ERM/Exam 3/Chapter 7

On a local television program, a financial reporter stated, "There will be big news this week about Sixth National Bank's bad real estate development loans. Unless they get acquired soon, the bank will be broke." The next morning, long lines of depositors waited outside of each Sixth National Bank branch. When the branches opened, depositors began withdrawing their funds. Sixth National Bank did not have enough funds to pay all the depositors and had to close early, which only further compounded the problem. Which one of the following financial risks is Sixth National Bank facing by not having enough cash on hand to meet the immediate demand? Select one: A. Credit risk. B. Default risk. C. Exchange rate risk. D. Liquidity risk.

D. Liquidity risk.

Which one of the following is an example of a noncurrent liability? Select one: A. Short-term debt B. Unearned revenue C. Accounts payable D. Long-term notes payable

D. Long-term notes payable

Which one of the following statements about the balance sheet is correct? Select one: A. The balance sheet contains important financial information about net worth and assets, both which indicate the source of an organization's funding. B. Change in asset and liability valuation from historical cost to fair value has no effect on the value of shareholders' equity. C. The balance sheet must always balance, but an exception is that the balance sheet will not balance if net worth is a negative number. D. Net worth is positive whenever the value of assets exceeds the value of liabilities and negative if the value of liabilities exceeds the value of assets.

D. Net worth is positive whenever the value of assets exceeds the value of liabilities and negative if the value of liabilities exceeds the value of assets.

A facility established for the purpose of purchasing income-producing assets from an organization, holding title to them and then using those assets to collateralize securities that will be sold to investors is Select one: A. A special purpose vehicle. B. A forward contract. C. An insurance derivative. D. A catastrophe bond.

A. A special purpose vehicle.

The basic accounting equation on which the balance sheet is structured is Select one: A. Assets = Liabilities + Net Worth B. Liabilities = Assets + Net Worth C. Net Worth = Liabilities + Assets D. Assets = Liabilities - Net Worth

A. Assets = Liabilities + Net Worth

The balance sheet provides a snapshot of an organization's financial condition Select one: A. At a given point in time. B. Over one 12 month period. C. For at least two points in time for comparison purposes. D. At the start and end of a business day.

A. At a given point in time.

A major benefit of involving a special purpose vehicle (SPV) in a securitization transaction is that investors can decide whether to invest in the securities based on the Select one: A. Risk presented by the income-producing assets held as collateral by the SPV. B. Organization's balance sheets. C. Number of borrowers involved and their individual risk. D. Overall credit risk of the organization.

A. Risk presented by the income-producing assets held as collateral by the SPV.

If an organization directly securitized its income-producing assets without using a special purpose vehicle (SPV) as an intermediary, investors Select one: A. Should not consider the overall credit risk of the organization. B. Must consider the overall credit risk of the organization. C. Would avoid investing in the organization altogether. D. Should examine individual borrowers' payments to the organization.

B. Must consider the overall credit risk of the organization.

The process of creating a marketable investment security based on the expected cash flows from a financial transaction is Select one: A. Trading. B. Securitization. C. Derivation. D. Investment.

B. Securitization.

Which one of the following statements is true about an organization's balance sheet? Select one: A. Total liabilities minus owners' equity equals total assets on the balance sheet. B. The balance sheet shows the financial position of a business on a specific date. C. Total assets must equal total liabilities on the balance sheet. D. The balance sheet summarizes revenues and expenses for an accounting period.

B. The balance sheet shows the financial position of a business on a specific date.

Jeremy purchased some long-term corporate bonds when he retired. He plans to use the periodic interest payments from the bonds to supplement his other sources of retirement income. However, some of the companies that issued the bonds that Jeremy purchased may become insolvent and unable to make periodic interest payments. This risk that Jeremy took when he invested in the corporate bonds is called Select one: A. Interest rate risk. B. Exchange-rate risk. C. Credit risk. D. Price risk.

C. Credit risk.

Owners' equity represents the capital contributed by an organization's owners plus the organization's Select one: A. Treasury stock. B. Net worth. C. Retained earnings. D. Net assets.

