FIN 2

71. A major cause of mortgage market meltdown in 2007 and 2008 was linked to ________. A. globalization B. securitization C. negative analyst recommendations D. online trading

B. securitization

7. According to the Flow of Funds Accounts of the United States, the largest financial asset of U.S. households is ____. A. mutual fund shares B. corporate equity C. pension reserves D. personal trusts

C. pension reserves

6. ____ is not a derivative security. A. A share of common stock B. A call option C. A futures contract D. All of the above are derivative securities.

A. A share of common stock

4. A dollar denominated deposit at a London bank is called _____. A. eurodollars B. LIBOR C. fed funds D. banker's acceptance

A. eurodollars

1. Financial assets represent _____ of total assets of U.S. households. A. over 60% B. over 90% C. under 10% D. about 30%

A. over 60%

3. When computing the bank discount yield you would use ____ days in the year. A. 260 B. 360 C. 365 D. 366

B. 360

40. The historical average rate of return on the large company stocks since 1926 has been A. 5% B. 8% C. 12% D. 20%

C. 12%

18. Which of the following is not a nickname for an agency associated with the mortgage markets? A. Fannie Mae B. Freddie Mac C. Sallie Mae D. Ginnie Mae

C. Sallie Mae

29. Methods to encourage managers to act in shareholders' best interest include I. Threat of takeover II. Proxy fights for control of the Board of Directors III. Tying managers' compensation to stock price performance A. I only B. I and II only C. II and III only D. I, II and III

D. I, II and III

57. An important trend that has changed the contemporary investment market is _________. A. financial engineering B. globalization C. securitization D. all three of the other answers

D. all three of the other answers

50. Real assets represent about ____ of total assets for financial institutions. A. 1% B. 15% C. 25% D. 40%

A. 1%

20. The maximum maturity on commercial paper is A. 270 days B. 180 days C. 90 days D. 30 days

A. 270 days

46. In 2008 real assets represented approximately __________ percent of the total asset holdings of American households. A. 37% B. 42% C. 48% D. 55%

A. 37%

62. Stone Harbor Products takes out a bank loan. It receives $100,000 and signs a promissory note to pay back the loan over 5 years. A. A new financial asset was created in this transaction. B. A financial asset was traded for a real asset in this transaction. C. A financial asset was destroyed in this transaction. D. A real asset was created in this transaction.

A. A new financial asset was created in this transaction.

32. __________ are an indirect way U.S. investors can invest in foreign companies. A. ADRs B. IRAs C. SDRs D. CPCs

A. ADRs

75. An investment advisor has decided to purchase gold, real estate, stocks, and bonds in equal amounts. This decision reflects which part of the investment process? A. Asset allocation B. Investment analysis C. Portfolio analysis D. Security selection

A. Asset allocation

21. __________ portfolio construction starts with selecting attractively priced securities. A. Bottom-up B. Top-down C. Upside-down D. Side-to-side

A. Bottom-up

63. Which of the following firms was not engaged in a major accounting scandal between 2000 and 2005? A. General Electric B. Parmalat C. Enron D. WorldCom

A. General Electric

72. In recent years the greatest dollar amount of securitization occurred for which type loan? A. Home mortgages B. Credit card debt C. Automobile loans D. Equipment leasing

A. Home mortgages

15. Which one of the following best describes the purpose of derivatives markets? A. Transferring risk from one party to another B. Investing for a short time period to earn a small rate of return C. Investing for retirement D. Earning interest income

A. Transferring risk from one party to another

6. The most actively traded money market security is A. Treasury bills B. Bankers' Acceptances C. Certificates of Deposit D. Common stock

A. Treasury bills

19. _____ is a mechanism to mitigate potential agency problems. A. Tying income of managers to success of the firm B. Directors defending top management C. Anti takeover strategies D. Straight voting method of electing the board of directors

A. Tying income of managers to success of the firm

64. Accounting scandals can often be attributed to a particular concept in the study of finance known as the A. agency problem B. risk - return trade - off C. allocation of risk D. securitization

