Exam 1 - FIN460 - CSULB

Kahneman quote from Vanity Fair article

"the agent of economic theory is rational, selfish, and his tastes do not change"

The foreign exchange market is the largest of all financial markets , with daily turnover exceeding _____ per day in 2019 .

$ 8.3 trillion

The SEC defines large investors as those with assets of ______ or more, or income above ________ per year in the last two years.

$1,000,000; $200,000

The SEC defines large investors as those with assets of ______ or more, or income above ________ per year for families in the last two years.

$1,000,000; $300,000

Corporate bonds are long-term bonds with a minimum denomination of ______ and coupons that are paid _______.

$1,000; semiannually

Corporate bonds are long-term bonds with a minimum denomination of ____ and coupons that are paid ____.

$1000; semiannually

*A one-year, $1000 par value corporate bond has a coupon rate of 8% (paid semiannually). The real rate of interest is 2%. This year's inflation rate was 2% and is expected to increase to 3% over the coming year. The Default Risk Premium on similar corporate bonds is 2%. This bond's price (fair value) is:

$1009.50 (insert how to solve)

The components of a Treasury STRIP are issued to investors in minimum denominations of ______ or in multiples of ______.

$100; $100

The annual income range in which the greatest percentage of adults are invested in stocks is

$100k and over

As of December 2018, the total dollar amount of primary mortgages outstanding was roughly

$15 trillion.

If the reserve requirement is 10% and a bank has $100,000 in checking deposits, 50,000 in savings deposits, and has made $20,000 in loans to businesses, what is the bank's required reserves?

$15,000

*Through open market operations, the Fed purchases Treasury securities totaling $200 million. If the reserve requirement is 10%, what is the total change in the money supply associated with these Treasury purchases?

$2 Billion (change in money supply= (1/reserve requ.) x (change in reserves) =(1/.10) x 200M=$2,000M, or $2 Billion

How much will required reserves increase as a result of this deposit?

$2,500

The daily volume of electronic payments processed through the Fedwire and CHIPS systems is approximately

$4.5 trillion

What is the maximum increase in the money supply that occurs if there is a new deposit of $100?

$400

The minimum denomination for municipal bonds is typically

$5,000.

If Ygritte deposits $1000 into her checking account in the Third Bank of Westeros, how much will the bank have in excess reserves?

$750

Which of the following equations represents the relationship between savings and investment in a closed economy?

(Y−C−T)+(T−G)=I

Financial institutions encourage investment by savers by offering investments in _____ , ______and _______

- Annuities - pension funds - life insurance

During the past 30 years, reversal of some of the trends that have reshaped the financial industry are

- Changes in regulatory barriers - Financial innovation changes - Changes in Technology

If this bank sells all of the bonds it holds to the central bank, how much does this bank have in excess reserves?

$18,000

which of the following are money market securities sold on a single payment basis?

-CDs -federal funds

what are the major US stock market indexes?

-Dow Jones Industrial Average -NYSE -S&P 500 index -Wilshire 5000 Index

class C

10 votes per share. founders

The major forward market participants are

Broker-dealers commercial banks investment banks

Bond ratings provide investors with a ranking of the _____ of a bond issue

Default risk

nobel prize is 2013. split between

Fama, Shiller, Hansen

GSEs

Government Sponsored Enterprises such as Fannie Mae or Freddie Mac

Level 1 ADR's are traded only on the

OTC market .

If banks decide to keep fewer excess reserves and instead lend more, which of the following is the most likely effect?

The nominal interest rate decreases.

evidence for weak form

Young Eugene Fama

For a callable bond, the difference between the face value of the bond and the call price paid is the

call premium.

_____ are long term obligations issued by corporations

corporate bonds

The major issuers of bond market securities (borrowers) are

corporations; governments

Federal reserve banks are responsible for the collections and replacement of _______ from circulation

currency

economic linkages

customers and suppliers

semi-strong... what does it do

debatable

What are the risks associated with financial intermediation?

default risk, liquidity risk, insolvency risk

if take out top,

doesn't effect ones below it

If the price of the underlying stock is less than the strike price "X", the put option is said to be

in the money

implications for strong firm

insider trading should be unprofitable

Returns with simple interest rates

interest earned on principal only

corporate bonds may be either ______ or _______ grade

investment or speculative

Second Mortgages

loans secured by a piece of real estate already used to secure a first mortgage

The ____ the interest rate "r," the ____ the value of FV.

lower, lower; higher, higher

in 2016, the single largest holder of mortgages were

mortgage pools

Alt-A mortgages

mortgages that are considered riskier than a prime mortgage and less risky than a subprime mortgage

corporate bonds primary markets are identical to that of ______

munis

The decrease in funds demanded with increasing interest rates will lead to a demand curve that is ______ sloped

negatively

Busse-Green CNBC

news good- reflected in stock price in 3 minutes news bad- reflected in 15 minutes.

One "discount point" paid up from equals _______ of the principal value of the mortgage.

one percent

Futures trading occurs on

organized exchanges

Between 1990 and 2018, markets in _______ grew more than markets in other parts of the world as a percent of worldwide stock market capitalization.

pacific basin

Bidders at the stop out yield may receive a ______ of their allotment

prorata share

The theory that describes how the exchange rate between two countries will adjust due to differences in inflation between the two countries is called

purchasing power parity .

The period of time between the firm's filing of the registration statement with the SEC and the selling of shares is referred to as the

quiet period

As interest rates _______, the payoff of a call option on a bond _______.

rise ; falls fall ; rises

evidence against semi takes out

semi and strong

The two types of securities that investors most often associate with capital markets are

stocks and bonds

The principal amount of a second mortgage is limited by

the borrower's equity in the property

Nominal interest rates tend to _____________ over time.

vary

Hedging reduces a firm's risk by reducing the

volatility of future returns .

Common shareholders have the right to _____ on major issues in the firm , such as the election of the board of directors .

vote

Common shareholders have the right to _______ on major issues in the firm, such as the election of the board of directors.

vote

Preferred shareholders are granted ________ only if the firm has _______.

voting rights ::: missed preferred dividend payments

short sell

when news is bad. takes time and money to set up. This is evidence for semi-strong

The major suppliers of securities for capital markets are

- Corporations - governments

To encourage continued expansion in the housing market and to provide competition for Fannie Mae, the US government created _______ and ________ in the late 1960s.

- Freddie mac (FHLMC) - Ginnie Mae (GNMA)

Two important characteristics of capital market securities are

- Maturity greater than one year - Wider price fluctuations than MM securities

In a world without financial institutions where suppliers provided funds directly to users, suppliers of funds would face three types of risks/costs. These are

- Monitoring cost - liquidity cost - price risk

The decline of the share of assets held by commercial banks between 1948 and 2016 is due to

- Strict capital regulations - Regulations imposed during the financial crisis - low interest rates

For a minimum payment option ARM, once the principal has reached 110 to 115 percent of the original loan balance, the borrower loses the minimum payment option and the loan must convert to (choose all that apply)

- a fully amortizing option arm - an interest only option arm

Two of the most important payment services provided by financial institutions to the economy are _______ and ________

- check clearing - wire transfers

In the "originate and hold" model, financial institutions are exposed to risks, including which of the following

- credit risk -liquidity risk - interest rate risk

When a U.S. corporation or investor receives currency cash flows, the U.S. dollar value of those cash flows will _______ if the foreign currency ________ against the U.S dollar

- increase;appreciate -decrease;depreciation

Selling/securitizing mortgages reduces which of the following types of risks of the originating financial institution?

- interest rate risk -credit risk -liquidity risk

The financial institutions that experienced a dramatic increase in their share of total FI assets during the period 1948 - 2016 are

- investment companies - securities broker/dealers - pension funds

The initial primary market sale for corporate bonds occurs through which of the following methods? -A public auction limited to qualified investors -A public offering using an investment bank as underwriter -A subscription sale that targets wealthy individual investors -A private placement to a small group of investors

-A public offering using an investment bank as underwriter -A private placement to a small group of investors

international trends-takeawaays

-US has the largest stock market in the world -emerging markets are increasing in importance as well

pros of investing globally

-ability to diversify risk (when US firms do poorly, firms in other countries may do well) -exposure to growth in wealth of emerging countries

a negotiable certificate of deposit has which of the following characteristics?

-bank issued time deposit -most common denomination is 1 million -can be traded in secondary market

what are frictions

-corruption -lack of legal protection -microstructure issues

how do we calculate stock price

-discount the cash flows -On September 20, $4.50 all information -On October 1, $7.50 all informatio

is the stock market rigged

-due to micro structure, some investors do have an advantage -the returns are small, but volume is large. this can affect nearly all investors in the market

CNBC basic information about positivity

-early sales of new drug "Concerta" is strong -prescriptions have surpassed that of Ritalin -peak sales potential in excess of $300M -analyst recommends that investors buy the stock

The three tools that the federal Reserve Bank can use to implement monetary policy are

-executing open market operations -adjusting the discount rate -adjusting bank reserve requirements

the federal reserve bank generate income primarily from 3 sources,

-fees from provision of services to banks -interest earned o n governments securities held -interest earned on bank reserves

The three major bond rating agencies are

-fitch ratings -sp standard and poor's -moody's

For all three bond rating agencies, ______ risk results in a ______ bond rating.

-higher/lower -lower/higher

The major purchasers of bond market securities (investors) are

-households, governments,. corporations, foreign investors

For inflation-indexed Treasury notes and bonds, the semiannual coupon payment is calculated using the _______ and the _______. -inflation-adjusted principal value; semiannual coupon rate -original principal value; semiannual coupon rate -original principal value; annual coupon rate -inflation-adjusted principal value; annual coupon rate

-inflation-adjusted principal value; semiannual coupon rate

cons of investing globally

-lack of information can make it difficult to evaluate firms in other countries -exchange rate risk -political/sovereign risk -different regulation standards in US than other countries

who has exposure to stock holdings

-many people have exposure through mutual and pension funds -stock market participation peaked at 65% in 2007, down to 52% in 2013 -median family income is $57k

CNBC example basic information

-newscaster will report (live) information about the drug company ALZA -information is from Bank of America security analyst (Jerry Treppel) -the information is positive -as the information is being released on TV, investors are trading -time zero is when ticker symbol appears onscreen (6 seconds in) -transaction prices are plotted in red. mid-quotes (average of the bid and ask price) are plotted in white -there were 29 trades from -15 minutes to time 0 -there were 29 trades from 0 to 1 minute -there were 125 trades from 0 to 15 minutes -the average trade size is roughly 70000 -1.7 million traded from time -15 to 0 -9 million traded from 0 to 15 minutes -Bank of America analyst, Jerry Treppel's price target was 80. stock closed above 80 within a month -ALZA corp was bought as a wholly owned subsidiary of J&J in June of 201

examples of irrationality

-overconfidence. survey results overconfidence. people think they're above average -framing bias: read a story and throw math out the windo

The supervisory and regulatory activities of each federal reserve banks in it's district includes the authority to do which of the following?

-perform examinations and inspections -approve expanded activities -issue warnings

is the stock market always right? can it be wrong

-prices are the best unbiased expectation of future cash flows -no concept of "right" and wrong

the initial primary market sale for municipal bonds occurs through which of the following methods

-private placement to a small group of investors -a public offering using an investment bank as underwriter

is the stock market too volatile

-returns and risk should be proportional (according to efficient markets) -Shiller (and others) think stocks are too volatile

The twelve members of the federal open market consists of which of the following?

-seven members of the board of governors -four of the presidents -president of new york fed

which of the following characteristics of commercial paper?

-short term promissory notes -unsecured -issued primarily by companies with strong credit ratings

The characteristics of international bond markets are that bonds are (choose four) -offered in registered form. -traded outside the jurisdiction of any single country. -offered to investors in different countries. -free from exhange rate risk. -offered in unregistered form. -underwritten by an international syndicate.

-traded outside the jurisdiction of any single country. -offered to investors in different countries. -offered in unregistered form. -underwritten by an international syndicate.

why are indices important

-used to understand economic changes (leading indicator) -used in passive investing -used in event studies

what is a dual-class firm? Why do firms typically issues dual classes of common stock?

. Dual-class firms are corporations in which two classes of common stock are outstanding with differential voting rights assigned to each class in various ways. For example, inferior voting rights have been assigned by i) limiting the number of votes per share on one class relative to another, ii) limiting the fraction of the board of directors which one class could elect relative to another, or iii) a combination of these two. To offset the reduced voting rights, inferior class shares are often assigned higher dividend rights. Dual-class firms have often been used in corporations owned and controlled by a single family or group turning to the public market to raise capital through the issue of new shares. To retain voting control over the firm, the family or group issues the dual classes of stock, keeping the high voting stock for themselves and selling the limited voting shares to the public. In all other respects the shares of the two classes are often identical. Because dual-classes of stock have often been used by a small group (i.e., family managers) to entrench themselves in the firm, dual-class firms are controversial.

One "discount point" paid up front equals __________ of the principal value of the mortgage.

1 %

On the NYSE, ______ dealer(s) may make a market in a particular stock, while on the NASDAQ, ______ dealer(s) may make a market for a particular stock.

1 :: many

class B

1 vote per share. employees, founders, venture capital, and directors

Most eurodollar CD's maturity of ________ to _________

1 week; 6 months

types of organized exchanges

1) NYSE 2) NASDAQ

Two important characteristics of federally insured mortage loans are

1) There is a maximum loan size limit 2) little or no down payment is required

what changes stock price

1) announcement 2) new information like unpredictable, timing unknown, good/bad?

Implications of efficient market hypothesis

1) fair returns 2) rewards exist 3) market prices are not "right" or "wrong" 4) passive index funds are the best investment

secondary markets

1) organized exchange 2) decentralized markets

3 ways to create an index

1) price-weighted average 2) value-weighted average 3) equally weighted

what are the potential flaws with the behavioral critique

1) relies on irrationality 2) relies on lab experiments 3) lack of unified framework 4) lack of impact on stock prices 5) limits to arbitrage

major characteristics of common stock

1) residual claim status 2) voting rights 3) discretionary dividend payments 4) limited liability

steps for event study

1) run regression to estimate B and X 2) predict the expected return 3) calculate abnormal return

3 points against EMH

1) stock prices are much more volatile than the underlying dividend stream 2) anomalies 3) sentiment 4) economic linkages

Treasury notes have original issue maturities from over _____ to _____ years.

1-10

3 major bond rating agencies:

1. Moody's 2. Standard and Poor's (S&P) 3. Fitch

The coupon interest paid periodically on a bond is calculated as the product of the _______ and the _______ of the bond.

1. coupon rate 2. face value

Characteristics of treasury notes and bonds:

1. default risk free 2. low returns 3. interest rate risk 4. liquidity risk

corporate bond secondary markets include:

1. exchange market 2. over-the-counter market

the major issuers of debt market securities are:

1. federal 2. state 3. local gov 4. corporations

no matter the agency you choose for bond ratings, there are 2 draft categories:

1. good ones- investment rates 2. not so good- speculant rates (usually higher, larger default risk)

additional complexities in international bond investing:

1. higher risk; political risks higher 2. lower recourse in the event on non-repayment 3. foreign exchange rate movements can significantly impact returns

major purchasers of capital market securities are:

1. households 2. businesses 3. government units 4. foreign investors

motivations for international bond investing:

1. potentially higher returns 2. better diversification

The U.S. Treasury issues Treasury notes and bonds to finance ______ and ______.

1. the national debt 2. other government expenditures

functions of municipal bonds:

1. to fund imbalances between expenditures and receipts 2. to finance long term capital outlays

types of instruments sold on the bond markets:

1. treasury notes (t-notes) and bonds (t-bonds) 2. municipal bonds (munis) 3. corporate bonds

Electronic communications networks (ECN) now process about ______ of all trading and _______ extended-hours trading.

1/3 ::: almost all

T-note or t-bond coupon rate is rounded down from stop yield to the nearest _____ if needed

1/8th

Treasury bonds have original issue maturities from over ____ years

10

One stock option gives the holder the right to buy or sell ______ shares of the underlying stock.

100

Corporate bonds are long-term bond with a minimum denomination of _______ and coupons that are paid________

1000;semiannually

The par value of a treasury security to be resold as a strip must be in an amount that will provide semiannual coupon payments of _______ or a multiple of ________

100;100

From 1992 through 2015, U.S. investors holdings of foreign financial market debt securities increased by a factor of about

10x

Fully amortizing option ARM's are usually available in _______ and _______ year maturities.

15 ; 30

The most common mortgage maturities are _______ and _______ year, with fixed interest payments

15 ; 30

As of December 2018, the total dollar amount of primary mortgages outstanding was roughly

15 trillion

Fully amortizing option ARMs are usually available in ______-year and ______-year maturities.

15; 30

The most common mortgage maturities are ______ and ______ year, with fixed interest payments.

15; 30

Fully amortizing option ARMs are usually available in ______-year and ______-year maturities.

15;30

The euro officially started trading in January of the year

1999 .

Treasury notes have original issue maturities from over ____ to ____

1; 10

Treasury notes have original issue maturities from over _____ to _____ years.

1; 10

Concerned with the affect that high-speed anonymous trading could have in the stability of exchanges, the SEC banned naked access trading in

2010

Concerned with the affect that high-speed anonymous trading could have on the stability of exchanges, the SEC banned naked access trading in

2010

Borrowers whose down payment is less than ____ percent of the purchase price are required to purchase

20; private mortgage insurance

Borrowers whose down payment is less than _______ percent of the purchase price are required to purchase ________.

20; private mortgage insurance

A 10 year Treasury note can be separated into ______ individual STRIP securities

21

A 10-year Treasury note can be separated into ______ individual STRIP securities. 20 10 21 11

21

debt financing percentage for public firms

23%

Once a stock transaction is completed on the NYSE, settlement occurs within ______ days.

3

On average, less than _______ percent of the total possible votes are cast at corporate shareholders' meetings.

