Financial Equity Securities Exam 1

"Commercial Paper" is a term used to describe short-term unsecured debt issued by large corporations. Which of the following statements is accurate when discussing the term commercial paper?

-Considered to be a fairly safe asset, given that a firm's condition presumably can be monitored and predicted. -Can sometimes be backed by a bank line of credit. -Referred to as "CP". -(answer) All three statements are true when discussing the term commercial paper.

Choose four government (mortgage-related) agencies that were created because Congress believed that adequate credit was not being received through normal private sources.

-Federal Home Loan Bank (FHLB) -Government National Mortgage Association (GNMA or Ginnie Mae) -Federal National Mortgage Association (FNMA or Fannie Mae) -Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac).

Which of the following are derivative securities? (Select all that apply.)

-Futures -Options

Which of the following are requirements of the Sarbanes-Oxley Act?

-Prohibits auditors from providing other services -CFOs personally vouch for accounting statements -More Independent Directors

Some common derivative securities include

-Put options -Call options -Futures

Who are the demanders of capital?

-The Federal Government -Corporations

Investment bankers advise an issuing corporation on

-appropriate interest rates -the price it can charge for a new security issued

Typical benefits to owning common stock include

-dividends -voting rights

A real asset (Select all that apply.)

-has productive capacity -could be intangible

The Dodd-Frank Wall Street Reform and Consumer Protection Act

-institutes the Volcker Rule -calls for stricter rules for bank capital, liquidity and risk management.

The U.S. government borrows funds in large part by selling long-term Treasury _____ and ____

-notes -bonds

After the securitization of mortgages, Fannie Mae and Freddie Mac quickly bought more than

50%

The U.S. government borrows funds in large part by selling Treasury notes and Treasury bonds. Which of the following is NOT a true statement about Treasury notes and bonds?

Both bonds and notes are short term instruments

True or false: In theory, stock prices reflect investor's collective assessment of a firm's current performance and future prospects. True false question.

True

True or false: Individuals who buy stocks on margin borrow part of the funds to pay for the stocks from their broker.The broker in turn may borrow the funds from a bank, agreeing to repay the bank immediately if the bank requests it.

True

True or false: Securities markets play an important role in facilitating the deployment of capital resources to their most productive uses. The markets need to be transparent for investors to make informed decisions.

True

True or false: T-bills are the most marketable of money market instruments or investments

True

True or false: Virtually all real assets involve some risk.

True

When an index return equals the weighted average of the returns of each component security, with weights proportional to outstanding market value, it is referred to as a ________ ____________ market index.

Value, Weighted

Start-up companies rely on bank loans and investors who are willing to invest in them in return for an ownership stake in the firm. What do you call the equity investment in these young companies?

Venture capital

A floating-rate bond promises payments that debt are

based on current interest rates

Corporate bonds are________ -term bonds issued by private corporations typically paying _______ coupons and returning the face value of the bond at maturity.

long semiannual

State and local government issued bonds whose interest income is usually exempt from tax are called ________ bonds.

municipal

Typically, each share of common stock entitles its owners to ________ vote(s) on any matters of corporate governance put to a vote at the corporation's annual meeting.

one

________ management calls for holding highly diversified portfolios without spending effort or other resources attempting to improve investment performance through security analysis. _________ management is the attempt to improve performance either by identifying mis-priced securities or by timing the performance of broad asset classes.

passive active

Another name for a repurchase agreement, or short-term sale of securities with an agreement to repurchase the securities at a higher price is a

repo

The real interest rates earned on TIP are

risk-free.

A futures contract calls for delivery of an asset at an agreed upon price; the _______ position delivers the commodity upon maturity.

short

In the years leading up to the financial crisis, a large number of mortgage backed securities were composed of riskier loans made to financially weaker borrowers. These mortgages were known as

subprime mortgages

A credit default _______ is, in essence, an insurance contract against the default of one or more borrowers.

swap

The principal amount in TIPS is adjusted in proportion to increases in

the Consumer Price Index.

Prior to the Great Recession of 2007-2009, the last major macroeconomic threat was

the collapse of the high-tech bubble.

The return on the S&P 500 equals

the return from holding all 500 firms in proportion to their market value.

What management is the attempt to improve performance either by identifying mispriced securities or by timing the performance of broad asset classes.

Active

management is the attempt to improve performance either by identifying mispriced securities or by timing the performance of broad asset classes.

Active

Which of the following defines a "bankers' acceptance".

An order by a customer to pay a sum of money at a future date.

Which of the following financial assets are included in household wealth?

Bank accounts, corporate stock, and bonds

What is a dollar-denominated bond sold in Britain called?

Eurodollar Bond

True or false: Despite being located outside the United States, foreign banks are under the regulation of the Federal Reserve Board.

False

True or false: Financial assets determine the wealth of an economy, while real assets merely represent claims on financial assets.

False

If Congress believes a particular sector of the economy is not receiving adequate credit through normal private sources it may form government agencies to channel that credit. These agencies can issue _______________ to finance their activities.