A. agency problem

14. Asset allocation refers to the _________. A. allocation of the investment portfolio across broad asset classes B. analysis of the value of securities C. choice of specific assets within each asset class D. none of the answers define asset allocation

A. allocation of the investment portfolio across broad asset classes

70. Real assets are ______. A. are assets used to produce goods and services B. always the same as financial assets C. always equal to liabilities D. claims on company's income

A. are assets used to produce goods and services

53. After considering current market conditions an investor decides to place 60% of their funds in equities and the rest in bonds. This is an example of A. asset allocation B. security analysis C. top down portfolio management D. passive management

A. asset allocation

33. Security selection refers to _________. A. choosing specific securities within each asset-class B. deciding how much to invest in each asset-class C. deciding how much to invest in the market portfolio versus the riskless asset D. deciding how much to hedge

A. choosing specific securities within each asset-class

17. An individual who goes short in a futures position A. commits to delivering the underlying commodity at contract maturity B. commits to purchasing the underlying commodity at contract maturity C. has the right to deliver the underlying commodity at contract maturity D. has the right to purchase the underlying commodity at contract maturity

A. commits to delivering the underlying commodity at contract maturity

24. The value of a derivative security _________. A. depends on the value of other related security B. affects the value of a related security C. is unrelated to the value of a related security D. can only be integrated by calculus professors

A. depends on the value of other related security

31. In securities markets, there should be a risk-return trade-off with higher-risk assets having _________ expected returns than lower-risk assets. A. higher B. lower C. the same D. Can't tell from the information given

A. higher

65. An intermediary that pools and manage funds for many investors is called a/an ______. A. investment company B. savings and loan C. investment banker D. ADR

A. investment company

5. According to the Flow of Funds Accounts of the United States, the largest liability of U.S. households is ________. A. mortgages B. consumer credit C. bank loans D. gambling debts

A. mortgages

5. Money market securities are sometimes referred to as "cash equivalent" because _____. A. they are safe and marketable B. they are not liquid C. they are high risk D. they are low denomination

A. they are safe and marketable

74. U.S. Treasury bonds pay interest every six months and repay the principal at maturity. The U.S. Treasury routinely sells individual interest payments on these bonds to investors. This is an example of ___________. A. unbundling B. bundling C. securitization D. security selection

A. unbundling

26. A T-bill quote sheet has 90 day T-bill quotes with a 4.92 bid and a 4.86 ask. If the bill has a $10,000 face value an investor could buy this bill for A. $10,000.00 B. $9,878.50 C. $9,877.00 D. $9,880.16

B. $9,878.50 10,000 X [1- ((.0486x90)/360)]

47. In 2008 mortgages represented approximately __________ percent of total liabilities and net worth of American households. A. 12% B. 15% C. 28% D. 42%

B. 15%

45. The combined liabilities of American households represent approximately __________ percent of combined assets. A. 11% B. 21% C. 25% D. 33%

B. 21%

15. Which of the following is not a true statement regarding municipal bonds? A. A municipal bond is a debt obligation issued by state or local governments. B. A municipal bond is a debt obligation issued by the Federal Government. C. The interest income from a municipal bond is exempt from federal income taxation. D. The interest income from a municipal bond is exempt from state and local taxation in the issuing state.

B. A municipal bond is a debt obligation issued by the Federal Government.

73. The process of securitizing poor quality bank loans made to developing nations resulted in the creation of __________. A. Pass-throughs B. Brady bonds C. WEBS D. FHLMC participation certificates

B. Brady bonds

11. Which one of the following is a true statement? A. Dividends on preferred stocks are tax-deductible to individual investors but not to corporate investors B. Common dividends cannot be paid if preferred dividends are in arrears on cumulative preferred stock C. Preferred stockholders have voting power D. Investors can sue managers for nonpayment of preferred dividends

B. Common dividends cannot be paid if preferred dividends are in arrears on cumulative preferred stock

7. ______ voting of common stock gives minority shareholders the most representation on the board of directors. A. Majority B. Cumulative C. Rights D. Proxy