30

The Dow Jones Industrial Average includes the values of ___ large successful firms of interest to investors .

30

The Dow Jones Industrial Average includes the values of ____ large successful firms of interest to investors

30

The Dow Jones Industrial Average includes the values of ______ large successful firms of interest to investors.

30

The age range in which the greatest percentage of adults are invested in stocks is

30 - 64

to convert a single payment yield to a bond equivalent yield, you mush multiply the single payment yield by

365/360

Over the period 1994 to 2019, approximately ______ to ______ percent of the U.S. national debt consisted of Treasury notes and bonds.

40;60

In Lincolnland the reserve requirement is 20% and banks keep no excess reserves. What is money multiplier?

5

The minimum denomination for municipal bonds is typically

5000

in 2016, over _______ percent of all residential mortgages were sold or securitized

60

in 2019, over ________ percent of all residential mortgages were sold or securitized.

65

in 2019, over ________ percent of all residential mortgages were sold or securitized.

65%

internal financing percentage for public firms

68%

equity financing percentage for public firms

7%

what is layout of people for and against EMH

70% for 30% against

Approximately ___ percent of all futures contracts are liquidated before maturity by taking an offsetting position .

99

EAR

=(1+r/c)^c -1

t-bonds have original maturities of ______

> 10 years

order book

A DMM's record of unexecuted limit orders.

The interest rate spread is the difference between the yield on ____ and the yield on ____

A bond; a treasury security of similar maturity

In 2006, two events occurred that acted as triggers for the financial crisis of 2008. They were:

A decline in housing prices, an increase in interest rates by the Fed

The development of online banking has made it easier for people to move wealth to cash from other forms of assets. What change would counteract the effect of this on the nominal interest rate?

A decrease in the money supply

Which of the following best describes an event that could cause the change shown in the graph?

A government runs a budget deficit

Which of the following increases the demand for money?

A higher price level

Prices of treasury notes and bonds are quoted as ____ of the ____ of the security.

A percentage; face value

The initial primary market sale for municipal bonds occurs through which of the following methods?

A private placement to a small group of investors A public offering using an investment bank as underwriter

red herring prospectus

A prospectus issued before the effective date of a securities registration statement; permissible to release these before the registration statement is effective so long as a disclaimer that it is not an offer to sell securities is noted in red on the prospectus.

The initial primary market sale for corporate bonds occurs through which of the following methods:

A public offering using an investment bank as an underwriter. A private placement to a small group of investors.

The initial primary market sale for corporate bonds occurs through which of the following methods?

A public offering using an investment bank as underwriter A private placement to a small group of investors

Rounding the stop-out yield for a treasury not or bond down to the nearest 0.125 percent ensures that the issue will sell at

A slight discount

*Investment XYZ pays 5 percent simple interest for 10 years. Investment ABC pays 4.50 percent compound interest for 10 years. As an investor with $10,000, you would choose investment ______ and earn an additional _____ in interest.

ABC; $529.69 (Simple Interest= [r*PV]*t) Compound interest=A[(1+r)^t-1])

The system that was jointly developed by the federal reserve and the private sector to be a nationwide network to electronically process credit and debit transfers of funds is the _____ system

ACH

describe the three forms of stock market efficiency

According to the weak form market efficiency, current stock prices reflect all historical public information. Thus, historical price trends are of no help in predicting future stock price movements. Under weak form market efficiency, historical news and trends are already impounded in historical prices and are of no use in predicting today's or future stock prices. Thus, weak from market efficiency concludes that investors cannot make more than the fair (required) return using information based on historical price movements. The semistrong market efficiency focuses on the speed with which public information is impounded into stock prices. According to the concept of semistrong market efficiency, as public information arrives about a company it is immediately impounded into its stock price. For example, semistrong form market efficiency states that a common stock's value should respond immediately to unexpected news announcements by the firm regarding its expected future earnings. Thus, if an investor calls his or her broker just as the earnings news is released he or she cannot earn an abnormal return. Prices immediately adjust. According to semistrong form market efficiency investors cannot make more than the fair (required) return by trading on public news releases. The strong form of market efficiency states that stock prices fully reflect all information: both public and private. Thus, according to strong form market efficiency even learning Ainside@ information about the firm is of no help in earning more than the required rate of return. As insiders get private information about a firm, the market has already reacted to it and has fully adjusted the firm=s common stock price to its new equilibrium level. Thus, strong form market efficiency implies that there is no set of information that allows investors to make more than the fair (required) rate of return on a stock.

For a Treasury note or bond, the accrued interest is calculated by multiplying the semiannual coupon payment times ______ divided by ______.

Actual days since last coupon; actual days in coupon period

For a treasury note or bond, the accrued interest is calculated by multiplying the semiannual coupon payment times ____ divided by ____

Actual days since last coupon; actual days in coupon period

To boost their earnings in the risky subprime mortgage market and take advantage of low interest rates, mortgage lenders offered ____ mortgages with very low initial rates

Adjustable rate

Option ARMS

Adjustable rate mortgages that offer the borrower several monthly payment options

evidence for semi strong

Air Tran. quickly incorporated then flat

A(n) _______ gives the option holder the right to buy or sell the underlying asset at any time before and on the expiration date of the option.

American option

NYSE Euronext also operates the ____ market, where OTC and pink sheet stocks are traded

ArcaEdge

NYSE Euronext also operates the ______ market , where OTC and pink sheet stocks are traded .

ArcaEdge

NYSE Euronext also operates the _______ market , where OTC and pink sheet stocks are traded .

ArcaEdge

NYSE Euronext also operates the _______ market, where OTC and pink sheet stocks are traded.

ArcaEdge

Mortgages differ from most other types of debt securities (except mortgage bonds) in that mortgages

Are backed by real property

Unlike with other mortgage-backed securities, the mortgages used as collateral for mortgage backed bonds normally ____ the security issuer's balance sheet

Are not removed from

The ____ is the yield to maturity in the Treasury STRIP using the ____ in the calculation.

Asked yield; ask price

When a financial institution accepts short-term deposits from investors and uses those funds to issue long-term loans to borrowers, they are engaging in

Asset transformation

Which of the following best describes why the demand for loanable funds is downward sloping?

At higher interest rates, the return to investments will be lower

A sinking fund provision is ____ to investors, so bonds with a sinking fund provision generally have ____ yields than bonds without.

Attractive; lower

Due to the presence of a mortgage as pledged collateral for the bondholders, mortgage-backed bonds tend to have a bond rating of ______ or better.

BBB

federal reserve banks operate under the general supervision of

Board of Governors of the federal reserve

While common shareholders do no exercise control over the firm's daily activities, they can exercise their voting rights to elect the ____ who has that responsibility

Board of directors

Before common stock can be issued by a corporation, shares must be authorized by a majority vote of the _____ and the _____

Board of directors; existing common shareholders

Sansa recently started a position as an intern at the Iron Bank and is making entries on the Bank's balance sheet. Which of the following should she put under assets?

Bonds

The depletion of the United Kingdom's gold reserves during the Second World War rendered the gold standard impractical . This led to the creation of the _________ in 1944 .

Bretton Woods Agreement

The three types of transactions that can occur at an NYSE trading post are

Brokers trading for their customers at market price, limit orders left with a specialist to be executed later, specialists transacting for their own account

The Volcker Rule forbids depository institutions from engaging in what type of risky trading activity?

Buying or selling derivatives for the banks own account

concurrent with the sabanes-oxley act in 2002, the NYSE took action to heighten corporate governance requirements on demestic NYSE listen companies, including

CEOs must annually certify the firm's financial info provided to investors companies must have a majority of independant directors shareholders must approve all equity-based management compensation plans companies must have corporate governance guidelines and codes of ethics and conduct

Which of the following is correct about capital inflows?

Capital inflows can be positive, negative, or equal to zero

Duration provides a direct relationship between the _______ for a ______.

Change in security price; small change in interest rates

Which of the following would be counted as a liability on a bank's balance sheet?

Checking accounts

The largest options exchange is the

Chicago Board Options Exchange

The largest options exchange is the

Chicago Board Options Exchange .

smaller, regional stock exchanges are in

Chicago, Philadelphia, Boston, Cincinnati

Which country has the greatest number of banks among the list of top 20 global banks by size?

China

Trading curbs implemented by stock exchanges that are triggered by extreme price movements such as those caused by program trading are called

Circuit breakers

The dirty price for a treasury note or bond is the sum of the ____ plus the ____

Clean price; accrued interest

A mortgage backed bond uses mortgages not for their cash flows, but as ____ for the bond holders

Collateral

The two major types of mortgage-backed securities that are created by securitizing mortgages are

Collateralized mortgage obligations; pass-through securities

Preferred shareholders receive their payments before the ____ but after ____

Common shareholders; bondholders

what is meant by the statement "common stockholders have a residual claim on the issuing firm's assets"?

Common stockholders have the lowest priority claim on a corporation's assets in the event of bankruptcy. That is, they have a residual claim. Only after all senior claims are paid (i.e., payments owed to creditors, bondholders, and preferred stockholders) are common stockholders entitled to what assets of the firm are left, i.e., the residual. The residual claim feature associated with common stock makes it riskier than debt or bonds as an investable asset.

the most widely held of all financial securities in pension funds, mutual funds and other other types of funds are

Corporate stocks

In primary markets, the users of funds are frequently

Corporations needing funds for new projects

By replacing risky assets (mortgage loans)!386$ cash or lower-risk assets, a mortgage sale can reduce a financial institution's credit risk, liquidity risk and interest rate risk, as well as regulatory costs such as the

Cost of holding required capital; cost of reserve requirements

The risk that financial institutions face when doing business in foreign countries is called

Country or sovereign risk

The coupon interest paid periodically on a bond is calculated as the product of the ____ and the ____ of the bond.

Coupon rate; face value

Throughout the life of the bond, the _______ remains constant but the _______ may change due to the arrival of new information.

Coupon rate; required rate of return

Individual rules and restrictions within the bond indenture are referred to as

Covenants

The money base consists of ______ plus ______.

Currency in circulation; reserves

The inverse relationship between interest rates and the present value of security holds for _______ and _______.

Current market prices; expected rates of return Fair present value; required rates of return

Weak Form Market Efficiency

Current stock prices reflect all historic price and volume information about a company

Bonds backed solely by the general credit worthiness of the issuing firm, unsecured by specific assets or collateral, are called

Debentures

*All else equal, as the coupon rate on a bond increases, the bond's sensitivity to changes in interest rates______.

Decreases

As interest rates increase, the price of a bond _______ at a(n) _______ rate.

Decreasing; decreasing

Treasury notes and bonds are backed by the full faith and credit of the U.S. government and are considered to be from from

Default risk

When a financial institution hires employees to fund users on behalf of fund providers. they are said to be acting as

Delegated monitors

Hamsterville's national income increased due to an increase in government spending. How does an increase in national income affect the money market and interest rates?

Demand for money increases; interest rates increase

Financial institutions frequently pool small deposits from individual savers and invest the funds in large denomination securities. This is called

Denomination intermediation

The largest U.S. city to ever suspend payments on its unsecured debt and declare bankruptcy was

Detroit

A value-maximizing, profitable firm with good growth prospects may choose to eschew ___ and use its profits for ____ instead

Dividends, the firms growth

Alt-A mortgage borrowers are characterized by a lack of _______ and lower _______ than prime mortgage borrowers.

Documentation ; Credit Scores

If the market value of the securities the bond holder receives with conversion ____ the market value of the bond, the bond holder will ____.

Does not exceed; not convert, exceeds; convert and take a profit

The most widely reported stock market index is the

Dow Jones Industrial Average

The most widely reported stock market index is the

Dow Jones Industrial Average .

Trading licenses are needed to make trades on the floor of the NYSE . These licenses are sold by ________ and are good for _______.

Dutch auction ; one year

The third - largest exchange in the world based on trading volume is an ____ called the ____ network .

ECN : BATS

Which of the following is NOT a responsibility of the SEC?

Ensuring that investors make good decisions.

History and Logic Behind Efficient Market Hypotheis

Eugene Fama: job is to predict the market. very hard. Tufts university.

After the United States, _______ is the world's second largest and most developed securitization market.

Europe

The derivative securities markets that are mostly second to the U.S. are in

Europe .

What immediate effect does this have on banks' balance sheets?

Excess reserves decrease.

What happens when a central bank buys bonds?

Excess reserves increase

How do excess reserves change if the central bank lowers the reserve requirement from 25% to 20%?

Excess reserves increase by $5,000

If the bank of the north has $1000 worth of bonds that it sells for $1000, how does its balance sheet change?

Excess reserves increase, but there is no change in total assets

The major U.S. stock markets open at 9:30 am EST and close at 4:00 pm EST. Trading that occurs outside of those hours is called _____ and is processed through ____

Extended-hours trading; electronic communications networks (ECN)

The largest independent regulator for all securities firms doing business in the United States is

FINRA

The correct equation for calculating the future value FV of a lump sum PV at "n" periods in the future given interest rate "r" is

FV = PV(1+r)^n

Bonds are usually called when interest rates ____ so the issuer can gain by reissuing new bonds with a ____ interest rate.

Fall; lower

If a firm misses a preferred dividend payment, the preferred shareholders can force the company into bankruptcy

False

T/F All else being equal, the higher the coupon rate, the lower the price of the bond

False

T/F: If a firm misses a preferred dividend payment, the preferred shareholders can force the company into bankruptcy.

False

T/F: Interest on primary mortgages is tax deductible but interest on secondary mortgages is not.

False

True or false : If a firm misses a preferred dividend payment , the preferred shareholders can force the company into bankruptcy .

False

True or false: In a mortgage sale with recourse, the mortgage loan is removed from the seller's balance sheet permanently.

False

True or false: Interest on primary mortgages is tax deductible but interest on secondary mortgages is not.

False

True or false: The huge growth in subprime mortgages during the early 2000s was a not a major instigator for the 2008 financial crisis.

False

True or false: Yield changes of bond market securities were uncorrelated over the period from 1980 through 2019.

False

True or false: the original issuers of financial instruments obtain additional funds when those instruments are resold on the secondary market

False (original issuers receive no funds from secondary market transactions between unrelated parties)

T/F: the original issuers of financial instruments obtain additional funds when those instruments are resold on the secondary market

False, original issuers receive no funds from secondary market transactions between unrelated parties

In 1938, the government established _________ to buy mortgages from depository institutions and create liquidity in mortgage markets

Fannie Mae (FNMA)

To insure certain types of mortgages against default risk, the government established the _______ and the _______ during the 1930's

Federal Housing Administration (FHA) ; Veterans' Administration (VA)

Repayment of federally insured mortgages is guaranteed by either __________ or __________.

Federal Housing Administration (FHA); Veterans Administration (VA)

______ are sold in secondary financial markets by _________.

Financial instruments; agents in need of funds

In primary markets, fund users raise new capital through the sale of

Financial securities

In _____ underwriting, the investment bank purchases the stock from the firm for a guaranteed price and resells it at a higher price, earning a profit called the underwriter's spread.

Firm commitment

With ____ underwriting, the investment bank guarantees the issuer a price for newly issued bonds by purchasing the entire issue at a fixed price

Firm commitment

The risk that the value of a foreign investment may change due to appreciation or depreciation of the foreign currency is

Foreign exchange risk

NYSE Euronext is a public company that operates _____ exchanges in the U.S., of which the _____ is the largest and most well-known

Four; NYSE

When that Hodor deposited $1000 in the bank,the bank kept $200 in its vault and loaned out $800 Which of the following best describes what the bank is doing?

Fractional reserve banking

the financial crisis of 2008 hit european banks hard, though some countries were spared because of their focus on domestic retail banking, such as

France, Italy

The financial crisis of 2008 hit European banks hard, though some countries were less affected because of their focus on domestic retail banking. The less affected countries included (choose all that apply)

France. Italy.

To encourage continued expansion in the housing market and to provide competition for Fannie Mae, the US government created ______ and ______ in the late 1960's

Freddie Mac (FHLMC) ; Ginnie Mae (GNMA)

_______ are standardized and traded on organized exchanges

Futures Contracts

Two types of municipal bonds exist: ____ and ____ bonds.

General obligation; revenue

UET equation=

Geometric average=[(1+r)(1+r)(1+r)]^(1/n)-1]

A leader in the European mortgage securitization market is

Germany

A leader in the European mortgage securitization market is

Germany.

Mortgage companies are the largest issuer of mortgage backed securities guaranteed by

Ginnie Mae (GNMA)

To encourage continued expansion in the housing market and to provide competition for Fannie Mae, the US government created _______ and ________ in the late 1960s.

Ginnie Mae (GNMA) Freddie Mac (FHLMC)

Mortgage companies are the largest issuer of mortgage-backed securities guaranteed by

Ginnie Mae (GNMA).

Treasury STRIPS are created by and sold to investors through

Government securities brokers and dealers

The holder of a stock warrant will exercise the warrant and buy the stock when the market price of the stock is ____ the price specified in the warrant.

Greater than

In a dual-class common stock arrangement, the shareholders with the weaker voting rights are often compensated by receiving

Higher dividend rights

Which of the following best describes why the quantity of loanable funds supplied increases when the real interest rate increases?

Higher real interest rate encourages savings

Bond insurance guarantees that payment will be made to investors in the event the issuer defaults. Bond insurers generally have a ____ credit rating than the bond ____.

Higher; issuer

In 2009 , China began a program of internationalizing its currency by allowing the yuan to be traded by banks in

Hong Kong .

The major supplier of funds for secondary markets are

Households

Common stocks typically have which of the following that bonds do not have? I. Voting rights II. Fixed cash flows III. Set maturity date IV. Tax deductibility of cash flows to investors

I

As of December 2005, trading licenses are required to conduct trades on the floor of the NYSE. Which of the following statements about these trading licenses is/are correct? I. Licenses are auctioned off in a special type of auction called a Dutch auction. II. Only a member organization of the NYSE is eligible to bid for a trading license. III. The SEC determines the maximum bid price. IV. Trading licenses are good for 10 years.

