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