Test Banks 12, 13, 14, 15
A contract that requires the investor to sell securities on a future date is called a A) short contract. B) long contract. C) hedge. D) micro hedge.
A
A deductible reduces ________ in exactly the same way as ________. A) moral hazard; coinsurance B) adverse selection; restrictive provisions C) moral hazard; cancellation of insurance D) adverse selection; limits on the amount of insurance
A
A major disruption in financial markets characterized by sharp declines in asset prices and firm failures is called a A) financial crisis. B) fiscal imbalance. C) free-rider problem. D) "lemons" problem.
A
A possible sequence for the three stages of a financial crisis might be ________ leads to ________ leads to ________. A) asset price declines; banking crises; unanticipated decline in price level B) unanticipated decline in price level; banking crises; increase in interest rates C) banking crises; increase in interest rates; unanticipated decline in price level D) banking crises; increase in uncertainty; increase in interest rates
A
A put option gives the owner the A) right to sell the underlying security. B) obligation to sell the underlying security. C) right to buy the underlying security. D) obligation to buy the underlying security.
A
A serious consequence of a financial crisis is A) a contraction in economic activity. B) an increase in asset prices. C) financial engineering. D) financial globalization.
A
A short contract requires that the investor A) sell securities in the future. B) buy securities in the future. C) hedge in the future. D) close out his position in the future.
A
A substantial decrease in the aggregate price level that reduces firms' net worth may stall a recovery from a recession. This process is called A) debt deflation. B) moral hazard. C) insolvency. D) illiquidity.
A
A sales commission is charged for the purchase of A) no-load mutual funds. B) load mutual funds. C) sinking mutual funds. D) syndicated funds.
B
When asset prices rise above their fundamental economic values, a(n) ________ occurs. A) asset-price bubble B) liability war C) decline in lending D) decrease in moral hazard
A
________ makes investments in new start-up businesses. A) capital buyout fund B) sovereign wealth fund C) venture capital fund D) hedge fund
C
Advice on taxes, accounting or management information systems, and business strategies are commonly referred to as ________ services. A) accounting audit B) management advisory C) seller D) managing underwriter
B
A________ pays out cash flows from a collection of assets in different tranches, with the highest-rated tranch paying out first, while lower ones paid out less if there are losses on the underlying assets. A) collateralized debt obligation (CDO) B) adjustable-rate mortgage C) negotiable CD D) discount bond
A
Agency problems in the subprime mortgage market included all of the following EXCEPT A) homeowners could refinance their houses with larger loans when their homes appreciated in value. B) mortgage originators had little incentives to make sure that the mortgagee is a good credit risk. C) underwriters of mortgage-backed securities had weak incentives to make sure that the holders of the securities would be paid back. D) the evaluators of securities, the credit rating agencies, were subject to conflicts of interest.
A
An innovation that blurred the distinction between brokerage firms and commercial banks was Merrill Lynch's development in 1977 of the A) cash management account. B) money market mutual fund. C) individual retirement account. D) discount brokerage.
A
By hedging a portfolio, a bank manager A) reduces interest-rate risk. B) increases reinvestment risk. C) increases exchange-rate risk. D) increases the probability of gains.
A
By taking the short position on a futures contract of $100,000 at a price of 115 you are agreeing to ________ a ________ face value security for ________. A) sell; $100,000; $115,000. B) sell; $115,000; $100,000. C) buy; $100,000; $115,000. D) buy; $115,000; $100,000.
A
Conflicts of interest is a type of ________ problem that occurs when a person or institution has multiple objectives that are in conflict with each other. A) moral hazard B) adverse selection C) risk sharing D) spinning
A
Debt deflation occurs when A) an economic downturn causes the price level to fall and a deterioration in firms' net worth because of the increased burden of indebtedness. B) rising interest rates worsen adverse selection and moral hazard problems. C) lenders reduce their lending due to declining stock prices (equity deflation) that lowers the value of collateral. D) corporations pay back their loans before the scheduled maturity date.
A
During the "Great Recession" unemployment rates in the United States increased to A) over 10%. B) over 25%. C) 7.5%. D) 5%.