I & II

Suppose that over the last 10 to 15 years significantly large numbers of investors have been able to earn abnormal returns from using the firm's publicly-available financial information to forecast growth in earnings and dividends. This would be evidence that the markets are not: I. weak form efficient. II. semistrong form efficient. III. strong form efficient.

I & II maybe

Which of the following is/are true about specialists? I. Investment banks generally cannot be specialists. II. Specialists are used by the NASDAQ system. III. Market and limit orders are transacted at specialist posts, but the specialist's own account orders are executed elsewhere. IV. Specialists help maintain continuous trading.

I & IV

The NYSE specialists are charged with: I. trading for their own account. II. ensuring public limit orders are executed. III. facilitating the processing of public market orders.

I, II, & III

Which of the following indexes are value-weighted? I. NYSE Composite II. S&P 500 III. NASDAQ Composite IV. Dow Jones Industrial Average

I. II, & III

Fisher Equation

I= RIR(real i rate) + Expected inflation (IP)

depository insitutiitions currently hold large balances of excess reserves at the fed. As a result the fed intends to move the federal funds rate primarily by setting the ________ to the top of the desired target range for the federal funds rate.

IOER

primary markets

IPO

How do secondary markets support primary markets?

IPO= primary no original issuer, trading between investors=secondary

what is the difference between a price-weighted stock market index and a value-weighted stock market index?

In a price-weighted index the stock prices of the companies in the indexes are added together and divided by an adjusted value, (or divisor). Dow indexes are price-weighted averages. The divisor was set at 30 in 1928, but due to stock splits, stock dividends, and changes in the 30 firms included in the index, this value dropped to 0.132129493 by August 2013. In a value-weighted index the current market values (stock price x number of shares outstanding) of all stocks in the index are added together and divided by their value on a base date. Any changes in the stocks included in the index are incorporated by adjusting the base value of the index. The NYSE, established in 1966, is a value-weighted index. To modernize and align the index methodology with those used in other indexes, the NYSE revised its NYSE Composite Index in January 2003. At this time the composite was recalculated to reflect a new base value of 5,000 rather than the original base value of 50 set in December 1965. The S&P 500 index and the Wilshire 5000 index are also value-weighted

A counterparty to a over-the-counter forward option contract is most likely to default when the counterpart is losing heavily on the contract and the FI is _______ on the contract.

In the money

Which of the following is a contractionary monetary policy tool that is NOT an open market operation?

Increase the reserve ratio

*Typically, during periods of uncertainty in financial markets (high unemployment, recessions) the price of the Treasury securities will ________ while default risk premium (DRP) will _______.

Increase; widen (uncertainty=contractionary policies=higher DRP and higher prices)

As the rate of return on a bond _______, the duration _______.

Increases; Decreases Decreases; Increases

As the maturity of a bond _______, the duration ______, but at a(n) ______ rate.

Increases; increases; decreasing decreases; decreases; increasing

Subprime mortgages are mortgage loans issued to

Individuals with poor credit

The semiannual coupon paid on TIPS securities is based on the ____ and so ____ from period to period.

Inflation-adjusted principal; may vary

When a firm offers its stock to be traded in public stock markets for the first time, this is referred to as a(n)

Initial public offering

The first-time issue of stock by a corporation going public is called

Initial public offering IPO

The risk that a financial institution will not have enough capital reserves to offset a sudden loss is called

Insolvency risk

Currently, only ____ and ____ as defined by the SEC can participate in private placements of bonds.

Institutional investors; large investors

Returns with compound interest rates

Interest earned on principal and reinvested interest FV=PV(1+r/n)^nt

What happens to the interest rate and long-run aggregate supply (LRAS) as a result of what happens to the interest rate?

Interest rate decreases; LRAS increases

Which of the following best describes the impact of a decrease in the demand for capital on the interest rate and the quantity of loans made?

Interest rate decreases; quantity of loans made decreases.

By replacing fixed-rate mortgage loans with cash or mortgage-backed securities, a mortgage sale can reduce a financial institution's

Interest rate risk

The mismatch of maturities between liabilities and assets of financial institutions exposes them to

Interest rate risk

Selling/securitizing mortgages reduces which of the following types of risks of the originating financial institution?

Interest rate risk Liquidity risk Credit risk

Selling/securitizing mortgages reduces which of the following types of risks of the originating financial institution?

Interest rate risk, credit risk, liquidity risk

As a mortgage approaches maturity, the ____ portion of the monthly payment decreases and the ____ portion of the monthly payment increases

Interest; principal

The financial institutions that experienced a dramatic increase in their share of total Fl assets during the period 1948-2016 are

Investments companies, securities broker/dealers and pension funds

The financial crisis of 2008 hit European banks hard, especially in countries with large investments in "toxic" mortgage-backed securities, such as (choose all that apply)

Ireland. the U.K. Spain.

Preferred stock is a hybrid security with characteristics between stocks and bonds, such as

It represents an ownership interest in the firm, it pays dividends only after the bondholders have received their payments, it pays a fixed periodic dividend payment, it represents a claim on the firm's assets subordinate to the bondholders

Which of the following would most likely limit the ability of monetary policy to quickly correct an output gap?

It takes time to recognize that a gap exists.

in July 2013 NYSE assumed responsibility for managing ______ following a scandal involving rate manipulation by a group of large banks for their own profit

LIBOR

The relationship between the down payment, purchase price and the loan to value ratio (LTV) is given by

LTV = Loan amount / purchase price

The _______ the coupon on the bond, the _______ its duration.

Larger; Shorter Smaller; Longer

Chapter 8 financial institutions

Learnsmart

explain why GE could not issue commercial paper in Sept 2008

Lehman bankruptcy-> CP worthless-> MMMF breaks buck-> run on MMMF-> lack of CP buyers-> CP market frozen-> GE can't find buyers for CP

Which of the following best describes the impact of this statement on the market for loanable funds?

Less savings means that the supply of loanable funds decreases, increasing the interest rate.

Because mortgage bonds are backed with a claim on specific assets of the firm, they are ____ risky and have ____ yields than unsecured bonds

Less; lower

Bond insurance increases the ____ of bonds by making it easier to sell them on the secondary market.

Liquidity

The preference of fund suppliers to choose to hold cash versus investing in long-term securities increases the cost of long-term borrowing. This cost can be best described as

Liquidity cost

In the 'originate and hold' model, financial institutions are exposed to risks, including which of the following?

Liquidity risk, interest rate risk, and credit risk

Two important characteristics of federally insured mortgage loans are

Little or no down payment is required; there is a maximum loan size limit

The largest foreign exchange trading center is _______ followed by _______.

London ; New York

The rate used for sale on Eurodollar funds is known as the

London Interbank Offered rate

The _____________ the interest rate "r", the ________ the present value of the annuity.

Lower; higher higher; lower

To stabilize financial markets following the 9/11 terrorist attacks, the Federal Reserve Bank

Lowered interest rates; provided loans to non-bank FI's such as investment banks

What are the differences between money markets and capital markets?

MM=<1 year, low interest rates (Treasury bills, fed funds, repurchase agreements, commercial paper, negotiable CD's) CM=>1 year (CM=corp. stock, mortgages, corp bonds, Treasury bonds, state and local gov. bonds, us gov agency bonds, bank and consumer loans; MM=(Treasury bills, fed funds, repurchase agreements, commercial paper, negotiable CD's))

The agreement that led to the creation of the euro and the European Central Bank was the

Maastricht Treaty .

Collateralized mortgage obligations (CMO) give investors greater control over the ____ of the mortgage-backed securities they buy

Maturity

Financial institutions frequently transform short-maturity liabilities provided by investors into a portfolio of long-maturity assets. This is known as:

Maturity Intermediation

The advantage of cumulative voting is that it allows _____ to have a real effect on the outcome of the election of the board

Minority shareholders

Bond markets are traditionally classified into three types, which are (choose three)

Municipal bonds, corporate bonds, treasury notes and bonds.

Firms that do not meet the listing requirements of the NYSE Euronext often trade on the

NASDAQ

The ____ was the worlds first electronic stock market and provides continuous trading for the most active stocks traded over the counter

NASDAQ

An index consisting of the stocks of the industrial companies, banks and insurances companies listed on the NASDAQ is the

NASDAQ Composite Index.

An index consisting of the stocks of the industrial companies, banks, and insurances companies listed in the NASDAQ is the

NASDAQ composite index

is investing stocks simply gambling

NO. differences include: -expected return. positive for stock investing, negative for gambling -economic intuition. bearing risk for stocks, luck of the draw for gambling

hold

NYSE

where does most trading occur

NYSE

Historically the _____ has been the leader in daily stock trading volume , while the _____ is the leader in total number of firms listed .

NYSE : NASDAQ

Level 2 ADR's can be traded on the _____ and the _____.

NYSE : NASDAQ

Historically the _______ has been the leader in daily stock trading volume, while the ______ is the leader in total number of firms listed.

NYSE :: NASDAQ

Level 2 ADR's can be traded on the ______ and the ______.

NYSE ; NASDAQ

The ______ consists of all common stocks listed on the NYSE.

NYSE Composite Index

The _______ consists of all common stocks listed on the NYSE .

NYSE Composite Index

U.S. stock markets are represented by a variety of market indexes such as the (choose all that apply)

NYSE Composite Index. S&P Composite Index. the Wilshire 5000 Index. the Dow Jones Industrial Average.

The two major secondary stock markets in the U.S. are the _______ and the ______.

NYSE Euronext & NASDAQ

The two major secondary stock markets in the U.S. are the _______ and the _______.

NYSE Euronext ; NASDAQ

The two major secondary stock markets in the U.S. are the _____ and the _____

NYSE Euronext, NASDAQ

In terms of volume of trading and market value of firms traded, the _____________ is the largest U.S. stock market. In terms of number of firms traded, the ___________ is the largest in the United States.

NYSE; NASDAQ

The SEC has delegated certain regulatory responsibilities related to the day-to-day monitoring of stock trading activities to the ______ and the ______.

NYSE; NASDAQ

Westley is a citizen of Florin. He believes that the investment conditions in the neighboring country of Guilder are much better. Assume both countries have an open economy. If other investors share Westley's opinion, what will happen to net capital inflows and the supply of loanable funds in Guilder?

Net capital inflows will increase; the supply of loanable funds will increase

Which of the following statements is true when the money market is in equilibrium?

No economic forces are acting on the economy to change the interest rate.

What happens to the nominal interest rate and the quantity of money in the money supply if the demand for money increases?

Nominal interest rate increases; no change in the quantity of money.

If a preferred dividend is fixed regardless of the current performance of the firm, we say the preferred stock is

Non-participating

Unlike interest payments on debt, dividends are ____ and failure to pay dividends will cause the firm to ____

Not guaranteed, default

For very small firms , NASDAQ maintains an electronic ________ which is not part of NASDAQ , but supports posting and retrieval of price quote information over an electronic network for small stocks .

OTC bulletin board

For very small firms, NASDAQ maintains an electronic ________, which is not part of NASDAQ, but supports posting and retrieval of price quote information over an electronic network for small stocks.

OTC bulletin board

Nationally chartered banks ("National Banks") are those chartered through the

Office of the Comptroller of the Currency

The final prospectus for the issue is distributed and selling of securities starts

On the day following the SEC registration approval

What is the short-run effect of a decrease in the money supply on output and the price level?

Output decreases; price level decreases.

For large interest rate increases, duration _______ the fall in bond price.

Over predicts

When the required rate of return is equal the coupon rate, the bond will sell at

PAR

If a preferred dividend may be increased when the firm has an exceptionally profitable period, we say the preferred stock is

Participating

Which of the following would cause an unambiguous decrease in nominal interest rates?

People are able to access money more easily

Which of the following describes the process that returns the money market to equilibrium when the quantity of money demanded is greater than the money supply?

People sell their bonds, which lowers bond prices, which in turn increases interest rates.

All of the following decrease nominal interest rates EXCEPT

People start keeping more money outside of bank

The quotes for the smallest firms on the OTC bulletin board are recorded manually on _____ published daily and distributed through the national association of securities dealers

Pink sheets

In a world without financial institutions where suppliers provided funds directly to users, suppliers of funds would face 3 types of risks/costs. These are:

Price risk, Monitoring cost, and liquidity cost

Program trading has been criticized for introducing increased ___ to stock markets

Price volatility

Duration relates the percentage change in bond _______ to _______ changes in interest rates.

Price; small

For inflation indexed treasury notes and bonds, the ____ is adjusted to reflect ____

Principal value; inflation

One of the major functions of Ginnie Mae (GNMA) is to sponsor the mortgage-backed security programs of

Private industry issuers

Which of the following best describes national savings in a closed economy?

Private savings + public savings

If "T" is the marginal income tax rate of the bondholder, then the correct expression for the after-tax return Ra on a taxable bond with before tax yield Rb is _____.

Ra = Rb(1 - T)

All other risks being equal, an investor with a marginal tax rate of "T" would be indifferent between a municipal bond that pays a return of Ra and a corporate bond that pays a return of ______.

Ra/(1 - T)

All other risks being equal, an investor with a marginal tax rate of "T" would be indifferent between a municipal bond that pays a return of Ra and a corporate bond that pays a return of ______.

Ra/(1-T)

What will be the impact of contractionary fiscal policy and contractionary monetary policy on real gross domestic product(GDP) and the interest rate of Hamsterville?

Real GDP will decrease; impact on interest rates will be indeterminate.

What will be the effect of these policies on real gross domestic product (GDP) and interest rates in Hamsterville?

Real GDP will increase; impact on interest rates will be indeterminate.

Which of the following best describes how the two axes should be labeled in a model that shows the relationship between borrowers and savers?

Real interest rate on the vertical axis; quantity of loanable funds on the horizontal axis

Which of the following best describes the result of a government moving from a budget deficit to a budget surplus?

Real interest rates decrease

The advantage of the SEC shelf registration process to the issuing firm is that is leads to

Reduced time and cost

What happens to required reserves and excess reserves if the reserve requirement is increased to 20%?

Required reserves increase to $20,000; excess reserves decrease to $5000

The Federal reserve Board also sets bank _________ and reviews and approves the _______ set by the 12 federal reserve banks

Reserve Requirements ; discount rates

Bonds that are issued to finance a specific revenue-generating project and whose payments are made from those revenues are called ____ bonds

Revenue

The three largest Federal Reserve Banks, holding over 65 percent of the total assets of the system are

Richmond, San Francisco, and New York

Derivative securities allow _______ to be transferred from those that want less to those that are willing to bear more.

Risk

For a call option, if the asset's market price is "S" and the strike price is "X", then the intrinsic value of an in the money call option is

S - X

For a call option , if the asset's market price is " S " and the strike price is " X " , then the intrinsic value of an in - the - money call option is

S - X .

example of value weighted.

S&P 500 (large). S&P 400 (mid). S&P 600 (small). all make up the S&P 1500. not the largest firms. based on industry reputation. also: -Nikkei (japan) -FTSE (UK) -TSX (toranto) -DAX (Germany)

An index consisting of the stocks of the top 500 of the largest U.S. corporations listed on the NYSE and NASDAQ is the

S&P 500 Index.

U.S. stock markets are represented by a variety of market indexes such as

S&P, Wiltshire 5000, NYSE, DownJones

An equilibrium in the market for loanable funds is most closely associated with which of the following equations?

S=I

yield/required rate of return of debentures, mortgage bonds, and subordinated debentures:

SD-high Deb- medium mort- low

The two primary regulators of derivatives trading in the U.S. are the ____ and the ____.

SEC : CFTC

The Wall Street Reform and Consumers Protection Act of 2010 would place regulation of OTC derivatives under the authority of the _______ and the _______.

SEC ; CFTC

The two primary regulators of derivatives trading in the U.S are the _______ and the _______.

SEC ; CFTC

Commercial paper is issued with maturities of less than 270 days to avoid the time consuming and costly

SEC registration process

commercial paper is issued with maturities of less than 270 days to avoid the time consuming and costly

SEC registration process

Level 1 ADR's have the least amount of _________ and have very weak _______ requirements .

SEC regulation ; disclosure

Level 1 ADR's have the least amount of ________ and have very weak ________ requirements.

SEC regulation; disclosure

Private mortgage pass-through securities must be registered with the _______ and are _______ in a manner similar to corporate bonds.

SEC; rated by a ratings agency

The NASDAQ automatic order execution system for individual traders placing buy or sell orders of 1,000 or fewer shares is called the:

SOES

In the United States , the _______ increased the cost of operating in the U.S. and resulted in a significant drop in IPO's of foreign firms in U.S. stock markets .

Sarbanes - Oxley Act

In the United States, the ________ increased the cost of operating in the U.S. and resulted in a significant drop in IPO's of foreign firms in U.S. stock markets.

Sarbanes-Oxley Act

In the ________, the U.S. Congress in 2002 gave the SEC additional powers to oversee audits, impose penalties on corporate wrongdoers, force faster and more extensive financial disclosure, and provide recourse for aggrieved shareholders.

Sarbanes-Oxley Act

What relationship does the supply of loanable funds illustrate?

Savers respond to an increase in interest rates by saving more money.

The term "thrifts" refers to which of the following type(s) of depository institutions?

Savings banks, credit unions, and savings associations

The markets in which stocks, once issued, are bought and sold by investors with no involvement of the original issuing firm are called

Secondary markets

The passage of Securities Act of 1934 designated that the _____ would be the regulator of financial markets and exchanges in the U.S.

