Test #1: CH. 1 - 4

The ____________ refers to the potential conflict between management and shareholders.

agency problem

Which of the following portfolio construction methods starts with security analysis?

bottom-up

Corporate shareholders are best protected from incompetent management decisions by:

the threat of takeover by other firms

The national net worth of the U.S. in 2009 was _________.

$39.139 trillion

In 2009, _______ of the assets of U.S. households were financial assets as opposed to tangible assets.

63%

_________ financial asset(s).

Derivatives and U.S. Agency bonds are

Mortgage-backed securities were created when ________ began buying mortgage loans from originators and bundling them into large pools that could be traded like any other financial asset.

FNMA and FHLMC

Until 1999, the ________ Act(s) prohibited banks in the United States from both accepting deposits and underwriting securities.

Glass-Steagall

The spread between the LIBOR and the Treasury-bill rate is called the ________.

TED spread

Requires corporations to have more independent directors and requires the firm's CFO to personally vouch for the firm's accounting statements, prohibits auditing firms from providing other services to clients, and requires corporations to have more independent directors and requires the firm's CFO to personally vouch for the firm's accounting statements

The Sarbanes-Oxley Act

An example of a derivative security is/are ______.

a commodity futures contract and a call option on Intel stock

A debt security pays ____________.

a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security

A fixed-income security pays ____________.

a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security

The material wealth of a society is a function of _________.

all real assets

In 2009, ____________ was the least significant liability of U.S. nonfinancial businesses in terms of total value.

bank loans

In terms of total value, the most significant liability of U.S. nonfinancial businesses in 2009 was _______.

bonds and mortgages

In 2009, ____________ was the least significant financial asset of U.S. nonfinancial businesses in terms of total value.

cash and deposits

Security selection refers to ____________.

choosing which securities to hold based on their valuation

________ were designed to concentrate the credit risk of a bundle of loans on one class of investor, leaving the other investors in the pool relatively protected from that risk.

collateralized debt obligations

_______ are examples of financial intermediaries.

commercial banks, insurance companies, investment companies, and credit unions

Which of the following are mechanisms that have evolved to mitigate potential agency problems?

compensation, underperforming, takeover threats

________ are in essence an insurance contract against the default of one or more borrowers.

credit default swaps

The value of a derivative security _______.

depends on the value of the related security

In 2009, ____________ was the most significant liability of U.S. commercial banks in terms of total value.

deposits

Financial intermediaries exist because small investors cannot efficiently ________.

diversify their portfolios, assess credit risk of borrowers, or advertise for needed investments

Financial assets can permit all of the following except ____________.

elimination of risk

Commercial banks differ from other businesses in that both their assets and their liabilities are mostly:

financial

The means by which individuals hold their claims on real assets in a well-developed economy are:

financial assets

Although derivatives can be used as speculative instruments, businesses most often use them to:

hedge risks

Theoretically, takeovers should result in ___________.

improved management and increased stock price

Financial assets ______.

indirectly contribute to the country's productive capacity

In 2009, ____________ was the least significant real asset of U.S. nonfinancial businesses in terms of total value.

inventory

The smallest component of domestic net worth in 2009 was ____________.

inventory

________ specialize in helping companies raise capital by selling securities.

investment bankers

A disadvantage of using stock options to compensate managers is that:

it can create an incentive for mangers to manipulate information to prop up a stock price temporarily

_______ is/are a real asset(s).

land, machines, and knowledge

In 2009, ____________ was the least significant financial asset of U.S. households in terms of total value.

life insurance reserves

In 2009, ____________ was the most significant financial asset of U.S. commercial banks in terms of total value.

loans and leases

During the period between 2000 and 2002, a large number of scandals were uncovered. Most of these scandals were related to:

manipulation, misleading, allocating

Investment bankers perform the following role(s) ___________.

market new stock and bond issues for firms, provide advice to the firms as to market conditions, price, etc, and design securities with desirable properties

They aggregate individual home mortgages into homogeneous pools, the purchaser receives monthly interest and principal payments received from payments made on the pool, the banks that originated the mortgages continue to service them

mortgage-backed securities

In 2009, ____________ was the most significant liability of U.S. households in terms of total value.

mortgages

In 2009, ____________ was the most significant financial asset of U.S. households in terms of total value.

pension reserves

Which of the following financial assets made up the greatest proportion of the financial assets held by U.S. households?

pension reserves

New issues of securities are sold in the ________ market(s).

primary

In 2009, ____________ was the most significant real asset of U.S. households in terms of total value.

real estate

In 2009, ____________ was the most significant real asset of U.S. nonfinancial businesses in terms of total value.

real estate

The largest component of domestic net worth in 2009 was ____________.

residential real estate

Investors trade previously issued securities in the ________ market(s).

secondary

The sale of a mortgage portfolio by setting up mortgage pass-through securities is an example of ________.

securitization

Money market securities are____________.

short term, highly marketable, and generally very low risk

_______ is/are financial assets

stocks and bonds

Asset allocation refers to ____________.

the allocation of assets into broad asset classes

Which of the following portfolio construction methods starts with asset allocation?

top-down