B. Cumulative

60. Individuals may find it more advantageous to purchase claims from a financial intermediary rather than directly purchasing claims in capital markets because I. intermediaries are better diversified than most individuals II. intermediaries can exploit economies of scale in investing that individual investors cannot III. intermediated investments usually offer higher rates of return than direct capital market claims A. I only B. I and II only C. II and III only D. I, II and III

B. I and II only

37. Debt securities promise _________. I. a fixed stream of income II. a stream of income that is determined according to a specific formula III. a share in the profits of the issuing entity A. I only B. I or II only C. I and III only D. II or III only

B. I or II only

21. Which one of the following is a true statement regarding the Dow Jones Industrial Average? A. It is a value-weighted average of 30 large industrial stocks B. It is a price-weighted average of 30 large industrial stocks C. It is a price-weighted average of 100 large stocks traded on the New York Stock Exchange D. It is a value-weighted average of all stocks traded on the New York Stock Exchange

B. It is a price-weighted average of 30 large industrial stocks

68. In 2008 the largest corporate bankruptcy in the U.S. history involved the investment banking firm of ______. A. Goldman Sachs B. Lehman Brothers C. Morgan Stanley D. Merrill Lynch

B. Lehman Brothers

20. __________ are real assets. A. Bonds B. Production equipment C. Stocks D. Commercial paper

B. Production equipment

35. __________ portfolio construction starts with asset allocation. A. Bottom-up B. Top-down C. Upside-down D. Side-to-side

B. Top-down

34. An example of a derivative security is _________. A. a common share of General Motors B. a call option on Intel stock C. a Ford bond D. a U.S. Treasury bond

B. a call option on Intel stock

24. A bond that has no collateral is called _________. A. a callable bond B. a debenture C. a junk bond D. a mortgage

B. a debenture

23. A __________ represents an ownership share in a corporation. A. call option B. common stock C. fixed-income security D. preferred stock

B. common stock

14. Deposits of commercial banks at the Federal Reserve are called _____. A. bankers acceptances B. federal funds C. repurchase agreements D. time deposits

B. federal funds

66. Financial institutions that specialize in assisting corporations in primary market transactions are called _______. A. mutual funds B. investment bankers C. pension funds D. globalization specialists

B. investment bankers

30. Firms that specialize in helping companies raise capital by selling securities to the public are called _________. A. pension funds B. investment banks C. savings banks D. REITs

B. investment banks

59. Brady bonds were an example of _________. A. securitization B. mortgagization C. bundling D. pass through securities

B. mortgagization

55. The efficient markets hypothesis suggests that _______. A. active portfolio management strategies are the most appropriate investment strategies B. passive portfolio management strategies are the most appropriate investment strategies C. either active or passive strategies may be appropriate, depending on the expected direction of the market D. a bottom up approach is the most appropriate investment strategy

B. passive portfolio management strategies are the most appropriate investment strategies

56. In a perfectly efficient market the best investment strategy is probably a/an A. active strategy B. passive strategy C. asset allocation D. market timing

B. passive strategy

54. Suppose an investor is considering one of two investments which are identical in all respects except for risk. If the investor anticipates a fair return for the risk of the security they invest in they can expect to A. earn no more than the Treasury bill rate on either security B. pay less for the security that has higher risk C. pay less for the security that has lower risk D. earn more if interest rates are lower

B. pay less for the security that has higher risk

4. According to the Flow of Funds Accounts of the United States, the largest single asset of U.S. households is ___. A. mutual fund shares B. real estate C. pension reserves D. corporate equity

B. real estate

52. After much investigation an investor finds that Intel stock is currently under priced. This is an example of ______. A. asset allocation B. security analysis C. top down portfolio management D. passive management

B. security analysis

22. Treasury bills are financial instruments issued by __________ to raise funds. A. commercial banks B. the Federal Government C. large corporations D. state and city governments

B. the Federal Government

12. The bid price of a treasury bill is _________. A. the price at which the dealer in treasury bills is willing to sell the bill B. the price at which the dealer in treasury bills is willing to buy the bill C. greater than the ask price of the treasury bill expressed in dollar terms D. the price at which the investor can buy the treasury bill