Securities and Exchange Commission (SEC)

In secondary market transactions, funds are exchange with the help of _____ acting as an intermediary between the buyer and seller of an instrument

Securities brokers

A financial institution can remove recently originated mortgages from its balance sheets by

Selling pools of mortgages on the secondary market; issuing mortgage-backed securities against those mortgages

What if I could perfectly predict Air Tran stock prices

September 27th. Know about merger. -Buy Air Tran shares through loan, buy more, price doesn't change. This is inefficient

Foreign currency futures contracts were introduced in response to the introduction of floating exchange rates between currencies of different countries following the

Smithsonian Agreements

In the NYSE, each listed stock is assigned to one ____ who acts as a ____ for that stock

Specialist, designated market maker

SNAP voting rights

Spiegel/Murphy jointly own 18.7% of firm's stock but control 88.5% of voting rights of the firm

The obligations of an NYSE stock specialist include

Stabilize order flow and prices for the stock, buy or sell the stock as needed to make a market

Bonds issues with ____ attached give the bond holder the opportunity to purchase common stock of the issuing firm at a specified price up to a specified date, without loss of the underlying bond

Stock warrants

One of the reasons that _____ are considered to be riskier than _____ is due to their _____ status

Stocks, bonds, residual claim

The 2 types of securities that investors most often associate with capital markets are _________ and __________.

Stocks; bonds

Debentures which are junior in their rights to both secured debt and regular debentures are called

Subordinated debentures

Fannie Mae also conducts a program by which it ____ mortgage-backed securities with a bank or thrift in exchange for original conforming mortgages

Swaps

Negative yields can and have been bid in the auction for _______, but they cannot be bid in the auction for other types of Treasury notes and bonds.

TIPS

Negative yields can and have been bid in the auction for _______, but they cannot be bid in the auction for other types of Treasury notes and bonds. Treasury bills STRIPS TIPS commercial paper

TIPS

True or false: GNMA only supports pools of mortgage loans whose credit risk is insured by one of four government agencies.

TRUE

True or false: With dual-class common stock, one class has more rights to elect directors to the board than the other class, effectively giving those shareholders control of the board.

TRUE

The source of funds for repayment of municipal bonds is ____ or ____.

Tax receipts; project revenues

All financial institutions are exposed to _____ and _____ risk in the daily production of their services.

Technology;operational

Most corporate bonds are ____ bonds, meaning that the entire issue matures on a single date.

Term

Most secondary bond market trades are carried out on ______ including virtually all _____ transactions

The OTC market; large

Private mortgage pass-through securities must be registered with ____ and are ____ in a manner similar to corporate bonds

The SEC; rates by a ratings agency

Private mortgage pass-through securities must be registered with ____ and are _____ in a manner similar to corporate bonds

The SEC; rates by a ratings agency

The Volcker Rule was passed as part of what important Act of Congress?

The Wall Street Reform and Consumer Protection Act of 2010

The Volcker Rule was passed as part of what important Act of Congress?

The Wall Street Reform and Consumer Protection Act of 2010.

All of the following lead to an increase in nominal interest rates EXCEPT

The central bank buy bonds

The term "Brexit" refers to

The decision of the people of the United Kingdom to leave the European Union after 43 years

The term 'Brexit' refers to

The decision of the people of the United Kingdom to leave the European Union after 43 years

If a new technology is invented that makes it easier to withdraw money from the bank, which of the following will occur in the money market?

The demand for money decreases and the nominal interest rate decreases

After negotiating the terms of the transaction over the phone, federal funds transactions are completed electronically using

The fed wire network

Which of the following is the rate that banks in the United States charge each other for overnight loans?

The federal funds rate

Which of the following is NOT specified in the derivative security contract?

The final purpose for which the asset exchanged will be used

Which of the following is NOT specified in the derivative security contract?

The final purpose for which the asset exchanged will be used.

initial public offering (IPO)

The first public issue of a financial instrument by a firm.

Since 1997, the U.S. treasury has issued treasury inflation protected securities (TIPS) whose returns are not fixed but are tied to

The inflation rate

Which of the following should be used to show the effect of the decrease in tax revenues on interest rates in Burgerville?

The market for loanable funds

Which of the following should be used to show the effect of the increase in tax revenues on interest rates in Marthaland?

The market for loanable funds

Which of the following would be the appropriate model to use to describe the behavior of borrowers and savers?

The market for loanable funds

What happens if banks decide to start keeping excess reserves instead of fully loaning out?

The money supply decreases.

The central bank of Johnsrudia sold existing government securities in an open market operation. Which of the following changes is the most likely result of this action?

The nominal interest rate increases.

The current interest rate in Atlantis is 4%. At an interest rate of 4%, households want to hold 4 million in cash and 2 million in bonds. However, M1 is currently 3 million. Which of the following best describes what will happen in the money market in Atlantis?

The nominal interest rate will increase, which will lower the quantity of money demanded

*Which of the following is not a characteristics of secondary markets?

The original issuer of the securities raises funds traded in secondary markets

Which of the following would most likely occur as a result of expansionary monetary policy?

The price level increases

After interest rates were lowered in Hamsterville, national savings in Hamsterville decreased.Which of the following changes would reflect what is described in the statement above?

The quantity of loanable funds supplied decreased.

Which of the following best describes an equilibrium in the loanable funds market?

The real interest rate has adjusted until the quantity of savings supplied is equal to the quantity of borrowing demanded.

At the current interest rate of 5%, national saving in Florin is currently 200 million by investment demand is currently 100 million. Which of the following best describes what will happen once the credit market clears in Florin?

The real interest rate will be lower than 5% the amount of loans made will be between 100 million and 200 million

Based on current conditions in the credit market in Patagonia, the amount of money that borrowers want to borrow is greater than the amount of money that savers want to save. Which of the following best describes what will happen as a result of this disequilibrium in credit markets?

The real interest rate will increase until the quantity of loanable funds demanded equals the quantity of loanable funds supplied

U.S. stock markets are represented by a variety of market indexes such as

The willshire 5000 the S&P composite the Dow Jones Industrial Average The NYSE Composite index

In terms of severity, the financial crisis of 2008 is generally considered to be

The worst recession in the U.S. since the great depression

why are stock markets the most watched and reported of the financial security market

This is because stock market movements are sometimes seen as predictors of economic activity in a country. This is also because corporate stocks may be the most widely held of all financial securities. Most individuals own stock securities either directly through stock purchases or indirectly through pension fund and mutual fund investments, and thus their economic wealth fluctuates closely with the market.

Business demand funds for which of the following reasons?

To satisfy short-term working capital needs for inventory and receivables; To invest in long-term (fixed) assets like plant and equipment.

A(n) _______ involves swapping an obligation to pay interest at a fixed or floating rate for payments representing the total return on a loan (interest and principal value changes).

Total return swap

Collateralized mortgage backed securities provide investors with a guaranteed annual coupon and protection from prepayment risk by repackaging the mortgage please flows into ____ which can be sold separately to investors

Tranches

T/F The unbiased expectations theory posits that current long term interest rates are geometric averages of current and expected future short term interest rates.

True

T/F: A lien held by a financial institution gives that institution the right to sell the property if the mortgage borrower defaults, and blocks others from buying or selling the property until the loan is paid off.

True

T/F: A market order is filled at the best price available as recorded in a public database of prices collected across multiple markets.

True

T/F: GNMA only supports pools of mortgage loans whose credit risk is insured by one of four government agencies.

True

T/F: The collateral backing pass-through securities issued by private mortgage issuers does not meet the standards of a government-related issuer.

True

The secondary market for treasury bills is the largest of any US money market security

True

True or False: GNMA only supports pools of mortgage loans whose credit risk is insured by one of four government agencies.

True

True or False: One of the important values of credit default swaps is that they allow FI's to maintain long-term customer lending relationships without bearing the full credit risk exposure from those relationships.

True

True or False: The originate and distribute model contributed to the financial crisis because it allowed FI's to issue risky mortgages known that they could sell them before they defaulted

True

True or False: the experience of the financial crisis showed the financial world that credit default swaps are themselves subject to default risk.

True

True or false : A market order is filled at the best price available as recorded in a public database of prices collected across multiple markets .

True

True or false : Commercial banks are required to include swap risk exposure when calculating risk - based capital requirements .

True

True or false : Level 2 ADR's are subject to SEC regulations and disclosure requirements similar to those imposed on U.S. firms trading on the major U.S. exchanges .

True

True or false : U.S. markets and currencies dominate global derivative securities markets .

True

True or false : With dual - class common stock , one class has more rights to elect directors to the board than the other class , effectively giving those shareholders control of the board .

True

True or false: GNMA only supports pools of mortgage loans whose credit risk is insured by one of four government agencies

True

True or false: GNMA only supports pools of mortgage loans whose credit risk is insured by one of four government agencies.

True

True or false: Interest payments on municipal bonds are exempt from federal income taxes and most state and local income taxes.

True

True or false: Stock warrants may be detached from the underlying bond and sold separately to another investor. True False

True

True or false: The collateral backing pass-through securities issued by private mortgage issuers does not meet the standards of a government-related issuer.

True

True or false: The unbiased expectation theory acknowledges that an investor with an "n" year investment horizon has a choice between purchasing one "n" year maturity security, or a series of "n" one-year securities

True

True or false: The unbiased expectations theory posits that current long-term interest rates are geometric averages of current and expected future short-term interest rates.

True

True or false: Treasury notes and bonds trade in very active secondary markets.

True

True or false: an investor who has taken a position in an option can always liquidate that position by also taking the opposite side of that position, so the two positions net to zero

True

True or false: in the U.S., most money market securities are traded "over the counter" rather than on organized exchanges

True

True or false: in the US., most money securities are traded "Over the counter" rather than on organized exchanges.

True

True or false: the collateral backing pass-through securities issued by private mortgage issuers does not meet the standards of a government-related issuer.

True

T/F: The originate and distribute model contributed to the financial crisis because it allowed Fl's to issue risky mortgages knowing they could sell them before they defaulted.

True, this is called moral hazard

T/F: The originate and distribute model contributed to the financial crisis because it allowed FI's to issue risky mortgages knowing they could sell them before they defaulted.

True. (this is called "moral hazard")

The most frequently reported and analyzed yield curve is the curve for

U.S. Treasury securities.

A cross currency exchange rate is an exchange rate between two currencies that does not involve the

U.S. dollar .

Before the advent of cross currency exchange rates , most cross currency trades had to go through the

U.S. dollar .

The International Fisher effect assumes that the appreciation or depreciation of a foreign currency relative to the U.S. dollar is proportional to the difference between ________ and ________.

U.S. nominal interest rates ; foreign nominal interest rates

The federal reserve trading desk at the new york fed implements the FOMC policy directive by selling or buying _______ over the counter market.

US Treasury securities

____________ are regarded as having no default risk.

US government securities

Call provisions are ____ to bond holders so callable bonds generally have ____ yields than non-callable bonds.

Unattractive; higher

The gold standard was dominant in the late 19th and early 20th centuries because the _______ which was the dominant international trading country , had a long - standing commitment to the gold standard .

United Kingdom

the financial crisis of 2008 hit european banks hard, especially in countries with large investments in "toxic" mortgage backed securities, such as

United Kingdom, Ireland, Spain

The principal value of a TIPS security is adjusted every six months ____ for inflation or ____ for deflation, as measured by the percentage change in the consumer price index.

Upward; downward

Most of the major stock market indexes, with the exception of the Dow, are ____ indexes

Value-weighted

Preferred shareholders are granted ____ only if the firm has

Voting rights, missed preferred dividend payments

An index consisting of the stocks of virtually every company that (1) is U.S. headquartered, (2) is actively traded in a U.S. stock market, and (3) has widely available price information, is the

Wilshire 5000 Index.

An index consisting of the stocks of virtually every company that (1) is U. S. Headquartered, (2) is actively traded in a U.S. stock market, and (3) has widely available price information, is the

Wiltshire 5000 index

Traditionally, during the quiet period, the firm was restricted from providing ____ or _____ about the firms security offering

Written communication, interviews

For a put option, if the asset's market price is "S" and the strike price is "X", then the intrinsic value of an in the money put option is

X - S

The return that the bondholder will earn on a bond if he or she buys it at its current market price, receives all coupon and principal payments as promised, and holds the bond to maturity is the

Yield to maturity

The interest rate spread is the difference between the yield on ________ and the yield on ___________.

a bond; a Treasury security of similar maturity

American Depository Receipt (ADR)

a certificate that represents ownership of a foreign stock

In 2006, two events occurred that acted as triggers for the financial crisis of 2008. They were

a decline in housing prices. an increase in interest rates by the Fed.

Which of the following could have caused this change?

a decrease in the money supply

if the rate of interest is set below the equilibrium rate, there will be _________ loanable funds

a deficit of

When the required rate of return is greater than the coupon rate, the bond will sell at

a discount

discount money market instruments are sold at _________ and are redeemed at _________ at maturity

a discount; face value

Dividends on preferred stock are _________ and are paid ________.

a fixed percentage of the stock's par value ::: quarterly

For an Interest Only ARM, once the initial interest-only period has ended, the borrower loses the interest-only payment option and the loan must convert to

a fully amortizing option ARM

For an interest-only option ARM, once the initial interest-only period has ended, the borrower loses the interest-only payment option and the loan must convert to

a fully amortizing option ARM

For a Minimum Payment Option ARM, once the principal has reached 110 to 115 percent of the original loan balance, the borrower loses the minimum payment option and the loan must be convert to (choose all that apply)

a fully amortizing option ARM ; an interest Only Option ARM

For an interest-only option ARM, once the initial interest-only period has ended, the borrower loses the interest-only payment option and the loan must convert to

a fully amortizing option ARM.

For a minimum payment option ARM, once the principal has reached 110 to 115 percent of the original loan balance, the borrower loses the minimum payment option and the loan must convert to (choose all that apply)

a fully amortizing option ARM. an interest only option ARM.

A forward contract can be used as _______ against the risk that future spot prices on an asset will move against the investor , by guaranteeing a future price for the asset today .

a hedge

A forward contract can be used as a _______ against the risk that future spot prices on an asset will move against the investor, by guaranteeing a future price for the asset today.

a hedge

issue with Price weighted average

a high priced stock can dominate the index

preferred stock

a hybrid security that has characteristics of both bonds and common stock (pays a fixed dividend payment

Reverse-Annuity Mortgage (RAM)

a mortgage for which a mortgage borrower receives regular monthly payments from a financial institution rather than making them. When RAM matures (or borrower dies), the borrower (or estate of borrower) sells the property to retire the debt

As a result of increased globalization, movements in US financial markets now have __________ impact on foreign financial markets

a much greater

As a result of increased globalization, movements in foreign financial markets now have _____ impact on U.S. financial markets

a much greater

Prices of Treasury notes and bonds are quoted as _______ of the ______ of the security.

a percentage/ face value

Prices of Treasury STRIP securities are quoted as _______ of the ______ of the security.

a percentage; face value

Prices of Treasury STRIP securities are quoted as _______ of the _______ of the security

a percentage; face value

Prices of Treasury notes and bonds are quoted as _______ of the ______ of the security.

a percentage; face value

When the required rate of return is less than the coupon rate, the bond will sell at

a premium

lien

a public record attached to the title of the property that gives the financial institution the right to sell the property if the mortgage borrower defaults

Correspondent banking

a relationship between a small bank and a large bank in which the large bank provides a number of deposit, lending, and other services

preemptive rights

a right of existing stockholders in which new shares must be offered to existing shareholders first in such a way that they can maintain their proportional ownership in the corporation

Unlike stocks and bonds, mortgages tend to be owned by

a single investor

rounding the stop out yield for a treasury note or bond down to the nearest 0.125 percent ensures that the issue will sell at

a slight discount

trading post

a specific place on the floor of the exchange where transactions on the NYSE occur

proxy

a voting ballot sent by a corporation to its stockholders. When returned to the issuing firm, a proxy allows stockholders to vote by absentee ballot or authorizes representatives of the stockholders to vote on their behalf

Select all that apply. By replacing risky assets (mortgage loans) with cash or lower-risk assets, a mortgage sale can reduce a financial institution's credit risk, liquidity risk and interest rate risk, as well as regulatory costs such as the cost of a. holding required capital. b. reserve requirements. c. employee salaries and benefits. d. maintaining physical assets.

a, b

Select all that apply. Selling/securitizing mortgages reduces which of the following types of risks of the originating financial institution? a. Interest rate risk b. Credit risk c. Maturity risk d. Exchange rate risk e. Liquidity risk

a, b, e

Select all that apply To insure certain types of mortgages against default risk, the government established the _______ and the ________ during the 1930s. a. Veterans' Administration (VA) b. Housing and Urban Development (HUD) c. Federal Housing Administration (FHA) d. Bureau of Indian Affairs (BIA)

a, c

Select all that apply. Two important characteristics of federally insured mortgage loans are a. there is a maximum loan size limit. b. private mortgage insurance is usually required. c. no fees are charged if repayment is required. d. little or no down payment is required.

a, d

The initial primary market sale for municipal bonds occurs through which of the following methods?

a. A public offering using an investment bank as underwriter b. A private placement to a small group of investors

A leader in the European mortgage securitization market is a. Germany. b. Spain. c. France. d. Italy.

a. Germany.

The ______ lists more firms than the ______ and mostly has ______ dollar trading volume. a. NASDAQ; NYSE; lower b. NASDAQ; AMEX; lower c. NASDAQ; NYSE; higher d. NYSE; NASDAQ; higher

a. NASDAQ; NYSE; lower

For very small firms, NASDAQ maintains an electronic ________, which is not part of NASDAQ, but supports posting and retrieval of price quote information over an electronic network for small stocks. a. OTC bulletin board b. database c. report generator d. pink sheets board

a. OTC bulletin board

In _________ underwriting, the investment bank does not guarantee the firm a price for newly issued stock and acts as a distribution agent, selling the stock for a fee. a. best efforts b. open negotiation c. firm commitment d. syndicated

a. best efforts

To limit the borrower's exposure to increasing interest rates, an adjustable-rate mortgage may place ________ on the interest rate increase allowed each year and during the life of the loan. a. caps b. requirements c. crowns d. indentures

a. caps

While Ginnie Mae only guarantees the timing of payments on pass-through securities issued by others, Freddie Mac ________ and ________ pass-through securities. a. creates; guarantees payment of b. sponsors; originates c. sponsors; guarantees payment of d. originates; purchases

a. creates; guarantees payment of

The difference between the nominal rate quoted on a security and the rate quoted on a Treasury security with similar characteristics is called the: a. credit risk premium b. maturity risk premium c. default risk premium d. inflation risk premium

a. credit risk premium c. default risk premium

By removing risky assets from its balance sheet, a mortgage sale can reduce a financial institution's a. credit risk. b. exchange rate risk. c. country risk. d. sovereign risk.

a. credit risk.

