to be further away.
Which services are offered by full-service brokers?
-Holding securities for safekeeping -Providing buy and sell recommendations -Trading for client accounts -Extending margin loans
Which of the following statements are correct regarding commercial paper?
-Is backed by a bank line of credit -Considered to be a fairly safe asset due to the ability to be monitored and predicted over a short term
Which statements are true of the DJIA?
-It has been calculated since 1896 -It must be adjusted for stock splits
Which statements are true of the S&P 500?
-It is based on 500 firms -Is is based on the free float
Which statements about preferred stocks are true?
-It pays a fixed stream of income without a contractual obligation to make the payments -Corporations may exclude 50% of dividends received from domestic corporations from taxable income
Which statements are true about Rule 415 and its consequences?
-It was introduced in 1982 -Registered securities are said to be "on the shelf" -It allows securities to be sold on short notice, with little additional paperwork
Companies whose shares are available for purchase to investors are referred to as
-Publicly listed -Publicly traded -Public companies
The Sarbanes-Oxley Act was passed by Congress in 2002 in response to which issues?
-Tainted securities research and recommendations put out to the public -Allocations of shares in initial public offerings -Misleading financial statements and accounting practices
What are the requirements of the Sarbanes-Oxley Act?
-The CFO must personally vouch for the corporation's accounting statements -Corporations must have more independent directors
Which of the following statements are true about public corporations?
-The members of the board of directors are elected at the annual meeting -Their common stock can be bought or sold freely on stock exchanges
Which of the following are correct about inflation-indexed treasury bonds?
-Their yields are interpreted as real interest rates -They provide a constant stream of income in real dollars -The principal amount on them is adjusted in proportion to increases in the consumer price index
Which of the following are true statements regarding ADRs?
-Were created to make it easier for foreign firms to satisfy US security registration requirements -May corresponds to ownership of a fraction of a foreign share
Steps of a short sale of a share of stock
1) borrow the share - sell the share 2) pay any dividends that are issued 3) purchase the share 4) return share to lender
Two types of International bonds are
1) foreign bonds which are issued in foreign countries but in the currency of the investor and 2) Eurobonds which are denominated in a currency other that of the country in which it is issued
The major governing legislation includes the Securities Act of ---- and the Securities Exchange Act of ----.
1933; 1934
The U.S. stock market that provides an automated quotation system for the OTC market, showing current bid-ask prices for thousands of stocks, is the
NASDAQ
The NYSE Euronext acquired the American Stock Exchange in 2008 to focus on small firms and was renamed
NYSE Amex
A certificate traded in US markets that represents ownership of a foreign company is referred to by its initials
ADR
Rank the exchanges by the market capitalization of the firms traded on them as of 2018.
NYSE, NASDAQ, Japan, Shanghai, and London
A ------------------- is a time deposit with a bank where the bank pay interest and principal to the depositor only at maturity.
Certificate of deposit
The New York Stock Exchange is an example of what type of market?
Auction market
Mortgage-backed security-large pools of mortgages that could be traded like any other financial asset
CDO-a security representing a portfolio of fixed-income assets divided into trenches CDS-a contract that provides insurance against the risk of default ARMs-loans with low initial or "teaser" interest rates that eventually would reset to current market interest yields
Which of the following are mortgage-related government agencies, created because Congress believed that adequate credit was not being received through normal sources?
FHLB, FNMA, GNMA, FHLMC
Why might the rating agencies have so dramatically underestimated credit risk in subprime securities?
Default probabilities had been estimated using historical data from an unrepresentative period characterized by a housing boom. They extrapolated historical default experience to a new sort of borrower pool. Since they were paid to provide ratings by the issuers of the securities, they faced pressure to provide generous ratings.
What are the types of financial assets?
Derivatives, fixed income, and equity
A computer-operated trading network offering an alternative to formal stock exchanges or dealer markets for trading securities is often referred to as an ______.
ECN
What are the terms used for the price specified in an options contract at which the underlying asset can be bought or sold?
Exercise price and strike price or striking price
True or false: Agency problems are easy to fix
False
True or false: An example of an average latency time for CBOE Global Markets utilizing the BATS platform advertises times of .01 second.
False
True or false: Eurobonds are always denominated only in euros.
False
True or false: Time deposits may be withdrawn on demand
False
Funds in that bank's reserve account are called
Federal Funds
In addition to government regulation, the securities market exercises considerable self-regulation. The most important overseer in this regard is the
Financial Industry Regulatory Authority
What contributed to systemic risk?
Financial firms were highly leveraged and banks had a lot of capital so took on more risk
Which are the major ratings agencies?
Fitch, Standard & Poor's, and Moody's
Which securities are considered fixed income?
Floating-rate bonds and junk bonds
What are private equity investments?
Investment in firms that are not traded on a public stock exchange
1) The number of shareholders a company may have before being required to register its common stock with the SEC and file public reports was increased from 500 to 2,000 by the 2012 ______ Business Act.