C. Retained earnings.

Home Housewares Inc. is a retail store applying for commercial coverage with ABC Insurance. The underwriter requested a copy of Home Houseware's most recent financial statements. The underwriter will use the balance sheet to determine Select one: A. Dividend payments to shareholders as of the balance sheet date. B. Home Houseware's financial position as of the balance sheet date. C. Home Houseware's sources of cash as of the balance sheet date. D. Home Houseware's gross profit margin as of the balance sheet date.

B. Home Houseware's financial position as of the balance sheet date.

A construction company based in the U.S. has building contracts in five different foreign nations. The construction company agreed to accept payment for its work in each country's currency. The risk of loss of value when these foreign payments are converted to U.S. dollars is called Select one: A. Pure risk. B. Liquidity risk. C. Exchange-rate risk. D. Credit risk.

C. Exchange-rate risk.

An organization can use securitization to exchange Select one: A. Debt for income-producing assets. B. Cash for income-producing assets. C. Income-producing assets for cash. D. Liabilities for mortgage receivables.

C. Income-producing assets for cash.

Like most insurance companies, the majority of Insurance Company's portfolio is invested in bonds. If interest rates increase, the value of the bonds in the portfolio will decrease. This risk to Insurance Company is called Select one: A. Liquidity risk. B. Credit risk. C. Interest rate risk. D. Price risk.

C. Interest rate risk.

One financial risk for an insurer is that the insured will not pay all of the premiums when the premiums are due. This type of risk is called Select one: A. Underwriting risk. B. Interest rate risk. C. Price risk. D. Credit risk.

D. Credit risk.

Which one of the following statements is true regarding a generic model of a securitization? Select one: A. The Special Purpose Vehicle (SPV) uses income-producing assets from investors to fund debt from the organization. B. Investors purchase securities from the organization that are then used as a guarantee for the purchase of income-producing assets. C. The SPV sells income-producing assets to the organization in exchange for securities purchased by investors. D. The organization sells income-producing assets to an SPV in exchange for cash.

D. The organization sells income-producing assets to an SPV in exchange for cash.

When the United States dollar appreciates against the euro, a)One dollar buys more euros than it had previously. b)Swiss banks are forced to hedge currencies to make up the difference. c)Imports rise because of demand for U.S. dollars. d)There is no effect on importing companies who use U.S. banks.

a)One dollar buys more euros than it had previously.

On a balance sheet, what is a term for the value calculated by subtracting liabilities from assets? a)Owners' equity b)Book value c)Surplus d)All of the above e)None of the above

d)All of the above

The activity of buying a bundle of mortgage loans and then selling to investors an interest in those income-producing assets is a)Prohibited if subprime home loans are involved. b)Transacted with a commercial mortgage broker. c)Required under statutory accounting as a means to mitigate financial risk. d)Performed by an intermediary known as a special purpose vehicle.

d)Performed by an intermediary known as a special purpose vehicle.

Jeremy purchased some long-term corporate bonds when he retired. He plans to use the periodic interest payments from the bonds to supplement his other sources of retirement income. However, some of the companies that issued the bonds that Jeremy purchased may become insolvent and unable to make periodic interest payments. This risk that Jeremy took when he invested in the corporate bonds is called Select one: A. Credit risk. B. Interest rate risk. C. Price risk. D. Exchange-rate risk.

A. Credit risk.

Jones, Inc. buys grain from local farmers and re-sells the grain to a number of customers. Jones, Inc. has been approached by Snack Cracker Company. Snack Cracker would like to purchase wheat and corn from Jones, Inc. to use in the crackers it produces. Snack Cracker would like to pay for the grain within 30 days of the date the grain is delivered. As Snack Cracker is a new customer, Jones, Inc. asked to review its financial statements. Which balance sheet ratio would best assist Jones, Inc. in determining if Snack Cracker can pay for the grain within 30 days of the sale? Select one: A. Current ratio B. Debt-to-assets ratio C. Debt-to-equity ratio D. Equity-to-assets ratio

A. Current ratio`