A
During the banking crisis of the Great Depression, more than ________ of all commercial banks in the United States failed. A) one-third B) one-half C) one-tenth D) one-fifth
A
Each year banks with assets over $10 billion are subject to an assessment of the sufficiency of their bank capital under severe macroeconomic conditions called a A) stress test. B) nuclear test. C) liability test. D) disclosure test.
A
Evidence suggests that credit-rating agencies ________ exploited conflicts of interest because ________. A) have not; it would cause their ratings to lose credibility and thus have a lower value in the marketplace B) have not; they would have an increase in profits in the long-run C) have; it would cause their ratings to lose credibility and thus have a lower value in the marketplace D) have; they would have an increase in profits in the long-run
A
Forward contracts are of limited usefulness to financial institutions because A) of default risk. B) it is impossible to hedge risk. C) they are relatively inflexible. D) of interest-rate risk.
A
Hedging risk for a short position is accomplished by A) taking a long position. B) taking another short position. C) taking additional long and short positions in equal amounts. D) taking a neutral position.
A
If a pension fund has insufficient contributions and earnings to pay benefits, it is said it be A) underfunded. B) at par. C) fully funded. D) under par.
A
If mortgage brokers do not make a strong effort to evaluate whether the borrower can pay off a loan, this creates a A) severe adverse selection problem. B) decline in mortgage applications. C) call to deregulate the industry. D) decrease in the demand for houses.
A
If uncertainty about banks' health causes depositors to begin to withdraw their funds from banks, the country experiences a(n) A) banking crisis. B) financial recovery. C) reduction of the adverse selection and moral hazard problems. D) increase in information available to investors.
A
If you sold a short contract on financial futures you hope interest rates A) rise. B) fall. C) are stable. D) fluctuate.
A
In recent years, bank regulatory authorities have A) encouraged banks to enter the insurance field. B) discouraged banks from entering the insurance field. C) asked Congress to write new legislation that would make it illegal for banks to enter the insurance field. D) asked Congress to write new legislation that would make it legal for banks to enter the insurance field.
A
In the case of an insurance policy, ________ occurs when the existence of insurance encourages the insured party to take risks that increase the likelihood of an insurance payoff. A) moral hazard B) opportunism C) adverse selection D) shirking
A
Microprudential supervision focuses on the safety and soundness of A) individual financial institutions. B) the financial system as a whole. C) the shadow banking system. D) government credit agencies.
A
Options are contracts that give the purchasers the A) option to buy or sell an underlying asset. B) obligation to buy or sell an underlying asset. C) right to hold an underlying asset. D) right to switch payment streams.
A
Parties who have sold a futures contract and thereby agreed to ________ (deliver) the bonds are said to have taken a ________ position. A) sell; short B) buy; short C) sell; long D) buy; long
A
The growth of the subprime mortgage market led to A) increased demand for houses and helped fuel the boom in housing prices. B) a decline in the housing industry because of higher default risk. C) a decrease in home ownership as investors chose other assets over housing. D) decreased demand for houses as the less credit-worthy borrowers could not obtain residential mortgages.
A
When financial institutions are able to reduce the costs of information for each service they offer by applying the same information source to each service, we say that the financial institution is realizing A) economies of scope. B) economies of scale. C) increasing returns. D) diminishing marginal returns.
A
When financial institutions go on a lending spree and expand their lending at a rapid pace they are participating in a A) credit boom. B) credit bust. C) deleveraging. D) market race.
A
When housing prices began to decline after their peak in 2006, many subprime borrowers found that their mortgages were "underwater." This meant that A) the value of the house fell below the amount of the mortgage. B) the basement flooded since they could not afford to fix the leaky plumbing. C) the roof leaked during a rainstorm. D) the amount that they owed on their mortgage was less than the value of their house.
A
When the value of loans begins to drop, the net worth of financial institutions falls causing them to cut back on lending in a process called A) deleveraging. B) releveraging. C) capitulation. D) deflation.