A consequence of the unbiased expectation theory is that if investors believe that short-term interest will _____ in future periods, the yield curve will be ________ sloped. a. decrease; negatively b. decrease; positively c. increase; negatively d. increase; positively

a. decrease; negatively d. increase; positively

In theory, the higher the down payment made by the borrower, the less likely it is that the borrower will a. default on the mortgage. b. miss a payment. c. pay off the mortgage early. d. make a late payment.

a. default on the mortgage.

Alt-A mortgage borrowers are characterized by a lack of _________ and lower ________ than prime mortgage borrowers. a. documentation; credit scores b. job experience; credit scores c. job experience; documentation d. job experience; income

a. documentation; credit scores

Firms that reward shareholders with capital gains rather than dividends avoid the ________ problem that is particular to dividends. a. double taxation b. agency cost c. equity depletion d. free rider

a. double taxation

If the market value of the securities the bond holder receives with conversion _______ the market value of the bond, the bond holder will _______.

a. exceeds; convert and take a profit b. does not exceed; not convert

When individual investors want to buy or sell on the NYSE, they contact their broker who sends the order to a(n) ________ or a ________ for presentation to a designated market maker. a. floor broker; commission broker b. floor broker; market broker c. specialist; designated market maker d. exchange broker; specialist

a. floor broker; commission broker

Investors in callable securities generally require ______ interest compared to non-callable securities a. higher b. the same c. lower d. variable

a. higher

The ______ the annuity payment "PMT", the ______ the future value of the annuity. a. higher; higher b. higher; lower c. lower; higher d. lower; lower

a. higher; higher d. lower; lower

When financial market participants have ______ near-term spending needs, the supply of loanable funds at every interest rate is ______ a. higher; lower b. lower; higher c. higher; higher d. lower; lower

a. higher; lower b. lower; higher

Movements in stock market indices based on the same stock market tend to be a. highly correlated. b. mildly correlated. c. totally uncorrelated. d. negatively correlated.

a. highly correlated.

As an investor's utility (enjoyment) of assets obtained with borrowed funds increases, the demand for borrowed funds will _____ and interest rates will_______. a. increase; increase b. decrease; decrease c. decrease; increase d. increase; decrease

a. increase; increase

Another distinctive characteristic of the mortgage market is that the issuers of mortgage debt are often a. individuals. b. financial corporations. c. governments. d. non-financial corporations.

a. individuals

An increase in which of the following factors will cause household to increase their supply of loanable funds provided? a. interest rates b. immediate consumption needs c. riskiness of investments d. household wealth

a. interest rates d. household wealth

An order for the broker and designated market maker to transact only at a specific price is called a a. limit order. b. margin order. c. stop order. d. market order.

a. limit order.

Both the unbiased expectations theory and the liquidity premium theory ignore investor preferences regarding the _______ of the securities they hold. a. maturity b. return c. number d. price

a. maturity

Collateralized mortgage obligations (CMO) give investors greater control over the _______ of the mortgage-backed securities they buy. a. maturity b. default risk c. interest d. principal

a. maturity

The advantage of cumulative voting is that it allows _________ to have a real effect on the outcome of the election of the board. a. minority shareholders b. preferred shareholders c. majority shareholders d. Class A shareholders

a. minority shareholders

Because jumbo mortgages are larger than most mortgages and cannot be sold to Fannie Mae or Freddie Mac, they are considered to be _______ and have _______ interest rates. a. more risky; higher b. less risky; lower c. undesirable; higher d. risk free; lower

a. more risky; higher

With a minimum payment option ARM, it is possible for a borrower to make a minimum interest payment which is below the current required interest payment, resulting in the unpaid difference being added to the loan principal. This is called a. negative amortization. b. ballooning payments. c. inclining principal. d. reverse amortization.

a. negative amortization.

The lead investment banks in a syndicate that directly negotiate with the issuing firm on behalf of the syndicate are called the a. originating houses. b. managing partners. c. principal banks. d. captains.

a. originating houses.

Once authorized, new shares of stock are distributed to existing and new investors through a _________ with the help of investment banks. a. primary market sale b. pink sheet stock sale c. secondary market sale d. private placement

a. primary market sale

The markets in which stocks, once issued, are bought and sold by investors with no involvement of the original issuing firm are called a. secondary markets. b. tertiary markets. c. primary markets. d. post-issue markets.

a. secondary markets.

The mortgage pool underlying a mortgage pass-through security is actually owned by a _________ to which the mortgages are sold and which issues the securities backed by the mortgages. a. special purpose vehicle b. bank holding company c. savings bank d. commercial bank

a. special purpose vehicle

A group of investment banks that cooperate to help sell and distribute a new security issue is called a a. syndicate. b. cartel. c. holding company. d. special purpose vehicle.

a. syndicate.

Stock markets and stock market participants are subject to regulations imposed by _______ and by ________. a. the SEC; the exchanges b. FINRA; the U.S. Treasury c. the Federal Reserve Bank; the SEC d. the SEC; the U.S. Treasury

a. the SEC; the exchanges

Investors demand more funds at lower interest rates because: a. the cost of borrowing funds is lower b. the cost of borrowing funds is uncertain c. the cost of borrowing funds is higher d. the cost of borrowing funds may be less volatile

a. the cost of borrowing funds is lower

Investors are willing to supply more funds at higher interest rates because: a. their reward is higher b. the demand is higher c. their reward is lower d. demand is lower

a. their reward is higher

Business demand funds for which of the following reasons? a. to invest in long-term (fixed) assets like plant and equipment b. to satisfy short-term working capital needs for inventory and receivables c. to make speculative investments in currency markets d. to pay cumulative dividends to preferred shareholders

a. to invest in long-term (fixed) assets like plant and equipment b. to satisfy short-term working capital needs for inventory and receivables

Insider trading is illegal because through it, investors can earn _______ and enjoy an unfair advantage over other investors.

abnormal returns

After hitting the bottom in March 2009, the Dow Jones Industrial Average did not recover to its pre-crisis levels for

about four years

_____ must be paid by the buyer of a bond to the seller of a bond if the bond is purchased between interest payments

accrued interest

passive index funds are the best investment

active management is largely (though not always) wasted effort. -buy and hold, so as to avoid transaction costs

Treasury notes and bonds also trade in very ______

active secondary markets

For a Treasury note or bond, the accrued interest is calculated by multiplying the semiannual coupon payment times ______ divided by ______.

actual days since last coupon; actual days in coupon period

price-weighted average

add price of stocks and divide by a divisor. intuition: equivalent to buying one share of each stock in the portfolio notes: corresponds to buy and hold strategy of buying one share. the divisor starts at 1 and is then adjusted for dividends and stock splits

A mortgage whose interest rate is tied to some market interest rate or interest rate index is called a(n) _______ mortgage

adjustable rate

A mortgage whose interest rate is tied to some market interest rate or interest rate index is called a(n) _________ mortgage.

adjustable rate

Subprime mortgages were especially susceptible to default due to rising interest rates since many of them were ________ mortgages.

adjustable rate

To boost their earnings in the risky subprime mortgage market and take advantage of low interest rates, mortgage lenders offered _______ mortgages with very low initial rates.

adjustable rate

To boost their earnings in the risky subprime mortgage market and take advantage of low interest rates, mortgage lenders offered _________ mortgages with very low initial rates.

adjustable rate

to boost their earnings in the risky subprime mortgage market and take advantage of low interest rates, mortgage lenders offered ______ mortgages with very low initial rates

adjustable rate

If a piece of real estate is used to secure both a first and a second mortgage, the second mortgage holder is paid _______ the first mortgage is paid off.

after

motivation for event study

after southwest event, stock went down -1.01%. raw return does not reflect only information relevant to southwest

compare municipal bond returns with fully taxable corporate bonds by finding the ______ for corporate bonds

after tax return

cumulative voting

all directors up for election are voted on at the same time. The number of votes assigned to each stockholder equals the number of shares held multiplies by the number of directors to be elected

Level 3 ADR

allowed to issue shares directly into US Markets

rights offering

allows existing stockholders to purchase newly issued shares at a price slightly below market price

shelf registration

allows firms that plan to offer multiple issues of stock over a two-year period to submit one registration statement summarizing the firm's financing plans for the period --- allows firms to get stocks into the market quickly and cost-saves --- avoids 20 day waiting period

naked access trading

allows some traders to rapidly buy and sell stocks directly on exchanges using a broker's computer code without exchanges or regulators always knowing who is making the trades

A document listing every mortgage payment and the portion of interest and principal paid in each payment is called a(n)

amortization schedule

A document listing every mortgage payment and the portion of interest and principal paid in each payment is called a(n)

amortization schedule.

Competitive bids in a treasury bill auction specify the _________ and the _________

amount of par value of bills desired; discount yield

The cash flows from a coupon bond consists of a lump sum repayment of principal at maturity, plus

an annuity of fixed interest payments paid over the life of the bond

*Which of the following is NOT a likely impact of expansionary policies implemented by the Fed?

an increase in interest rates

in 2006, two events occurred that acted as triggers for the financial crisis of 2008. They were:

an increase in interest rates by the Fed ; a decline in housing prices

for a minimum payment option ARM, once the principal has reached 110 to 115 percent of the original loan balance, the borrower loses the minimum payment option and the loan must convert to

an interest only option ARM a fully amortizing option ARM

limit order

an order to transact at a specified price

market order

an order to transact at the best price available when the order reaches the post

Eurobonds pay interest ______ using a _____-day year.

annually; 360

Financial institutions encourage investment by savers by offering investments in __________, _____________, and __________.

annuities, pension funds, and life insurance.

A series of equal cash flows received at fixed intervals over an entire finite investment period are

annuity payments

evidence against semi strong

anomalies (small vs large)

An FI has fixed-rate liabilities in a foreign currency is exposed to the risk that the foreign currency may _______ against the FI's home currency, making interest and principal payments in the currency ______ expensive.

appreciate ; more

A firm that is net long in a currency will profit if that currency ______ against the dollar , and will lose if that currency ______ against the dollar.

appreciates ; depreciates

The ________ of a country's currency means that the country's goods are more expensive for foreign buyers , though foreign goods are cheaper for domestic buyers .

appreciation or revaluation

A ( n ) ______ in futures contracts seeks to take advantage of inefficiencies in the pricing of an asset between two markets by taking a long position in one market and a short position in the other market .

arbitrageur

A(n) _______ in futures contracts seeks to take advantage of inefficiencies in the pricing of an asset between two markets by taking a long position in one market and a short position in the other market.

arbitrageur

Empirical research has confirmed that stock markets _____ weak form efficient .

are

Empirical research has confirmed that stock markets ________ semistrong form efficient.

are

Empirical research has confirmed that stock markets ________ weak form efficient.

are

empirical research has confirmed that stock markets ______ weak form efficient

are

Mortgages differ from most other types of debt securities (except mortgage bonds) in that mortgages

are backed by real property

Mortgages differ from most other types of debt securities (except mortgage bonds) in that mortgages

are backed by real property.

As the market price "S" of the underlying asset increases. the put writer's potential gains

are limited to the put premium

Conventional mortgages _______ federally insured

are not

Conventional mortgages _________ federally insured.

are not

The fact the corporate insiders can earn abnormal returns by (illegally) trading on insider information indicates that stock markets ________ strong form efficient.

are not

conventional mortgages ______ federally insured

are not

Exchange traded derivative securities _______ subject to risk-based capital requirements for banks, but over the counter derivative securities potentially ______.

are not ; are

Unlike with other mortgage-backed securities, the mortgages used as collateral for mortgage-backed bonds normally _________ the security issuer's balance sheet.

are not removed from

semistrong form market efficiency

as public information arrives about a company, it is immediately impounded into its stock price

The discount yield for a treasury bill based on the current purchase price quoted by dealers is called the

asked yield

The ______ is the yield to maturity on a T-note or bond using the ________ in the calculation

asked yield; ask price

The _______ is the yield to maturity on the Treasury STRIP using the ________ in the calculation.

asked yield; ask price

The _______ is the yield to maturity on the Treasury note or bond using the ________ in the calculation.

asked yield; ask price

When FI's trade assets rather than hold them to maturity, they're exposed to market risk or

asset price risk

If the terms of repayment are not met by the bond issuer (borrower), the bond holder (investor) has a claim on the ______ of the bond issuer.

assets

Bond issuers usually set a bond's coupon rate close to the required rate of return at a time of issuance so the bond will initially sell

at PAR

With a forward contract , cash payments between buyer and seller occur ________ while futures contracts are _______.

at contract maturity ; marked to market daily

With a forward contract, cash payments between buyer and seller occur _______, while futures contracts are _______.

at contract maturity ; marked to market daily

A sinking fund provision is _______ to investors, so bonds with a sinking fund provision generally have _______ yields than bonds without.

attractive; lower

A sinking fund provision is _______ to investors, so bonds with a sinking fund provision generally have _______ yields than bonds without. attractive; lower unattractive; higher unattractive; lower attractive; higher

attractive; lower

a sinking fund provision is _______ to investors, so bonds with sinking fund provision generally have _______ yields than bonds without

attractive; lower

Select all that apply. For a minimum payment option ARM, once the principal has reached 110 to 115 percent of the original loan balance, the borrower loses the minimum payment option and the loan must convert to: a. a subprime mortgage. b. an interest only option ARM. c. a fully amortizing option ARM. d. an Alt-A jumbo mortgage.

b, c

Select all that apply. The two major regulations that were created to prevent unfair and unethical trading practices on securities exchanges were the a. the Sarbanes-Oxley Act. b. Securities Act of 1933. c. Gramm-Leach-Bliley Act. d. Securities Exchange Act of 1934. e. Financial Services Modernization Act.

b, d

Borrowers whose down payment is less than _______ percent of the purchase price are required to purchase ________. a. 20; supplemental homeowner's insurance b. 20; private mortgage insurance c. 15; supplemental homeowner's insurance d. 10; private mortgage insurance

b. 20; private mortgage insurance

The most widely reported stock market index is the a. S&P 500 Index. b. Dow Jones Industrial Average. c. Wilshire 5000 Index. d. NASDAQ Composite Index.

b. Dow Jones Industrial Average.

Due to the value of the conversion option, convertible securities generally pay ______ rate of interest than similar non-convertible securities. a. the same b. a lower c. a variable d. a higher

b. a lower

The size or denomination of each primary mortgage is a. no larger than $1,000,000. b. based on the borrower's needs. c. at least $100,000. d. a fixed multiple of $1,000.

b. based on the borrower's needs.

Alt-A mortgages are not ________ mortgages, so they cannot be sold to Fannie Mae or Freddie Mac. a. legal b. conforming c. risk-free d. risky

b. conforming

Securitization of mortgages allows mortgage issuers to separate _______ from the ________. a. interest rate risk; lending process b. credit risk; lending process c. good loans; bad loans d. liquidity risk; lending process

b. credit risk; lending process

A consequence of the unbiased expectation theory is that if investors believe that short-term interest rates will _______ in future periods, the yield curve will be ______ sloped. a. increase; negatively b. decrease; negatively c. decrease; positively d. increase; positively

b. decrease; negatively d. increase; positively

Common shareholders have a right to a share in the company's _______ and have a _______ on the firm's assets if the company fails, after all debt and tax liabilities have been paid. a. capital gains; residual claim b. dividends; residual claim c. success; lien d. dividends; mortgage

b. dividends; residual claim

In 2018, the second largest holder of mortgages were a. insurance companies. b. federal and related agencies. c. mortgage pools. d. individuals.

b. federal and related agencies.

Federally insured mortgages are originated by ________ and are guaranteed by U.S. government agencies. a. the Department of Housing and Urban Development b. financial institutions c. state agencies d. the U.S. Treasury

b. financial institutions

In _________ underwriting, the investment bank guarantees the firm a price for newly issued stock by purchasing the entire issue from the firm at a fixed price. a. open negotiation b. firm commitment c. syndicated d. best efforts

b. firm commitment

The emphasis of SEC regulations is on ________ but not ________. a. controlling the daily operations of exchanges; preventing investors from making bad decisions b. full and fair disclosure of information; preventing investors from making bad decisions c. preventing investors from making bad decisions; full and fair disclosure of information d. full and fair disclosure of information; preventing fraud in financial markets

b. full and fair disclosure of information; preventing investors from making bad decisions

the default risk premium tends to _______ when the economy is _______. a. decrease; contracting b. increasing; contracting c. decrease; expanding d. increase; expanding

b. increasing; contracting c. decrease; expanding

As a mortgage approaches maturity, the _______ portion of the monthly payment decreases and the ________ portion of the monthly payment increases. a. principal; fees b. interest; principal c. principal; interest d. fees; principal

b. interest; principal

A public record attached to the title of a property that serves as collateral for a mortgage is called a(n) a. escrow claim. b. lien. c. covenant. d. mortgage claim.

b. lien

Short-term securities have a more active secondary market and hence are more _____ than long-term securities: a. risky b. liquid c. desirable d. profitable

b. liquid

The theory that investors must be compensated for the higher price risk and lower liquidity inherent in longer-term securities is called the a. theory of market impostors b. liquidity premium theory c. market segmentation theory d. unbiased expectations theory

b. liquidity premium theory

For securities that are not highly liquid, investors demand a _______ to the interest rate as compensation. a. default risk premium b. liquidity risk premium c. rate risk premium d. inflation risk premium

b. liquidity risk premium

A highly liquid asset has which of the following characteristics? a. low sale price b. low transaction cost c. predictable price d. can be sold quickly

b. low transaction cost c. predictable price d. can be sold quickly

The _____ the default risk of a security, the ______ the interest rate demanded by the buyer. a. higher; lower b. lower; lower c. lower; higher d. higher; higher

b. lower; lower d. higher; higher

The type of mortgage-backed security in which a mortgage is used as collateral for a debt security is a a. pass-through security. b. mortgage-backed bond. c. collateralized mortgage obligation. d. collateralized debt obligation.

b. mortgage-backed bond.