B. the price at which the dealer in treasury bills is willing to buy the bill

2. Thirteen week T-bill auctions are conducted ____. A. daily B. weekly C. monthly D. quarterly

B. weekly

41. The average rate of return on U.S. Treasury bills since 1926 was _________. A. 0.5% B. 2.4% C. 3.8% D. 6.0%

C. 3.8%

48. Liabilities equal approximately _____ of total assets for nonfinancial U.S. businesses. A. 10% B. 25% C. 44% D. 75%

C. 44%

27. Which one of the following is a true statement regarding corporate bonds? A. A corporate callable bond gives its holder the right to exchange it for a specified number of the company's common shares B. A corporate debenture is a secured bond C. A corporate convertible bond gives its holder the right to exchange it for a specified number of the company's common shares D. Holders of corporate bonds have voting rights in the company

C. A corporate convertible bond gives its holder the right to exchange it for a specified number of the company's common shares

10. Which of the following is not a money market security? A. U.S. Treasury bill B. Six month maturity certificate of deposit C. Common stock D. Banker's acceptance

C. Common stock

69. The inability of shareholders to influence the decisions of managers, despite overwhelming shareholder support, is a breakdown in what process or mechanism? A. Auditing B. Public finance C. Corporate governance D. Public reporting

C. Corporate governance

13. The German stock market is measured by which market index? A. FTSE B. Dow Jones 30 C. DAX D. Nikkei

C. DAX

23. Which of the following are true statements about T-bills? I. T-bills typically sell in denominations of $10,000 II. Income earned on T-bills is exempt from all Federal taxes III. Income earned on T-bills is exempt from state and local taxes A. I only B. I and II only C. I and III only D. I, II and III

C. I and III only

36. Which one of the following firms falsely claimed to have a $4.8 billion bank account at Bank of America and vastly understated its debts, eventually resulting in the firm's bankruptcy? A. WorldCom B. Enron C. Parmalat D. Global Crossing

C. Parmalat

26. __________ portfolio management calls for holding diversified portfolios without spending effort or resources attempting to improve investment performance through security analysis. A. Active B. Momentum C. Passive D. Market timing

C. Passive

1. Which of the following is not a money market instrument? A. Treasury bill B. Commercial paper C. Preferred stock D. Banker's acceptance

C. Preferred stock

11. __________ assets generate net income to the economy and __________ assets define allocation of income among investors. A. Financial, financial B. Financial, real C. Real, financial D. Real, real

C. Real, financial

38. The Sarbanes-Oxley Act tightened corporate governance rules by requiring all but which one of the following? A. Required corporations to have more independent directors B. Required the CFO to personally vouch for the corporation's financial statements C. Required that firms could no longer employ investment bankers to sell securities to the public D. The creation of a new board to oversee the auditing of public companies

C. Required that firms could no longer employ investment bankers to sell securities to the public

44. Which of the following is not a financial intermediary? A. a mutual fund B. an insurance company C. a real estate brokerage firm D. a savings and loan company

C. a real estate brokerage firm

3. Net worth represents _____ of the liabilities and net worth of commercial banks. A. about 50% B. about 90% C. about 10% D. about 30%

C. about 10%

17. Security selection refers to the ________. A. allocation of the investment portfolio across broad asset classes B. analysis of the value of securities C. choice of specific securities within each asset class D. top down method of investing

C. choice of specific securities within each asset class

22. In a capitalist system capital resources are primarily allocated by ____________. A. governments B. the SEC C. financial markets D. investment bankers

C. financial markets

67. WEBS allow investors to _______. A. invest in U.S. mortgage backed securities B. invest in an individual foreign stock C. invest in a portfolio of foreign stocks D. avoid any exposure to foreign exchange risk

C. invest in a portfolio of foreign stocks

19. Commercial paper is a short-term security issued by __________ to raise funds. A. the Federal Reserve B. commercial banks C. large well-known companies D. the New York Stock Exchange

C. large well-known companies

25. A __________ gives its holder the right to sell an asset for a specified exercise price on or before a specified expiration date. A. call option B. futures contract C. put option D. interest rate swap