A
Which investment bank filed for bankruptcy on September 15, 2008 making it the largest bankruptcy filing in U.S. history? A) Lehman Brothers B) Merrill Lynch C) Bear Stearns D) Goldman Sachs
A
Which of the following is not a financial derivative? A) stock B) futures C) options D) forward contracts
A
Which of the following is true of life insurance companies? A) Typically the type of assets that life insurance companies hold are corporate bonds, commercial mortgages, and corporate stock. B) The two typical forms of life insurance polices that are held can be classified as whole and variable life policies. C) The major risk that life insurance companies face is that payouts to policy holders are very hard to predict. D) Life insurance companies have suffered from wide spread failures.
A
f you sell a $100,000 interest-rate futures contract for 110, and the price of the Treasury securities on the expiration date is 106, your ________ is ________. A) profit; $4,000 B) loss; $4,000 C) profit; $6,000 D) loss; $6,000
A
A contract that requires the investor to buy securities on a future date is called a A) short contract. B) long contract. C) hedge. D) cross.
B
A person remodeling her house could obtain a loan from a A) sales finance company. B) consumer finance company. C) business finance company. D) public finance company.
B
Brokers, in contrast to security dealers A) hold inventories of securities. B) make their income through commissions. C) make their living on the spread between the bid price and the asked price. D) buy and sell securities at given prices.
B
Charging risk-based insurance premiums is a time-honored principle of insurance management to reduce A) moral hazard. B) adverse selection. C) free riding. D) principal-agent problems.
B
Conflicts of interest may arise within the credit rating agencies because A) the investors pay the credit agencies for ratings. B) the issuers of debt securities pay the credit agencies for ratings. C) the credit rating agencies provide auditing services to issuers of debt securities. D) the credit rating agencies are involved in offering credit counseling to investors.
B
Evidence suggests that the market ________ take into account the credibility of analyst's recommendations of IPOs that were underwritten at the analyst's investment bank because the performance of these recommendations was about 50% ________ compared to recommendations made by other analysts at different investment banks. A) does; better B) does; worse C) does not; better D) does not; worse
B
Hedging risk for a long position is accomplished by A) taking another long position. B) taking a short position. C) taking additional long and short positions in equal amounts. D) taking a neutral position.
B
If a conflict of interest exists A) it will always have serious adverse consequences. B) it may not have a serious adverse consequences if the incentive to take advantage of the conflict is low. C) the government needs to step in to pass legislation to remove the conflict. D) there will not be serious adverse consequences, even if the incentive to take advantage of the conflict is low.
B
If you bought a long contract on financial futures you hope that interest rates A) rise. B) fall. C) are stable. D) fluctuate.
B
If you purchase a $100,000 interest-rate futures contract for 110, and the price of the Treasury securities on the expiration date is 106, your ________ is ________. A) profit; $4,000 B) loss; $4,000 C) profit; $6,000 D) loss; $6,000
B
If you sold a short futures contract you will hope that bond prices A) rise. B) fall. C) are stable. D) fluctuate.
B
If, for a $1,000 premium, you buy a $100,000 call option on bond futures with a strike price of 114, and at the expiration date the price is 110, your ________ is ________. A) profit; $1,000 B) loss; $1,000 C) profit; $3,000 D) loss; $3,000
B
In financial markets an IPO is an A) investment portfolio option. B) initial public offering. C) initial portfolio offering. D) investment portfolio offering.
B
In financial markets, when a firm issues stock for the first time it is called an A) investment portfolio option. B) initial public offering. C) initial portfolio offering. D) investment portfolio offering.
B
Mutual funds are primarily held by A) financial institutions. B) households. C) nonfinancial businesses. D) the Social Security trust fund. Answer: B
B
Mutual funds in which a fixed number of nonredeemable shares are sold at an initial offering and are then traded in the over-the-counter market, like shares of common stock, are called A) open-end funds. B) close-end funds. C) OTC funds. D) primary-issue funds.
B
Mutual funds that allow shares to be redeemed at any time at a price that is tied to the asset value of the fund are known as A) close-end funds. B) open-end funds. C) asset-value funds. D) redeemable funds.
B
Several features distinguish hedge funds from traditional mutual funds, including A) mutual funds have a minimum investment requirement of $1,000 or more; hedge funds have no minimum investment requirement. B) hedge funds typically charge investors large fees relative to mutual funds. C) hedge fund investors need not commit their money for more than a few weeks at a time, explaining why they pay higher fees. D) hedge funds are significantly less risky relative to mutual funds.
