Chapter 3 and 4 Quiz

A major factor of the collapse of the U.S. banking system in the 1930s was the high number of long-term mortgages outstanding.

False

Agents never have incentives to pursue behavior which is detrimental to their principals.

False

It is impossible for the cash flow on a project to be positive if the taxable income is negative.

False

Negative financial leverage occurs when the cost of debt is greater than the equity yield on the investment.

False

Removing the rate ceilings on deposits in thrifts in the early 1980s eliminated the maturity mismatch problem that these institutions had previously suffered.

False

The adjustable-rate mortgage allows the borrower to shift all or some of the interest rate risk to the lender.

False

The falling house prices in the mid-2000s generated greater equity positions for those buyers who recently purchased a home.

False

The instrument called hypotheca allowed the lender to take possession of the property only in the event of default.

False

The term "toxic mortgage debt" in the 2000s referred to mortgages on properties contaminated by hazardous waste.

False

Under the semi-strong form of market efficiency, an investor could earn excess returns using private or inside information.

False

When a residential mortgage is created, the mortgagee (lender) acquires a call option which allows the debt to be retires at any time prior to maturity.

False

A homeowner incurring a residential mortgage acquires a put option which is generally exercised when the value of the property is less that the amount owed on the mortgage.

True

Disintermediation is the process of funds flowing out of financial institutions.

True

Favorable financial leverage occurs when the cost of debt is less that the return on the investment.

True

In using the discounted cash flow model, the valuation of an asset depends on the expected amount, timing, and risk associated with the project's cash flows.

True

Influence on current U.S. law related to real estate can be traced all the way back to the Roman Empire.

True

Mortgages bankers came into prominence with the westward expansion following the Civil War.

True

Negative amortization increases the risk of default since, at some point, the balance of the mortgage cold exceed the value of the property.

True

The Federal National Mortgage Association was originally established in 1938 for the purpose of buying FHA mortgages.

True

The maturity mismatch problem faced by many financial institutions resulted from holding liabilities with much longer lives than their assets.

True