Jumpstart Our
The rate at which large banks in London are willing to lend money among themselves is known by the acronym
LIBOR
NASDAQ level with description
Level 1 - receive only inside quotes (i.e., the best bid and ask prices) Level 2 - receive all bid and ask quotes but cannot enter their own quotes Level 3 - registered market makers that can enter and change bid-ask quotes continually and have the fastest execution of trades
----- markets include short-term, highly liquid, and relatively low-risk debt instruments, whereas ------ markets include longer term and riskier securities securities
Money, capital
The right, rather than the ------, to buy an underlying asset is provided by ----- options but not futures contracts.
Obligation; call
In the United States, inflation-based treasury bonds are referred to by their acronym
TIPS
Research has found that when insider purchasers of a stock exceed insider sellers of a stock, it has a ______ abnormal return and when insider sellers exceed insider buyers, it has a ______ abnormal return.
Positive; negative
Which of the following US firms manipulated and misstated their accounts to the tune of billions of dollars?
Quest communications and HealthSouth
In 2002 in response to the spate of ethics scandals, what act did Congress pass to tighten the rules of corporate governance?
Sarbanes-Oxley Act
Pooling mortgages into standardized instruments backed by those mortgages, which can then be traded like any other security, is called what?
Securitization
What is the name of the law passed in 2010 that called for stricter rules for bank capital, liquidity, and risk management practices on Wall Street?
The Dodd-Frank Reform Act
The attempt to improve performance either by identifying mispriced securities or by timing the performance of broad asset classes is referred to as
active management
Which statements about bond trading are true?
The majority of bond trading occurs in the OTC market among bond dealers, even for bonds that are actually listed on the NYSE. -The NYSE has expanded its electronic bond-trading platforms, which is now called NYSE Bonds and is the largest centralized bond market. -Merrill Lynch, Salomon Smith Barney and Goldman Sachs are currently bond dealers.
True or False: Due to the risk-return trade-off in the securities markets, the higher-risk assets are priced to offer higher expected returns than lower-risk assets.
True
True or false: An investor who places a market order buys at the ask price and sells at the bid price.
True
True or false: British regulators have proposed phasing out LIBOR by 2021 to be replaced with a rate called SONIA
True
True or false: Development in financial markets worldwide include the construction of indexes for foreign markets.
True
True or false: Repos or RPs are short for repurchase agreements and are considered a form of short-term borrowing
True
True or false: Shelf registration refers to ready to be issued securities
True
Start-up companies rely on bank loans and investors who are willing to invest in them in return for an ownership state in the firm. What do you call the equity of investment in these young companies?
Venture capital
The prohibition of trading for their own accounts by deposit-taking banks is the
Volcker Rule, named after the former Federal Reserve Chair
That managers of a public corporation often pursue their own interests rather than the interests of the shareholders is referred to as the
agency problem
A futures contract calls for delivery of an asset at a specified delivery or maturity date for an
agreed-upon price
Market signals help to allocate capital efficiently only if investors are acting on
accurate information
Which of the following companies went bankrupt between the years of 2000 and 2008?
WorldCom, Lehman Brothers, and Enron
T-bill
a US government obligation with initial maturity of one year or less
A security bond such as a bond that pays a specified cash flow over a specific period is
a fixed-income or debt security
Repurchase Agreements (repos)
a form of short-term borrowing
CD
a time deposit with a bank
Auction Market
all traders in an asset meet at one place to buy and sell it
Capital markets
allow the risk inherent in all investments to be borne by the investors most willing to bear it
An equity offering (or new issue) is said to be seasoned when it is the sale of additional shares by a company that is
already traded
Repo
an agreement to sell and repurchase an asset
Term repo
an identical transaction except that the term of the implicit loan can be 30 days or more
Brokered Market
an intermediary offers search services to buyers and sellers
Banker's acceptance
an order to pay a sum of money at a future date, like postdated check, used widely in foreign trade
The ----- is the price you would pay for a security from a dealer, and the ----- price is the slightly lower price you would receive if you wanted to sell to a dealer.
ask; bid
In constructing portfolios, the choice among stocks, bonds, real estate and other broad classes is the
asset allocation decision
The difference between a dealer's bid and ask price is the
bid-ask spread
A transaction of more than 10,000 shares of stock is referred to as a(n)
block trade
Commercial paper, backed by a bank line of credit gives the -------- access to cash that can be used to pay off the paper at maturity.