B
The amount paid for an option is the A) strike price. B) premium. C) discount. D) yield.
B
The higher the insurance coverage, the ________ the policyholder can gain from risky activities that make an insurance payoff ________ likely. A) more; less B) more; more C) less; less D) less; more
B
The incentive for analysts in investment banks to distort research increases when A) revenues from brokerage commissions increase. B) the potential revenues from underwriting greatly exceed brokerage commissions. C) the potential brokerage commissions greatly exceed revenues from underwriting. D) revenues from underwriting decrease.
B
The problem with spinning is that it may ________ the cost of capital to a firm and thus ________ the efficiency of the capital market. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease
B
The seller of an option has the A) right to buy or sell the underlying asset. B) obligation to buy or sell the underlying asset. C) ability to reduce transaction risk. D) right to exchange one payment stream for another.
B
When the SEC requires companies to publicly release financial statements, which of the following remedies of conflicts of interest does this fall under? A) leave it to the market B) regulate for transparency C) supervisory oversight D) separation of functions
B
f a borrower takes out a $200 million loan in a repo agreement and is asked to post $220 million of mortgage-backed securities as collateral, the "haircut" is A) 5%. B) 10%. C) 20%. D) 50%.
B
he ________, the difference between the interest rate on Baa corporate bonds and U.S. Treasury bonds. rose sharply during the Great Depression. A) credit boom B) credit spread C) adjustable-rate D) default swap
B
A call option gives the owner the A) right to sell the underlying security. B) obligation to sell the underlying security. C) right to buy the underlying security. D) obligation to buy the underlying security.
C
By taking the long position on a futures contract of $100,000 at a price of 115 you are agreeing to ________ a ________ face value security for ________. A) sell; $100,000; $115,000. B) sell; $115,000; $100,000. C) buy; $100,000; $115,000. D) buy; $115,000; $100,000.
C
Financial crises in advanced economies might start from a A) debt deflation. B) currency crisis. C) mismanagement of financial innovations. D) currency mismatch.
C
If a pension fund has sufficient contributions and earnings to pay benefits, it is said to be A) underfunded. B) at par. C) fully funded. D) over par.
C
If firms have an incentive to hide information from mandatory disclosure because the information is proprietary, then which of the following remedies is the least intrusive way to overcome this incentive? A) leave it to the market B) separation of functions C) supervisory oversight D) socialization of information production
C
If you buy a call option on Treasury futures at 115, and at expiration the market price is 110, the ________ will ________ exercised. A) call; be B) put; be C) call; not be D) put; not be
C
In investment banking, a conflict usually is present between the issuers of securities, who ________, and investors, who ________. A) benefit from unbiased auditing; desire unbiased consulting B) desire unbiased research; benefit from optimistic research C) benefit from optimistic research; desire unbiased research D) desire unbiased consulting; benefit from unbiased auditing
C
In the case of an insurance policy, ________ occurs when the existence of insurance encourages the insured party to take risks that increase the likelihood of an insurance payoff; ________ occurs when those most likely to get large insurance payoffs are the ones who want to purchase insurance the most. A) moral hazard; insurance market discrimination B) moral hazard; insurance segregation C) moral hazard; adverse selection D) adverse selection; moral hazard
C
Insurance companies reduce risk exposure in exchange for a portion of their insurance premiums by obtaining A) government loan guarantees. B) federal insurance. C) reinsurance. D) bankers acceptances.
C
Life insurance companies are regulated by state governments because A) they have never experienced bankruptcy. B) they have never experienced profitability. C) they have never experienced widespread failures. D) they hold only highly liquid assets.
C
One problem with conflicts of interest is that they can reduce the ________ in financial markets, thereby increasing ________. A) quantity of information; financial institutions' profits B) quantity of information; asymmetric information C) quality of information; asymmetric information D) quality of information; financial institutions' profits
C
POs have become very important in the U.S. economy because they are a major source of financing for A) so-called "blue-chip" companies. B) hedge funds. C) internet companies. D) mutual funds.