Empirical evidence suggests that stock market movements are _______ predictors of future economic activity. a. consistently accurate b. not consistently accurate c. never accurate d. very rarely accurate

b. not consistently accurate

A stock market index in which the stock prices of the companies in the index are added together and divided by an adjusted value is called a ______ average. a. volume-weighted b. price-weighted c. size-weighted d. value-weighted

b. price-weighted

A ________ is the composite value of a group of secondary market traded stocks. a. composite market price b. stock market index c. stock market indicator d. market barometer

b. stock market index

The loanable funds theory views the level of interest rates as being determined by: a. consumer confidence b. supply and demand for funds c. the Federal Reserve Bank d. the U.S. Treasury

b. supply and demand for funds

Market segmentation theory posits that the ______ and _____ of securities of differing maturities determines the interest rate at each maturity and hence the shape of the yield curve. a. volume; cost b. supply; demand c. supply; risk d. risk; return

b. supply; demand

The relationship among the real risk-free rate, the expected inflation, andthe nominal intereset rate is a called: a. the nominal effect b. the Fisher effect c. the inflation effect d. the fisher gambit

b. the Fisher effect

Investors are willing to supply more funds at higher interest rates because: a. demand is lower b. their reward is higher c. the demand is higher d. their reward is lower

b. their reward is higher

Today, NYSE Euronext is owned by Intercontinental Exchange (ICE), and the combined ICE-NYSE Euronext is the ________ exchange group globally. a. fourth largest b. third largest c. second largest d. largest

b. third largest

example of lack of selfishness

backward induction. for game, person 2 should accept if $1 or more. If person 1 offers $1 and can keep $99 it's selfish. People do not do that. If you reject the money offered, you're being irrational

if you have a negative abnormal return

bad news

A mortgage for which only interest payments are required for period of years, followed by a single principal repayment is called a(n)

balloon payment mortgage

The bond trustee is frequently a bank trust department. bank examiner. chief financial officer. corporate attorney.

bank trust department.

the size or denomination of each primary mortgage is

based on the borrower's needs

The size or denomination of each primary mortgage is

based on the borrower's needs.

The size or denomination of each primary mortgage is

based on the borrowers needs

In an interest rate swap agreement, the party receiving or making the floating rate payments may be exposed to _______ if the index on which the payments are based does not closely track their floating rate asset or liability.

basis risk

The residual risk that arises because the prices of the assets or liabilities hedged are imperfectly correlated over time with the prices of the forward or futures contracts used to hedge is called

basis risk

______ are bonds with coupons attached to the bonds

bearer bonds

in the US, borrower may no longer issue ______

bearer bonds

Bearer bonds are owned by the _______ and have ______ attached to the bond so the bearer can collect interest payments

bearer; coupons

Bearer bonds are owned by the _______ and have _______ attached to the bond so the bearer can collect interest payments.

bearer; coupons

GNMA (Ginnie Mae)

began in 1968 split from FNMA sponsoring mortgage-backed securities programs of financial institutions acting a guarantor to investors in mortgage-backed securities regarding the timely pass-through of principal and interest

a potential flaw of the efficient markets hypothesis is that it relies on investors

behaving rationally and in their own interests

In _______ underwriting , the investment bank does not guarantee the firm a price for newly issued stock and acts as a distribution agent , selling the stock for a fee .

best efforts

With ________ underwriting, the investment bank makes no guarantees but acts as a placing or distribution agent for the bonds and collects a fee.

best efforts

in ______ underwriting, the investment bank does not guarantee the firm a price for newly issues stock and acts as a distribution agent, selling the stock for a fee

best efforts

Primary markets: _____ is a public offering in which the investment bank does not guarantee a firm price and acts more as a distribution agent for a fee

best efforts offering

in the equation for the effective annual return, the periodic rate is given by ________ and the number of periods per year is given by _________

bey/(365/n); 365/n

While common shareholders do not exercise control over the firm's daily activities, they can exercise their voting rights to elect the _______ who has(have) that responsibility.

board of directors

Before common stock can be issued by a corporation, shares must be authorized by a majority vote of the ________ and the ________.

board of directors & existing common shareholders

Before common stock can be issued by a corporation , shares must be authorized by a majority vote of the _______ and the ________.

board of directors ; existing common shareholders

A correct measure of annual return on a discount security is the

bond equivalent yield

The legal contract that specifies the rights and obligations of the bond issuer and the bond holders is called the

bond indenture

a _____ is the legal contract that specifies the rights and obligations of the issuer and the holders

bond indenture

The legal contract that specifies the rights and obligations of the bond issuer and the bond holders is called the

bond indenture.

changes in values of _____ can be used by bond traders to evaluate changes in the investment attractiveness of bonds of different types and maturities

bond indexes

______ reflect both the monthly capital gain and loss on bonds plus any interest income earned

bond market indexes

_____ are markets in which bonds are issued and traded

bond markets

The sinking fund may be managed by the

bond trustee

the representative of the bond holders who monitors compliance with the bond indenture is called the

bond trustee

the sinking fund may be managed by the

bond trustee

The representative of the bond holders who monitors compliance with the bond indenture is called the

bond trustee.

The representative of the bond holders who monitors compliance with the bond indenture is called the bond lawyer. bond monitor. bonding agent. bond trustee.

bond trustee.

The sinking fund may be managed by the

bond trustee.

Freddie Mac issues ______ to raise funds to purchase pools of conforming mortgages from primarily thrift institutions, then issues _______ based on those mortgage pools, which it sells to outside investors.

bond; pass through securities

_____ are long term debt obligations issued by corporations and government units

bonds

Fannie Mae issues ______ to raise funds to purchase pools of conforming mortgages from financial institutions, then issues ______ based on those mortgage pools, which it sells to outside investors

bonds; pass-through securities

Fannie Mae issues ______ to raise funds to purchase pools of conforming mortgages from financial institutions, then issues _______ based on those mortgage pools, which it sells to outside investors.

bonds; pass-through securities

Freddie Mac issues ______ to raise funds to purchase pools of conforming mortgages from primarily thrift institutions, then issues _______ based on those mortgage pools, which it sells to outside investors.

bonds; pass-through securities

If a repurchase agreement is used to _______ funds, a reverse repurchase agreement must be used to ______ funds

borrow; lend

In a forward rate agreement, the buyer is the _______ and the seller is the ______, unlike other types of debt securities.

borrower ; lender

motivation for Air Tran

bought by Southwest Airlines (merger). How quickly was this shown in Air Tran stock price? jumps up then levels out

Federal funds loans involving parties that do not hold reserve balances at the federal reserve are arranged by

broker

Repo agreements between two parties are sometimes arranged with the help of _________ and ___________

brokers;dealers

When the government's budgeted expenditures exceed its tax revenues, it is said to have a

budget deficit.

______ are the major suppliers of funds for municipal bonds and corporate bonds

businesses and financial firms

Many FI's ________ rather than _______ options for regulatory reasons.

buy ; write

A derivative hedge solution to an interest rate risk exposure caused by a large positive duration gap is to go off the balance sheet and

buy an interest rate swap

when demand for money increases:

buy bonds

The _______ of a call option on a bond is taking a _______ position in the call option.

buyer ; long

Buying a cap to hedge against rising interest rates is like _______ on interest rates.

buying a call

The payoff of a portfolio consisting of taking a long position on a bond and buying a put on that bond mimics the payoff of

buying a call option

An FI can hedge the interest rate risk exposure of a bond on the liability side of its balance sheet by

buying a call option on the bond

Buying a floor to hedge against falling interest rates is like _______ on interest rates.

buying a put

An FI can hedge the interest rate risk exposure of a bond on the asset side of the balance sheet by

buying a put option on the bond

Prior to 1995 , most foreign exchange trading was executed _________ while after that most trading was executed _________.

by direct dealing ; by electronic brokerage

The Dow Jones Industrial Average includes the values of ______ large successful firms of interest to investors. a. 20 b. 50 c. 30 d. 10

c. 30

In 2019, over ________ percent of all residential mortgages were sold or securitized. a. 50 b. 25 c. 65 d. 85

c. 65

NYSE Euronext also operates the _______ market, where OTC and pink sheet stocks are traded. a. NYSE MKT b. NYSE Arca c. ArcaEdge d. AMEX

c. ArcaEdge

Trading licenses are needed to make trades on the floor of the NYSE. These licenses are sold by _______ and are good for ______. a. Dutch auction; five years b. subscription; two years c. Dutch auction; one year d. open auction; one year

c. Dutch auction; one year

After the United States, _______ is the world's second largest and most developed securitization market. a. Asia-Pacific b. South America c. Europe d. China

c. Europe

In the United States, the ________ increased the cost of operating in the U.S. and resulted in a significant drop in IPO's of foreign firms in U.S. stock markets. a. tech stock collapse b. rising dollar c. Sarbanes-Oxley Act d. financial crisis of 2008

c. Sarbanes-Oxley Act

_________ are regarded as having no default risk. a. bankers' acceptances b. interbank loans c. U.S. government securities d. mortgage-backed securities

c. U.S. government securities

If the rate of interest is set above the equilibrium rate, there will be _____ loanable funds. a. just enough b. a deficit of c. a surplus of

c. a surplus of

If a piece of real estate is used to secure both a first and a second mortgage, the second mortgage holder is paid _______ the first mortgage is paid off. a. before b. at the same time c. after

c. after

A document listing every mortgage payment and the portion of interest and principal paid in each payment is called a(n) a. coupon book. b. payment schedule. c. amortization schedule. d. mortgage document.

c. amortization schedule.

A mortgage for which only interest payments are required for a period of years, followed by a single principal repayment is called a(n) a. adjustable-rate mortgage. b. fully amortized mortgage. c. balloon payment mortgage. d. partially amortized mortgage.

c. balloon payment mortgage.

Before common stock can be issued by a corporation, shares must be authorized by a majority vote of the ________ and the ________. a. bondholders; existing common shareholders b. board of directors; bondholders c. board of directors; existing common shareholders d. preferred shareholders; bondholders

c. board of directors; existing common shareholders

Preferred shareholders receive their payments before the _______ but after the _______. a. tax collector; bondholders b. firm's suppliers; bondholders c. common shareholders; bondholders d. bondholders; firm's suppliers

c. common shareholders; bondholders

In order to retain control of the firm within a select investor group, some firms issue _______ common stock with different voting rights. a. ordinary b. special c. dual-class d. preferred

c. dual-class

To the extent that stock prices today reflect investors' current expectations about _______, stock market indexes today might be useful to forecast ________. a. expected future dividends; future stock prices b. the future; future stock prices c. expected future dividends; future economic activity d. the stock market; future stock prices

c. expected future dividends; future economic activity

A mortgage which locks in the borrower's interest rate over the life of the mortgage regardless of how market rates change is called a(n) _________ mortgage. a. conventional b. adjustable-rate c. fixed-rate d. insured

c. fixed-rate

Ginnie Mae is a government-owned enterprise, but Fannie Mae and Freddie Mac are publicly owned corporations referred to as a. too big to fail. b. federally chartered institutions. c. government-sponsored enterprises. d. U.S. Treasury divisions.

c. government-sponsored enterprises.

The Fisher effect predicts that the _______ expected inflation is, the _____ will be nominal interest rates. a. higher; lower b. lower; higher c. higher; higher d. lower; lower

c. higher; higher d. lower; lower

Subprime mortgages are mortgage loans issued to a. buyers of distressed property. b. poor people. c. individuals with poor credit. d. wealthy individuals.

c. individuals with poor credit.

A real risk-free interest rate is what an investor could earn in a world without a. opportunity b. cost c. inflation d. risk

c. inflation

The advantage of a 15-year over a 30-year mortgage (fixed interest) to the borrower is _________. The advantage to the lender is _______. a. less total interest paid; lower default risk b. mortgage is paid off later; lower interest rate risk c. less total interest paid; lower interest rate risk d. mortgage is paid off later; lower default risk

c. less total interest paid; lower interest rate risk

For securities that are not highly liquid, investors demand a ______ to the interest rate as compensation. a. inflation risk premium b. rate risk premium c. liquidity risk premium d. default

c. liquidity risk premium

One model that is commonly used to explain interest rates and interest rate movements is called the: a. borrowed funds hypothesis b. interest rate parity theory c. loanable funds theory d. theory of financial relativity

c. loanable funds theory

An order for the broker and designated market maker to transact at the best price available when the order reaches the trading post is called a a. margin order. b. stop order. c. market order. d. limit order.

c. market order.

Households invest in corporate stock primarily through ________ and ________. a. mutual funds; money market accounts b. brokerage accounts; online trading accounts c. mutual funds; pension funds d. pension funds; savings accounts

c. mutual funds; pension funds

A security that represents a fractional claim on the stream of interest and principal payments made on a mortgage pool underlying the security is called a a. mortgage-backed bond. b. collateralized debt obligation. c. pass-through mortgage security. d. collateralized mortgage obligation.

c. pass-through mortgage security.

The quotes for the smallest firms on the OTC bulletin board are recorded manually on _______ published daily and distributed through the National Association of Securities Dealers. a. a directory b. the NASDAQ ECN c. pink sheets d. blue sheets

c. pink sheets

All of the Dow Jones and Company stock indexes are ________ indexes. a. volume-weighted b. value-weighted c. price-weighted d. size-weighted

c. price-weighted

As the ______ of a financial security decreases, it become more attractive to investors and investors are willing to supply more funds to invest in it. The supply curve shifts right and the interest rate _____. a. rating; increases b. return; increases c. risk; decreases d. reputation; decreases

c. risk; decreases

Fannie Mae also conducts a program by which it _______ mortgage-backed securities with a bank or thrift in exchange for original conforming mortgages. a. guarantees b. sells c. swaps d. buys

c. swaps

Freddie Mac also conducts a program by which it _______ mortgage-backed securities with a thrift in exchange for original conforming mortgages. a. guarantees b. sells c. swaps d. buys

c. swaps

The largest stock markets in the world are in a. the Pacific Basin. b. Europe. c. the United States. d. Japan.

c. the United States.

All transactions on the floor of the NYSE exchange occur at a a. trading desk. b. kiosk. c. trading post. d. trading office.

c. trading post.

Collateralized mortgage backed securities provide investors with a guaranteed annual coupon and protection from prepayment risk by repackaging the mortgage pool cash flows into _______ which can be sold separately to investors. a. preferred stock b. notes c. tranches d. bonds

c. tranches

value weighted average

calculate total market value of all firms then divided by a divisor intuition: equivalent to investing in a portfolio with weights equal to market caps of firms divided by total market cap of all firms notes: corresponds to buy and hold strategy of weighting by mkt cap. the divisor starts at 1 and is adjusted for dividends and stock splits

Options are classified as either ____ options or ____ options .

call ; put

A _______ gives the buyer the right but not the obligation to buy an underlying security at a prespecified price called the exercise or strike price.

call option

The buyer of a _______ on a future contract has the right to _______ the underlying futures contact on or before expiration of the option at the exercise price.

call option ; buy put option ; sell

For a callable bond, the difference between the face value of the bond and the call price paid is the call adjustment. call premium. call coupon. recall bonus.

call premium.

Many corporate bond issues include a _______ in their indentures which allows the issuer to require the bond holder to sell the bond back to the issuer at a set price above the par value of the bond.

call provision

Many corporate bond issues include a _______ in their indentures which allows the issuer to require the bond holder to sell the bond back to the issuer at a set price above the par value of the bond. recall covenant callback covenant call provision call indenture

call provision

A security which can be retired by the issuer before its maturity date is referred to as a ________ security.

callable

Level 2 ADR

can be listed on NYSE & NASDAQ

A highly liquid asset has which of the following characteristics?

can be sold quickly; low transaction cost; predictable price

what if you have a raw return

can't tell

A _____ is like a call option on interest rates , and is used to hedge against increases in interest rates .

cap

Convexity is good because the _______ of large interest rate increases tends to be smaller than the ______ of large interest rate decreases

capital loss effect; capital gains effect

____ are markets for equity and debt instruments with original issue maturities of more than one year

capital markets

To limit the borrower's exposure to increasing interest rates, an adjustable-rate mortgage may place ________ on the interest rate increase allowed each year and during the life of the loan.

caps

to limit the borrower's exposure ot increasing interest rates, an adjustable rate mortgage may place ______ on the interest rate increase allowed each year and during the life of the loan

caps

One difference between a stock option and a stock index option is that at expiration, the stock index option is always settled in

cash

One difference between a stock option and a stock index option is that at expiration , the stock index option is always settled in

cash .

In the event of a default, a credit default swap may be settled by a _______ or _______.

cash payment ; delivery of bonds

In the post-2008 era, swap markets have introduced _______ to act as the counterparty to both sides of a swap transaction and thus reduce risk to both buyers and sellers

central clearinghouses

A risk-free investment is one in which the return is

certain.

During the past 30 years, reversal of some trends that have reshaped the financial industry are:

changes in regulatory barriers, financial innovation changes, and changes in technology.