borrower
Financial assets include
dollar bills, stocks, and bonds
The P/E ratio tells us how much stock purchasers must per ---------------- that the firm generates
dollar of earnings
Securities Exchange Act of 1934
established the securities and exchange commission
Securities Investor Protection Act of 1970
established the securities investor protection corporation to protect investors from losses if their brokerage firms fail
Callable bonds
firm has the option to repurchase the bonds from the holder at a stipulated price
Convertible bonds
give the bondholder the option to convert each bond into a stipulated number of shares of stock
The apparent success of monetary policy over the three decades prior to the financial crisis of 2008 was referred to as the
great moderation
Secured bonds
have collateral backing them in the event of firm bankruptcy
A subset of algorithmic trading that relies on computer programs to make extremely rapid decisions is
high-frequency trading
Dodd-Frank Wall Street Reform and Consumer Protection Act
increased oversight of the U.S. financial system to increase its stability
The Sarbanes-Oxley Act requires
independent financial experts to serve on audit committees, corporate officers to sign off on the firm's financial statements
When officers, directors, major stockholders, or others who hold private inside information allowing them to benefit in the buying or selling of stock do so, it is referred to as
insider trading
A commitment of current resources in the expectation of deriving greater resources in the future is the definition of a
investment
Firms specializing in the sale of new securities to the public, typically by underwriting the issue, are called
investment banks
Real assets
land and patents
1) Which of the following would all be considered real assets? -Bank accounts, insurance, and automobiles -Land, buildings, and equipment -Automobiles, land, and insurance -Stocks, bonds, and insurance
land, buildings, and equipment
The time it takes to accept, process, and deliver a trading order is the trade's
latency
An order specifying a maximum price at which an investor is willing to buy a security, or a minimum price to sell a security, is a(n)
limit order
The risk-reward trade-off of an asset depends on its effect on the risk of a diverse portfolio, that is, one with many assets so that the exposure to any particular asset is
limited
The most shareholders can lose in event of the failure of the corporation is their original investment because of what is referred to as
limited liability
When the proportion of the index a stock represents is determined by its proportion of the total market capitalization of all stocks is the index, the index is said to be
market-value-weighted
Reverse repo
mirror image of a repo
The FHLB borrows money by issuing securities and lends this money to savings and loans institutions to in turn be lent out to individuals borrowing for
mortgage loans
An ownership on a pool of mortgages or an obligation that is secured by such a pool is referred to as a
mortgage-backed security
Bonds issued by state and local governments are municipal bonds, often referred to by the nickname
munis bonds
A mutual fund that holds shares in proportion to their representation in the S&P 500 is an example of a
mutual fund
Mortgage-backed securities that are passed along from the homeowner to the lender to Fannie or Freddie to the investors are also called
pass throughs
Holding highly diversified portfolios without spending effort or other resources attempting to improve investment performance through security analysis is referred to as
passive management
If markets are efficient and prices reflect all relevant information, it is probably better to follow
passive strategies
Sources of venture capital are dedicated venture capital funds, wealthy individuals known as angel investors and institutions such as
pension funds
The ratio of the current stock price of last year's earnings per share is known as the
price earnings ratio
When the proportion of the index a stock represents is proportional to the stock's share price, the index is said to be
price weighted
Investments in firms that do not trade on public stock exchanges are known as
private equity investments
A primary offering in which shares are sold directly to a small group of institutional or wealthy investors by a private firm is a
private placement
A final and approved registration statement including the price at which the security is offered is a(n)
prospectus
Securities Act of 1933
requires full disclosure of relevant information relating to the issue of new securities.
Because stockholders are the last in line of all those who have a claim on the assets and income of the corporation, they are considered
residual claimants
Trades in already existing securities take place in the
secondary market
In constructing portfolios, the choice of which particular assets to hold within an asset class is the
security selection decision
The sale of shares not owned by the investor but borrowed through a broker and later repurchased to replace the loan is called a(n)
short sale
Commercial paper
short-term unsecured debt notes typically issued by large, well-known companies
An EFT or exchange-traded fund is a portfolio of shares that can be bought or sold as a unit, just as one can buy or sell a
single share of stock
A trader who makes a market in the shares of one or more firms and who maintains a "fair and orderly market" by dealing personally in the stock is referred to as a(n)
specialist
A limit sell instructs the broker to sell if and when the stock price rises above a
specified limit
Callable bonds give the firm the option to repurchase the bond from the holder at a
stipulated call price
A potential breakdown of the financial system when problems in one market spill over and disrupt others is
systemic risk
The equivalent taxable yield is simply the
tax-free rate divided by 1 - t
When stock is issued to the public for the first time by a formerly privately owned company, it is referred to as
the firm's initial public offering or IPO
Financial assets are claims to
the income generated by real assets
Financial assets allow the risk of a real asset to be borne by investors whose preferences match the securities risk-return characteristics and through
the sale of securities for the best prices
Portfolio construction techniques that start with the asset allocation decision and then progress to more specific security-selection decisions are referred to as
top-down
Dealer Market
traders specializing in particular assets buy and sell them for their accounts
When a securities market conveys accurate information, thereby facilitating the most productive use of capital resources, the market is said to be
transparent
Debenture bonds
unsecured bonds with no collateral
By buying securities on margin, an investor increases the --------- potential and increases the -------- risk of an investment.
upside; downside
The feds funds rate is simply the rate of interest on:
very short-term loans among financial institutions
Conforming mortgages satisfy certain underwriting guidelines before they may be purchased by Fannie Mae or Freddie Mac. Whereas subprime mortgages are riskier loans made to financially
weaker borrowers