C. put option

61. Surf City Software Company develops new surf forecasting software. It sells the software to Microsoft in exchange for 1000 shares of Microsoft common stock. Surf City Software has exchanged a _____ asset for a _____ asset in this transaction. A. real, real B. financial, financial C. real, financial D. financial, real

C. real, financial

58. Securitization refers to the creation of new securities by _________. A. selling individual cash flows of a security or loan B. repackaging individual cash flows of a security or loan into a new payment pattern C. taking an illiquid asset and converting it into a marketable security D. selling financial services overseas as well as in the U.S.

C. taking an illiquid asset and converting it into a marketable security

39. The success of common stock investments depends on the success of _________. A. derivative securities B. fixed income securities C. the firm and its real assets D. government methods of allocating capital

C. the firm and its real assets

13. __________ are examples of financial intermediaries. A. Commercial banks B. Insurance companies C. Investment companies D. All of the above are financial intermediaries

D. All of the above are financial intermediaries

18. _____ is an example of an agency problem. A. Managers engage in empire building B. Managers protect their jobs by avoiding risky projects C. Managers over consume luxuries such as corporate jets D. All of the answers provide examples of agency problems

D. All of the answers provide examples of agency problems

27. Financial markets allow for all but which one of the following? A. Shift consumption through time from higher income periods to lower B. Price securities according to their riskiness C. Channel funds from lenders of funds to borrowers of funds D. Allow most participants to routinely earn high returns with low risk

D. Allow most participants to routinely earn high returns with low risk

2. Real assets in the economy include all but which one of the following? A. Land B. Buildings C. Consumer durables D. Common stock

D. Common stock

16. __________ was the first to introduce mortgage pass-through securities. A. Chase Manhattan B. Citicorp C. FNMA D. GNMA

D. GNMA

12. Which of the following are financial assets? I. Debt securities II. Equity securities III. Derivative securities A. I only B. I and II only C. II and III only D. I, II and III

D. I, II and III

42. An example of a real asset is _________. I. a college education II. customer goodwill III. a patent A. I only B. II only C. I and III only D. I, II and III

D. I, II and III

51. Money Market securities are characterized by ________. I. maturity less than one year II. safety of the principal investment III. low rates of return A. I only B. I and II only C. I and III only D. I, II and III

D. I, II and III

8. Active trading in markets and competition among securities analysts helps ensure that __________. I. security prices approach informational efficiency II. riskier securities are priced to offer higher potential returns III. investors are unlikely to be able to consistently find under- or overvalued securities A. I only B. I and II only C. II and III only D. I, II and III

D. I, II and III

49. Which of the following is not an example of a financial intermediary? A. Goldman Sachs B. Allstate Insurance C. First Interstate Bank D. IBM

D. IBM

16. Which of the following is not a characteristic of a money market instrument? A. Liquidity B. Marketability C. Low risk D. Maturity greater than one year

D. Maturity greater than one year

43. The 2002 law designed to improve corporate governance is titled the A. Pension Reform Act B. ERISA C. Financial Services Modernization Act D. Sarbanes-Oxley Act

D. Sarbanes-Oxley Act

28. Financial intermediaries exist because small investors cannot efficiently _________. A. diversify their portfolios B. gather information C. monitor their portfolios D. all of the answers provide reasons why

D. all of the answers provide reasons why

8. An investor in a T-bill earns interest by _________. A. receiving interest payments every 90 days B. receiving dividend payments every 30 days C. converting the T-bill at maturity into a higher valued T-note D. buying the bill at a discount from the face value received at maturity

D. buying the bill at a discount from the face value received at maturity

9. The material wealth of society is determined by the economy's _________, which is a function of the economy's _________. A. investment bankers, financial assets B. investment bankers, real assets C. productive capacity, financial assets D. productive capacity, real assets

D. productive capacity, real assets

25. A bond issue is broken up so that some investors will receive interest payments while others will receive principal payments. This is an example of _________. A. bundling B. credit enhancement C. securitization D. unbundling

D. unbundling