Changes in the value of bond indexes can be used by bond traders to evaluate __________ of investing in bonds of different types and maturities.

changes in the attractiveness

Changes in the value of bond indexes can be used by bond traders to evaluate __________ of investing in bonds of different types and maturities. the potential future return the potential future risk changes in the attractiveness the potential capital growth

changes in the attractiveness

The feds check clearing systems routes _______ to the depository institution on which they are written and ________ from one bank to another.

checks; funds

Trading curbs implemented by stock exchanges that are triggered by extreme price movements such as those caused by program trading are called

circuit breakers

Trading curbs implemented by stock exchanges that are triggered by extreme price movements such as those caused by program trading are called

circuit breakers .

the full or dirty price of a t-note or t-bond is the sum of the _____ & _____

clean price + accrued interest

The dirty price for a Treasury note or bond is the sum of the ______ plus the _______.

clean price; accrued interest

In the United States, the quoted price for a Treasury note or bond is the _______ which _______ include the accrued interest.

clean price; does not

In the United States, the quoted price for a Treasury note or bond is the _______ which _______ include the accrued interest. dirty price; does not clean price; does dirty price; does clean price; does not

clean price; does not

Buyers and sellers of future contracts do not deal directly with each other, but rather with the exchange _______ who ensures that all trades are completed.

clearinghouse

The exchange _______ breaks up every option trade into a buy and sell transaction and takes the opposite side of each transaction, separating buyers from sellers and guaranteeing that the trades will be completed.

clearinghouse

The exchange _______ breaks up every trade into a buy and sell transaction and takes the opposite side of each transaction , separating buyers from sellers and guaranteeing that the trades will be completed .

clearinghouse

As a bond approaches maturity, the _______ the bond's price is _______

closer; to face value

A _______ occurs when a firm takes a simultaneous position in a cap and a floor.

collar

A _______ occurs when an FI takes a simultaneous position in a cap and a floor.

collar

A mortgage backed bond uses mortgages not for their cash flows, but as ______ for the bondholders.

collateral

A mortgage-backed bond uses mortgages not for their cash flows, but as _______ for the bondholders.

collateral

For mortgages, the property purchased with the loan serves as _______ backing the loan

collateral

For mortgages, the property purchased with the loan serves as ________ backing the loan.

collateral

money market mutual funds compete with interest- bearing deposits at

commercial banks

Spot transactions can be conducted through ________ or ________.

commercial banks ; non - bank currency dealers

corporations raise large amounts of funds in the money markets, primary in the form of

commercial paper

finance companies are not banks and cannot issue deposits, so they raise large amounts of funds in the money markets, especially through the issuance of

commercial paper

Euro-CP is issued in Europe by __________ without involving a bank

commercial paper dealers

Preferred shareholders receive their payments before the _________ but after the _______.

common shareholders ; bondholders

Most preferred stock may be converted to _______ at any time the investor chooses.

common stock

what is a major reason that returns to common stock are more volatile than returns to bonds

common stockholders are residual claimants while bond holders have a high priority on the firm's cash flows

voting rights

common stockholders elect board of directors. The board of directors hires and oversees Senior managers. Senior Managers perform day-to-day tasks of the firm. -Common stockholders also vote on major firm issues such as mergers and acquisitions, choosing auditor, and compensation plans

Concurrent with the Sarbanes-Oxley Act in 2002, the NYSE took action to heighten corporate governance requirements on domestic NYSE listed companies, including

companies must have corporate governance guidelines and codes of ethics and conduct. CEO's must annually certify the firm's financial information provided to investors. companies must have a majority of independent directors. shareholders must approve all equity-based management compensation plans

the US treasury sells t-notes and t-bonds through ________ auctions

competitive and noncompetitive single-bid

bids submitted to a treasury bill auction can be either _______ or _______ bids

competitive; non competitive

Alt-A mortgages are not _______ mortgages, so they cannot be sold to Fannie Mae or Freddie Mac

conforming

Alt-A mortgages are not ________ mortgages, so they cannot be sold to Fannie Mae or Freddie Mac.

conforming

Jumbo mortgages are not ________ mortgages, so they cannot be sold to Fannie Mae or Freddie Mac.

conforming

alt-a mortgages are not ______ mortgages, so they cannot be sold to fannie mae or freddie mac

conforming

jumbo mortgages are not ______ mortgages, so they cannot be sold to Fannie Mae or Freddie Mac

conforming

bottom line of behavioral critique

conventional financial theory ignores how real people make decisions

Unlike Ginnie Mae, Freddie Mac securitizes both __________ and __________.

conventional mortgages; FHA/VA insured mortgages

unlike Ginnie Mae, Fannie Mae securitizes both ______ and ______

conventional mortgages; FHA/VA insured mortgages

A security which possesses the option to be exchanged for a different type of security at a preset price is called a ____ security.

convertible

A bond that can be exchanged for another security of the issuing firm is called a(n)

convertible bond

A bond that can be exchanged for another security of the issuing firm is called a(n)

convertible bond.

The exact bond price/interest rate relationship is _______, while duration is _______

convex; linear

The most widely held of all financial securities in pension funds, mutual funds and other other types of funds are

corporate stocks

The biggest issuers of debt in the global debt markets from 1996 through 2018 were

corporations and financial institutions

The main issuer of money market securities are

corporations and the government

In primary markets, the users of funds are frequently:

corporations needing funds for new projects

The major purchasers of bond market securities (investors) are

corporations. households. governments. foreign investors.

The additional diversification effect of investing in stocks issued by foreign corporations occurs because global economies and stock markets are not highly

correlated

The additional diversification effect of investing in stocks issued by foreign corporations occurs because global economies and stock markets are not highly

correlated .

historical data has shown that major us interest rates are _____ the discount rate

correlated with

As part of its ______ relationship with large banks, a small bank may make a loan that is too large for its balance sheet and sell parts of that loan to large banks.

correspondent banking

As part of its ___________ relationship with large banks, a small bank may make a loan that is too large for its balance sheet and sell parts of that loan to large banks.

correspondent banking

as part of its ______ relationship with large banks, a small bank may make a loan that is too large for its balance sheet and sell parts of that loan to large banks

correspondent banking

by replacing risky assets (mortgage loans) with cash or lower-risk assets, a mortgage sale can reduce a financial institution's credit risk, liquidity risk and interest rate risk, as well as regulatory costs such as the

cost of reserve requirements cost of holding required capital

By replacing risky assets (mortgage loans) with cash or lower-risk assets, a mortgage sale can reduce a financial institution's credit risk, liquidity risk and interest rate risk, as well as regulatory costs such as the

cost of reserve requirements ; cost of holding required capital

The risk that financial institutions face when doing business in foreign countries is called

country or sovereign risk

When an investor buys a Treasury note or bond between coupon payments, the buyer must compensate the seller for any portion of the ______ that has ______ between the last coupon payment and the settlement date.

coupon payment; accrued

When an investor buys a treasury note or bond between the coupon payments, the buyer must compensate the seller for any portion of the _______ that has _________ between the last coupon payment and the settlement date.

coupon payment;accured

The coupon interest paid periodically on a bond is calculated as the product of the _______ and the ______ of the bond

coupon rate; face value

The coupon interest paid periodically on a bond is calculated as the product of the _______ and the _______ of the bond.

coupon rate; face value

Individual rules and restrictions within the bond indenture are referred to as

covenants

Individual rules and restrictions within the bond indenture are referred to as

covenants.

While Ginnie Mae only guarantees the timing of payments on pass-through securities issued by others, Fannie Mae _______ and _______ pass-through securities.

creates ; guarantees payment of

While Ginnie Mae only guarantees the timing of payments on pass-through securities issued by others, Fannie Mae ________ and ________ pass-through securities.

creates; guarantees payment of

In recent years, the fastest growing types of swaps have been

credit default swaps

The third of the modern wave of derivative securities to trade starting in the 1990's and 2000's were

credit derivatives

By removing risky assets from its balance sheet, a mortgage sale can reduce a financial institution's

credit risk

The risk that an asset held by a financial institution may default and not be repaid is called:

credit risk

A total return swap provides some protection from both ______ and _______.

credit risk ; interest rate risk

A total return swap provides some protection from both _______ and _______.

credit risk ; interest rate risk .

By removing _______ from the lending process, credit swaps may loosen the incentives of FI's to carefully perform each step in the lending process.

credit risk exposure

The difference between the nominal rate quoted on a security and the rate quoted on a Treasury security with similar characteristics is called the

credit risk premium and the default risk premium

Selling/securitizing mortgages reduces which of the following types of risks of the originating financial institution?

credit risk, liquidity risk, interest rate risk

By removing risky assets from its balance sheet, a mortgage sale can reduce a financial institution's

credit risk.

Securitization of mortgages allows mortgage issuers to separate _______ from the ________.

credit risk; lending process

A(n) _______ is a call option whose payoff increases as the default risk premium on a specified benchmark bond of the borrower increases above some exercise spread.

credit spread call option

if preferred dividends are missed and the missing dividends go into arrears to be paid up before any common dividends can be paid, we say the preferred stock is

cumulative

the process by which all board of director seats are up for election and voted for at the same time is called

cumulative voting

The process by which all board of director seats are up for election and voted for at the same time is called

cumulative voting .

The third-largest exchange in the world based on trading volume is an ______ called the ______ network. a. ECN; IEX b. ATS; IEX c. ATS; Arca d. ECN; BATS

d. ECN; BATS

Historically the _______ has been the leader in daily stock trading volume, while the ______ is the leader in total number of firms listed. a. NYSE; AMEX b. NASDAQ; NYSE c. NASDAQ; AMEX d. NYSE; NASDAQ

d. NYSE; NASDAQ

Private mortgage pass-through securities must be registered with the _______ and are _______ in a manner similar to corporate bonds. a. Federal Reserve Bank; sold in the primary market b. U.S. Treasury; rated by a ratings agency c. U.S. Treasury; sold in the primary market d. SEC; rated by a ratings agency

d. SEC; rated by a ratings agency

For mortgages, the property purchased with the loan serves as ________ backing the loan. a. covenant b. indenture c. escrow d. collateral

d. collateral

Jumbo mortgages are not ________ mortgages, so they cannot be sold to Fannie Mae or Freddie Mac. a. legal b. risky c. documented d. conforming

d. conforming

While Ginnie Mae only guarantees the timing of payments on pass-through securities issued by others, Fannie Mae ________ and ________ pass-through securities. a. originates; purchases b. sponsors; guarantees payment of c. sponsors; originates d. creates; guarantees payment of

d. creates; guarantees payment of

The process by which all board of director seats are up for election and voted for at the same time is called a. absentee voting. b. proxy voting. c. straight voting. d. cumulative voting.

d. cumulative voting.

Private mortgage pass-through issuers issue ______ to raise funds to purchase pools of nonconforming mortgages from financial institutions, then issues _______ based on those mortgage pools, which it sells to outside investors. a. debt securities; mortgage bonds b. debt securities; collateralized debt obligations c. stock; mortgage bonds d. debt securities; pass-through securities

d. debt securities; pass-through securities

The demand for loanable funds _______ as interest rates increase. a. becomes more volatile b. does not change c. increase d. decreases

d. decreases

The weak form of market efficiency predicts that investors cannot make more than the ________ when using historical information to make investment decisions. a. abnormal return b. excess return c. return on the market d. fair (required) return

d. fair (required) return

In 2018, the single largest holder of mortgages were a. federal and related agencies. b. mortgage pools. c. individuals. d. financial institutions.

d. financial institutions.

In a dual-class common stock arrangement, the shareholders with the weaker voting rights are often compensated by receiving a. a discount on future share purchases. b. company bonds at a reduced price. c. additional shares of stock. d. higher dividend rights.

d. higher dividend rights.

Subprime mortgages have a ________ rate of default than prime mortgages and thus have ________ interest rates than prime mortgages. a. higher; lower b. lower; lower c. lower; higher d. higher; higher

d. higher; higher

The single largest holders of corporate stock in the U.S. are a. mutual funds. b. brokers and dealers. c. pension funds. d. households.

d. households.

Firms that re-invest profits in positive NPV projects today rather than paying dividends may see their stock price ______ over time and their shareholders rewarded with future _______. a. decrease; dividends b. stagnate; capital loss c. decrease; capital loss d. increase; capital gains

d. increase; capital gains

The financial sector of U.S. business is the ______ provider of loanable funds and the _____ user of loanable funds a. largest; smallest b. smallest; largest c. smallest; smallest d. largest; largest

d. largest; largest

the difference between the required yield on long and short-term securities of the same characteristics except maturity is called the: a. default risk premium b. inflation premium c. credit risk premium d. maturity premium

d. maturity premium

The prices of securities with longer maturities are ______ sensitive to changes in interest rates when compared to shorter maturity securities. a. less b. not c. partially d. more

d. more

Electronic communications networks (ECN) now process about ______ of all trading and _______ extended-hours trading. a. one-fourth; some b. one-third; much of c. one-half; most d. one-third; almost all

d. one-third; almost all

The largest category of mortgage loan type by amount outstanding is mortgages on a. multifamily dwellings. b. commercial properties. c. farms. d. one-to-four family dwellings.

d. one-to-four family dwellings.

Because it may not be possible to execute a limit order immediately, the order is recorded in a(n) ________ maintained by the ________ and is executed when and if the current market price of the stock equals the limit price. a. database; brokerage firm b. database; stock exchange c. order book; broker d. order book; designated market maker

d. order book; designated market maker

Securitization of mortgages has made it possible for mortgage originators to move from a(n) ________ banking model to a(n) ________ banking model. a. originate and sell; originate and hold b. originate and hold; securitize and hold c. originate and sell; securitize and sell d. originate and hold; originate and sell

d. originate and hold; originate and sell

Securities not sold on one of the organized exchanges such as the NYSE Euronext are traded _________ using an electronic marketplace. a. less effectively b. dealer to dealer c. person-to-person d. over the counter

d. over the counter

Over time, the most common shape of the yield curve is ______ indicating that on average, the maturity premium is ________. a. flat; zero b. unevenly sloped; uncertain c. negatively sloped; negative d. positively sloped; positive

d. positively sloped; positive

Program trading has been criticized for introducing increased _______ to stock markets a. market capitalization b. trading volume c. investor confidence d. price volatility

d. price volatility

One of the major functions of Ginnie Mae (GNMA) is to sponsor the mortgage-backed security programs of a. Freddie Mac (FHLMC). b. the FHA. c. Fannie Mae (FNMA). d. private industry issuers.

d. private industry issuers.

The simultaneous buying and selling of a portfolio of at least 15 different stocks valued at more than $1 million using computer programs to initiate the trades is called a. block trading. b. block arbitrage. c. artificial intelligence. d. program trading.

d. program trading.

The loanable funds theory categorizes all market participants (consumers, businesses, governments, and foreign participants) as net ________ or ________ of funds. a. users; consumers b. generators; printers c. providers; creators d. suppliers; demanders

d. suppliers; demanders

Common shareholders have the right to _______ on major issues in the firm, such as the election of the board of directors. a. speak their mind b. petition the firm c. proxy representation d. vote

d. vote

According to the ________ of market efficiency, a firm's current stock price reflects all ________ price and volume information about the firm. a. strong form; historic b. semistrong form; historic c. weak form; current public d. weak form; historic

d. weak form; historic

The NASDAQ is primarily a ______ market, in which multiple ______ stand ready to make a market for each listed stock.

dealer ::: dealers

The NASDAQ is primarily a ______ market , in which multiple _______ stand ready to make a market for each listed stock .

dealer ; dealers

____ are bonds backed solely by the general credit worthiness of the issuing firm, unsecured by specific assets/collateral, junior in their rights to secured debt

debentures

Private mortgage pass-through issuers issue ______ to raise funds to purchase pools of non-conforming mortgages from financial institutions, then issues _______ based on those mortgage pools, which it sells to outside investors

debt securities ; pass-through securities

Private mortgage pass-through issuers issue ______ to raise funds to purchase pools of nonconforming mortgages from financial institutions, then issues _______ based on those mortgage pools, which it sells to outside investors.

debt securities; pass-through securities

When government monetary policy is expansive and the money supply is expanded, interest rates will __________

decrease

The default risk premium tends to ____ when the economy is ____.

decrease, expanding; increase, contracting

A consequence of the unbiased expectations is that if investors believe that short-term interest rates will ____ in future periods; the yield curve will be ____ sloped.

decrease, negativity; increase, positively

The default risk premium tends to ________ when the economy is ___________.

decrease; expanding and increase; contracting

lowering domestic interest rates can cause the dollars foreign exchange rate to _____ resulting in an _____ in US exports

decrease; increase

The feds Quantitative easing programs increased the supply of funds to the long term securities market and thereby ________ long term interest rate

decreased

The demand for loanable funds ____ as interest rates increase.

decreases

The demand for loanable funds ________ as interest rates increase.

decreases

When the federal reserve Sells US treasury securities form the over the counter market it, ______ the supply of excess reserves and places ____ pressure on the federal funds rate

decreases; upward

Price sensitivity to interest rate changes increases with increasing maturity at a _______ rate.

decreasing

Futures contracts are NOT subject to _______ risk

default

Futures contracts are not subject to ______ risk .

default

The risk that a security issuer will fail to make interest and principal payment on the security is called ____ risk.

default

In theory, the higher the down payment made by the borrower, the less likely it is that the borrower will

default on the mortgage

In theory, the higher the down payments made by the borrower, the less likely it is that the borrower will

default on the mortgage

In theory, the higher the down payment made by the borrower, the less likely it is that the borrower will

default on the mortgage.

Treasury notes and bonds are backed by the full faith and credit of the U.S. government and are considered to be free from

default risk

treasury notes and bonds are _____ because they are backed by the full faith and credit of the US government

default risk free

The difference between the nominal rate quoted on a security and the rate quoted on a Treasury security with similar characteristics is called the

default risk premium; credit risk premium

Treasury notes and bonds are backed by the full faith and credit of the U.S. government and are considered to be free from

default risk.