C
Property and casualty insurance companies hold the largest share of their assets in A) long-term government bonds. B) short-term government securities and commercial paper. C) tax-exempt municipal bonds and U.S. government securities. D) medium-term corporate bonds.
C
The price specified on an option at which the holder can buy or sell the underlying asset is called the A) premium. B) call. C) strike price. D) put.
C
When a corporation wishes to sell new securities, it usually employs A) a takeover specialist. B) a finance company. C) an investment bank. D) a commercial bank.
C
When interest rates fall, a bank that perfectly hedges its portfolio of Treasury securities in the futures market A) suffers a loss. B) experiences a gain. C) has no change in its income. D) may either gain, lose or see no change in its income.
C
Which of the following is NOT an advantage of private equity funds? A) Private companies are not subject to the same regulations as a publicly traded company. B) Managers of private firms are not under the same level of pressure to produce high returns compared to the managers of publicly traded firms. C) Private equity firms can do a better job in controlling the problems created by moral hazard. D) Private equity funds give managers of the companies higher stakes compared to managers in publicly traded companies.
C
Which of the following is an example of a bank realizing economies of scope? A) The bank develops a standard mortgage loan application to make the process of loaning out mortgages easier. B) The bank reduces costs of credit checking for the loan process by outsourcing the process to a specialist. C) By using the information collected from a corporation, the bank can decide how easy it would be to sell bonds issued by the corporation to the public. D) A bank in a rural area specializes in providing agricultural loans.
C
_______ are asymmetric information problems that act as a barrier to efficient allocation of capital. A) Asset prices B) Credit imbalances C) Financial frictions D) Financial derivatives
C
_______ assist in the initial sale of securities in the primary market; ________ assist in the trading of securities in the secondary markets. A) Investment banks; mutual funds B) Commercial banks; mutual funds C) Investment banks; securities brokers and dealers D) Commercial banks; securities brokers and dealers
C
A financial contract that obligates one party to exchange a set of payments it owns for another set of payments owned by another party is called a A) hedge. B) call option. C) put option. D) swap.
D
An option that can be exercised at any time up to maturity is called A) a swap. 5 B) a stock option. C) an European option. D) an American option.
D
Firms that are designated as systemically important financial institutions (SIFIs) are subject to all of the following additional Federal Reserve regulations EXCEPT A) higher capital standards. B) stricter liquidity requirements. C) providing a plan for orderly liquidation if necessary. D) interest rate ceilings on time deposits.
D
Futures differ from forwards because they are A) used to hedge portfolios. B) used to hedge individual securities. C) used in both financial and foreign exchange markets. D) a standardized contract.
D
In order to ensure that borrowers have an ability to repay residential mortgages, the new consumer protection legislation requires lenders to do all of the following EXCEPT A) verify the income of the borrower. B) verify the borrower's job status. C) check the credit history of the borrower. D) verify that the borrower can read and understand a loan contract.
D
Investment banks purchase new security issues in the hope of making a profit. This is the act of A) reinsuring. B) factoring. C) syndicating. D) underwriting.
D
Parties who have bought a futures contract and thereby agreed to ________ (take delivery of) the bonds are said to have taken a ________ position. A) sell; short B) buy; short C) sell; long D) buy; long
D
The Dodd-Frank legislation of 2010 permanently increased the federal deposit insurance to A) $40,000. B) $100,000. C) $200,000. D) $250,000.
D
The advantage of forward contracts over future contracts is that they A) are standardized. B) have lower default risk. C) are more liquid. D) are more flexible.
D
The government passed the Economic Recovery Act in October 2008 to prevent the financial crisis from continuing to worsen. A controversial component of this act was the A) temporary decrease in the federal deposit insurance limit. B) sale of new subprime mortgage assets. C) borrowing of $150 million from AIG. D) Troubled Asset Relief Program (TARP).
D
Which of the following is not a part of the Sarbanes-Oxley Act of 2002? A) the establishment of a Public Company Accounting Oversight Board (PCAOB) to supervise accounting firms and thus insure that audits are independent and controlled for quality B) increased penalties for white-collar crime and obstruction of official investigations C) requires a CEO and CFO to certify that periodic financial statements and disclosure of the firm are accurate D) requires investment banks to make public their analysts' recommendations
D