Federal Agency Debt

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 fundamental difference between real and financial assets is that real assets

have productive capacity.

If lenders have limited capital during a period of heightened uncertainty, such as the Financial Crisis of 2007-2009, they will most likely

hoard their capital.

Preferred stock is like a bond in that it

typically does not confer voting rights to its holder.

Angel investors are

wealthy individuals who invest in start-ups.

An investment is

forgone current consumption for expected future benefit.

A futures contract calls for delivery of an asset at an agreed upon price, called the _________ price.

future

If a market signals contain accurate information available to investors, then the market is said to be______ .

transparent

What is a primary role of the Board of Directors

Act as oversight to management

At what denomination level is a certificate of deposit terms typically negotiable at?

$100,000

Which of the following statements is NOT true about the Dow Jones Industrial Average (DJIA)?

- (answer) The DJIA continues to equal the average price of the 30 stocks in the index. -The Dow measures the return on a portfolio that holds one share of each stock. -The Dow is called a price-weighted average, computed by adding the prices of the stocks and dividing by a divisor. -The Dow Jones Industrial Average has been computed since 1896

Which of the following are financial assets?

-A bond -A share of stock

Which of the following are examples of Financial Intermediaries?

-Commercial Banks -Insurance Companies -Credit Unions

What are some common securities found in the bond market?

-Corporate bonds -Treasury Notes

Which of the following real assets have some risk associated with it(them)?

A factory

Mortgage Backed Securities are

Claims on Bundles of mortgages

Fixed-income securities otherwise known as _________ securities promise either a fixed stream of income or a stream of income that is determined according to a specific formula. (Enter one word per blank.)

Debt

CDSs allow the purchaser to buy protection from what type of risk?

Credit Risk

Which of the following are characteristic of private equity investors?

Hands-on management Equity ownership

Firms specializing in the sale of new securities to the public, typically by underwriting the issue are called ___________ bankers.

Investment

What are private equity investments?

Investments in firms that do not trade on a public stock exchange.

Which of the following would all be considered real assets?

Land, buildings, and equipment

________ liability means that the most shareholders can lose in event of the failure of the corporation is their original investment.

Limited

Which financial shenanigan was WorldCom guilty of in the early 21st Century?

Overstating Profits

Which of the following companies is NOT known for scandals and misleading the public, creating a crisis in corporate governance and ethics, between the years of 2000 and 2008

Procter and Gamble (P&G)

Each member of the Federal Reserve System is required to maintain a minimum balance in a _________ account with the Fed.

Reserve

What is most likely the low-earnings period for which the sale of financial assets be most useful? Multiple choice question.

Retirement

Which type of municipal bond is used to finance a particular project?

Revenue Bond

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

Which of the following statements is NOT true about equity.

Shareholders with equity are promised particular payments.

The money market is a subsector of the debt market consisting of very ________ term debt securities that are highly marketable

Short

When discussing stock prices, which of the following statements is NOT true?

Stock prices do not play a major role in the allocation of capital in market economies.

What is defined as a potential breakdown of an entire system stemming from disruption caused by one market spilling over into other markets?

Systemic Risk

Identify the correct statement about certificates of deposit?

They are treated as bank deposits by the Federal Deposit Insurance Corporation.

dentify the correct statement about certificates of deposit?

They are treated as bank deposits by the Federal Deposit Insurance Corporation.

The bond market is composed of longer-term borrowing or debt instruments than those that trade in the money market. Which of the following does this market NOT include?

Treasury Bills

Which of the following statements is NOT true about Treasury bills?

Treasury Bills are long-term government securities issued at a discount.

Equity is an ownership share in a corporation.

True

True or false: Although most money market securities are of low risk, they are not risk-free.

True

True or false: Equally weighted indexes do not correspond to buy and hold portfolio strategies.

True

Preferred stock is closest in form and structure to

a perpetutity

Initially, a bankers' acceptance is essentially

a postdated check.

A derivative asset is a security with a payoff that depends on the prices of other _________

asset or securities

Mortgage backed securities were traditionally composed of loans which had to satisfy certain underwriting guidelines before they could be purchased by Fannie Mae or Freddie Mac. These mortgages were known as

conforming mortgages

Fixed-income securities otherwise known as _________ securities promise either a fixed stream of income or a stream of income that is determined according to a specific formula.

debt

A _______ is a bond denominated in a currency other than that of the country in which it is issued, though it may be best to think of them simply as international bonds.

eurobond

A call option will only be exercised if the market price ______ the strike price.

exceeds

Firms specializing in the sale of new securities to the public, typically by underwriting the issue are called _______ bankers.

investment

A put option will only be exercised if the market price ______ the strike price.

is less than

Most money market securities trade in ________ denominations.

large

Debt securities are ________ of the issuers of those securities.

liabilities or liability

A derivative security's payoff is based on

other asset prices

Expected Return and Risk are ______.

positively correlated

The Dow Jones Industrial Average is considered a _________ weighted average.

price