In the new model of mortgage markets that became popular in the 1990s and 2000s, the loan originator passed the __________ of the loan on to the loan purchaser, thus reducing the originator's incentive to monitor the borrower's _________.

default risk; credit quality

in the "originate and sell" model of mortgage markets, the loan originator passes the ______ of the loan on to the loan purchaser, thus reducing the originator's incentive to monitor the borrower's ______

default risk; credit quality

The spread measures the return premium a bond earns to compensate the investor for _______, _______ and ________.

default risk; liquidity risk; special bond provisions

When an FI hires employees to monitor fund users on behalf of fund providers, they are said to be acting as

delegated monitors

The non financial sectors of US business __________ far more loanable funds than they ______________

demand; supply

The non-financial sectors of U.S. business ____ far more loanable funds than they ____.

demand; supply

When the US Treasury issues debt securities to fund federal budget deficits, they are acting as a ______________ of loanable funds

demander

Financial institutions frequently pool small deposits from individual savers and invest the funds in large denomination securities. This is called

denomination intermediation

the single largest liability on the federal reserve banks balance sheet is

depository institution reserves

A significant component of the money supply that is under the supervision of financial institution is

deposits at commercial banks and thrifts

A significant component of the money supply that is under the supervision of financial institutions is

deposits at commercial banks and thrifts

During the period 2003-2007 , the U.S. dollar ________ against the euro and most other major currencies as well .

depreciated

A financial security whose payoff is linked to another , previously issued security is called a ( n )

derivative security .

The largest U.S. city to ever suspend payments on its unsecured debt and declare bankruptcy was

detroit

The largest US city to ever suspend payments on its unsecured debt and declare bankruptcy was

detroit

The _______ of a country's currency means that the country's goods are less expensive for foreign buyers , though foreign goods are more expensive for domestic buyers .

devaluation or depreciation

With reserve annuity mortgage (RAM), the property is sold to retire the debt when the borrower

dies

With a reverse annuity mortgage (RAM), the property is sold to retire the debt when the borrower

dies.

A(n) _______ is an option that pays the buyer a stated amount in the case of a loan default

digital default option

An exchange rate quote that gives the cost of one unit of foreign currency in U.S. dollars is called a [ n )

direct quote .

commercial paper is sold to investors _________ and through ________ in the commercial paper market.

directly by the issuers; dealers

most secondary trading of t-notes and t-bonds occurs ____ through ______

directly; brokers and dealers

Like treasury bills, commercial paper is quoted on a ________ basis

discount

Each federal reserve banks _______ makes cash loans to financial insinuations by discounting eligible short-term securities at the official _______

discount widows: discount rate

The stop out yield for a T-bill auction is the _______ assigned to the issue, while the stop out yield for a treasury note or bond auction is the ______ for the issue

discount yield; yield to maturity

The stop-out yield for a Treasury bill auction is the _______ assigned to the issue, while the stop-out yield for a Treasury note or bond auction is the _______ for the issue.

discount yield; yield to maturity

The stop-out yield for a Treasury bill auction is the _______ assigned to the issue, while the stop-out yield for a Treasury note or bond auction is the _______ for the issue. discount yield; yield to maturity bond equivalent yield; yield to maturity bond equivalent yield; coupon rate discount yield; coupon rate

discount yield; yield to maturity

While Treasury bills are sold on a _______ basis, Treasury notes and bonds pay ________ interest.

discount; semiannual coupon

International stock markets are attractive to investors because of the additional ________ due to holding stocks issued by foreign corporations.

diversification effect

International stock markets are attractive to investors because of the additional _________ due to holding stocks issued by foreign corporations .

diversification effect

Common shareholders have a right to a share in the company's _______ and have a ________ on the firm's assets if the company fails , after all debt and tax liabilities have been paid .

dividends : residual claim

discretionary dividend payments

dividends are determined by the board of directors (who are elected by the common stock holders). No promised dividend payment,s no legal recourse if dividends are not paid. potential for very large dividend payments if the firm is highly profitable

Psychological research shows that people are not always rational, are not selfish, and their tastes

do change

If the market value of the securities the bond holder receives with conversion _______ the market value of the bond, the bond holder will _______. exceeds; not convert does not exceed; convert and take a loss does not exceed; not convert exceeds; convert and take a profit

does not exceed; not convert exceeds; convert and take a profit

strong form- what does it do

doesn't hold

In most years, the currency in which the largest amount of fixed rate debt is issued is the

dollar

many eurobonds are issued in

dollars

Firms that reward shareholders with capital gains rather than dividends avoid the ________ problem that is particular to dividends.

double taxation

example of price weighted

dow jones. 30 blue chip stocks.

The portion of the purchase price of a property that must be paid by the borrower at mortgage closing is called the

down payment

The portion of the purchase price of a property that must be paid by the borrower at mortgage closing is called the

down payment.

Trading licenses are needed to make trades on the floor of the NYSE. These licenses are sold by _______ and are good for ______.

dutch auction : 1 year

Minimum margin levels are set by

each exchange .

A financial institution's average cost of monitoring is lower than the individual investor's due to

economies of scale

In the 2000's, the open-outcry auction method of trading futures contracts was gradually replaced by

electronic trading platforms

A key assumption underlying purchasing power parity is that real risk - free interest rates are ______ across countries .

equal

According to the unbiased expectations theory, in equilibrium the return to an investor from holding one "n" year maturity security must _____ the return from holding a series of "n" one-year maturity securities.

equal

equal-weighted

equal dollar amounts in each stock intuition: spread investment equally in each firm notes: many retirement plans use this strategy. a related strategy is to put a fixed percentage into each investment

event study

estimate abnormal stock returns around events

goal of event study

estimate wealth change to shareholders due to the new, firm specific information

If the market value of the securities the bond holder receives with conversion _______ the market value of the bond, the bond holder will _______.

exceeds; convert and take a profit does not exceed; not convert

the federal reserve bank uses it's tools to influence either the demand for or supply of ________ at depository institutions

exces reserves

The CFTC has exclusive jurisdiction over all

exchange - traded derivative securities .

specialists

exchange members who have an obligation to keep the market going, maintaining liquidity in their assigned stock at all times

Although the diversification effect of international investment in stock is beneficial, the global investor is exposed to other risks, such as _______ risk and ______ risk.

exchange rate; political

Futures contracts are _______ contracts with _______ terms and conditions

exchange traded ; standardized

Futures contracts are _________ contracts with _______ terms and conditions .

exchange traded ; standardized

The CFTC has exclusive jurisdiction over all

exchange-traded derivative securities

municipal bonds are attractive to household investors because interest is:

exempt from federal and most local income taxes

If a call option is " in the money " , the buyer of the call can _______ buying the stock at the _______ and selling it at the market price .

exercise the option ; strike price " X "

If a call option is "in the money", the buyer of the can _______, buying the stock at _______ and selling it at the market price.

exercise the option ; the stroke price "X"

To the extent that stock prices today reflect investors ' current expectations about _________ stock market indexes today might be useful to forecast __________.

expected future dividends ; future economic activity

To the extent that stock prices today reflect investors' current expectations about _______, stock market indexes today might be useful to forecast ________.

expected future dividends; future economic activity

The major U.S. stock markets open at 9:30 am EST and close at 4:00 pm EST. Trading that occurs outside of those hours is called _______ and is processed through ________.

extended-hours trading; electronic communications networks (ECN)

single payment money market instruments are sold at ______ and are redeemed at __________ at maturity

face value; face value plus interest

The weak form of market efficiency predicts that investors cannot make more than the ________ when using historical information to make investment decisions .

fair ( required ) return

The semistrong of market efficiency predicts that investors cannot make more than the ________ by trading on public news releases.

fair (required) return

The strong of market efficiency predicts that investors cannot make more than the ________ by trading on privately held news about the firm.

fair (required) return

As interest rates _______, the payoff of a put option on a bond _______.

fall ; falls rise ; rises

Bonds are usually called when interest rates _______ so the issuer can gain by reissuing new bonds with a _______ interest rate.

fall; lower

Bonds are usually called when interest rates _______ so the issuer can gain by reissuing new bonds with a _______ interest rate. rise; lower fall; higher fall; lower rise; higher

fall; lower

bonds are usually called when interest rates _____ so the issuer can gain by reissuing new bonds with a __________interest rate

fall; lower

Other than residential mortgages, another area in which US financial institutions have been encouraged by government policy to provide financing is

farming

In 2018, the second largest holder of mortgages were

federal and related agencies

In 2018, the second largest holder of mortgages were

federal and related agencies.

the annual ____ is equal to annual expenditures (G) less taxes (T) received

federal deficit

The Federal Reserve also sets the target value for the ________, which can in turn affect other money market rates

federal funds rate

Some of the attractions of ADR's to U.S. investors looking for foreign stock investments are that (choose all that apply)

fees on ADR's are lower than fees on international mutual funds. they trade in dollars, not foreign currency. they diversify a stock portfolio like foreign securities.

When considering the decision to refinance a mortgage, the borrower must take into account not only the difference in interest rates, but also the ________ required for refinancing.

fees or points

Since December 2005, the SEC has allowed large companies to communicate with investors during the quiet period as long as the information is

filed with the SEC

The counterparty to a forward contract is often a ( n )

financial institution .

With a reverse annuity mortgage (RAM), the ______ makes regular payments to the

financial institution; borrower

With a reverse annuity mortgage (RAM), the _______ makes regular payments to the ________.

financial institution; borrower

Federally insured mortgages are originated by ________ and are guaranteed by U.S. government agencies.

financial institutions

In 2018, the single largest holder of mortgages were

financial institutions

The biggest issuers of both fixed rate and floating rate debt in most years are

financial institutions

In 2018, the single largest holder of mortgages were

financial institutions.

Consolidation of financial services such as commercial banking, insurance, and investment banking under one roof has led to the creation of a business entity called the

financial services holding company

Consolidation of financial services such as commercial banking, insurance, and investment banking under one roof has led to the creation of a business entity called the:

financial services holding company

With ________ underwriting, the investment bank guarantees the issuer a price for newly issued bonds by purchasing the entire issue at a fixed price.

firm comittment

In _______ underwriting , the investment bank guarantees the firm a price for newly issued stock by purchasing the entire issue from the firm at a fixed price .

firm commitment

With ________ underwriting, the investment bank guarantees the issuer a price for newly issued bonds by purchasing the entire issue at a fixed price.

firm commitment

With _________ underwriting, the investment bank guarantees the issuer a price for newly issued bonds by purchasing the entire issue at a fixed price

firm commitment

In _________ underwriting, the investment bank guarantees the firm a price for newly issued stock by purchasing the entire issue from the firm at a fixed price.

firm commitment where ... net proceeds = the price at which the investment bank purchases the stock from the issuer gross proceeds = the price at which the investment bank resells the stock to investors underwriter's spread = gross - net

Primary markets: ____ is a public offering of municipal bonds made through an investment bank, where the investment bank guarantees a price for the newly issued bonds by buying the entire issue and then reselling it to the public at a higher price

firm commitment underwriting

In a ( n ) ________ two parties agree to swap currencies based on a agreed - upon fixed exchange rate over a period of time .

fixed - fixed currency swap

If two countries both fixed the value of a unit of their currency to a quantity of gold , then the exchange rate between those two currencies was

fixed .

One of the risks of a fixed-fixed currency swap is that the ______ in the swap contract may favor one party over the other depending upon the current _______.

fixed exchange rate ; spot rate

A mortgage which locks in the borrower's interest rate over the life of the mortgage regardless of how market rates change is called a(n) _________ mortgage.

fixed rate

When interest rates are low, borrowers prefer _______ mortgages and lenders prefer ______ mortgages.

fixed rate ; adjustable rate

Globally, there is far more _______ debt than ______ debt issued.

fixed rate; floating rate

In a _______, two parties agree to swap currencies based on a agreed-upon fixed exchange rate over a period of time.

fixed-fixed currency swap

A mortgage which locks in the borrower's interest rate over the life of the mortgage regardless of how market rates change is called a(n) _________ mortgage.

fixed-rate

The buyer of an interest rate swap makes _______ payments, and the seller makes _______ payments

fixed-rate ; floating-rate

A practice in which , for a fee , traders are allowed to see incoming buy or sell orders milliseconds earlier than general market traders and quickly respond with their own transactions is called

flash trading .

The tendency of foreign investors to invest their funds in risk-free US government securities during times of crisis is referred to as

flight to quality

The tendency of foreign investors to invest their funds in risk-free US government securities during times of crisis is referred to as a

flight to quality

The tendency of foreign investors to invest their funds in risk-free U.S. government securities during times of crisis is referred to as a

flight to quality.

A _____ is like a put option on interest rates , and is used to hedge against decreases in interest rates .

floor

A ______ is like a put option on interest rates, and is used to hedge against decreases in interest rates.

floor

The buyer of a floor receives a payment from the seller proportional to the amount that interest rates drop below a specified _______ at maturity.

floor rate

flash trading

for a fee, traders are allowed to see incoming buy or sell orders milliseconds earlier than general market traders

we need lots of trading, few frictions

for this hypothesis to hold

The first of the modern wave of the derivative securities to trade were

foreign currency futures

Financial futures market trading was introduced in Chicago in 1972 with the establishment of trading in

foreign exchange futures contracts

Cash flows from the sale of products , services or assets denominated in a foreign currency are transacted in

foreign exchange markets .

The price at which one currency can be exchanged for another currency is called the

foreign exchange rate .

Currency swaps can be effectively used to reduce

foreign exchange risk .

______ are the major suppliers of funds for t-notes and t-bonds

foreign investors and governments

anchoring bias

forget about bad and think of good

recency

forget about good and think of bad

A contractual agreement between a buyer and a seller to exchange an asset for cash at a specified later date for a specified price is called a(n)

forward contract

To reduce the risk that the foreign currency will change relative to the dollar over the holding period , the firm can use a ________ to lock in the exchange rate at the end of the period .

forward contract

If a bond portfolio manager expects interest rates to rise, he or she can use a _______ to _______ bonds at a future date at a price specified today to offset the capital loss on the bond portfolio.

forward contract ; sell

Conceptually, a swap is a succession of _______ contracts.

forward rate

The exchange rate that is written into a forward contract is called the

forward rate .

NYSE Euronext is a public company that operates ______ exchanges in the U.S., of which the ______ is the largest and most well-known.

four ::: NYSE

a central bank is said to be independent if it is

free from pressure from politicians

The emphasis of SEC regulations is on _________ but not _________.

full and fair disclosure of information ; preventing investors from making bad decisions

The emphasis of SEC regulations is on ________ but not ________.

full and fair disclosure of information; preventing investors from making bad decisions

the emphasis of SEC regulations is on ______ but not ______

full and fair disclosure of information; preventing investors from making bad decisions

the price of the bond with accrued interest is called the _______ or the _____, the price without accounting for accrued interest is the ______

full price or dirty price; clean price

Most mortgage loans are structured so each payment includes both interest and principal, such that the principal is repaid in full by the maturity date. We say that the mortgage is

fully amortized

Most mortgage loans are structured so each payment includes both interest and principal, such that the principal is repaid in full by the maturity date. We say that the mortgage is

fully amortized.

two of the advantages of preferred stock to the issuing firm are

funds raised through its sale can be used to acquire income-generating assets unlike debt, the firm can miss a preferred dividend payment without fear of bankruptcy

Negotiable CD's are single payment securities with rates that are negotiated rather than market-determined. Once the rate has been negotiated, the CD's _________ can be determined.

future value

A ________ hedge produces symmetric gains and losses with interest rate increases and decreases.

futures

Like a forward contract, a ________ is a contractual agreement between a buyer and seller at time 0 to exchange a prespecified asset for cash at some later date at a price set at time 0.

futures contract

The underlying asset on a futures option is a(n)

futures contract

Hedging of currency risk reduces both possible _____ and possible _____ from currency movements .

gains ; losses

_______ are backed by the full faith and credit of the issuing municipality

general obligation (GO) bonds

municipal bonds backed by the full faith and credit of the issuer are call _______ bonds. Governments usually rely on _________to make payments on these bonds

general obligation, tax collections

Two types of municipal bonds exist: _______ and _______ bonds.

general obligation; revenue

Municipal bonds backed by the full faith and credit of the issuer are called ______ bonds. Governments usually rely on ______ to make payments on these bonds.

general obligations; tax collections

if you get positive abnormal return

good news

Treasury STRIPS are created by and sold to investors through

government securities brokers and dealers

Treasury bills have an active secondary market through _________ that buy and sell Treasury bills

government securities dealers

Ginnie Mae is a government-owned enterprise, but Fannie Mae and Freddie Mac are publicly owned corporations referred to as

government-sponsored enterprises

Ginnie Mae is a government-owned enterprise, but Fannie Mae and Freddie Mac are publicly owned corporations referred to as

government-sponsored enterprises.

The major supplier(s) of securities for capital markets (i.e. users of funds) are:

governments and corporations

The major issuers of bond market securities (borrowers) are

governments. corporations.

The major issuers of bond market securities (borrowers) are

governments; corporations; nonprofit organizations

The holder of a stock warrant will exercise the warrant and buy the stock when the market price of the stock is _______ the price specified in the warrant.

greater than

The holder of a stock warrant will exercise the warrant and buy the stock when the market price of the stock is _______ the price specified in the warrant. the same as close to less than greater than

greater than

the holder of a stock warrant will expertise the warrant and buy the stock when the market price of the stock is ________ the price specified in the warrant

greater than

_____ is the public debt and debt owed to the government borrowed by other departments in the government

gross federal debt

An important advantage of FI's functioning as swap dealers is that they generally

guarantee swap payments over the life of the contract

Collateral pledged in a repurchase agreement may have a ________ applied to protect the repo buyer (lender) against a change in the value of the collateral during the repo period.

haircut

slow thinking

high effort, slowly think through problems *almost always makes the right decision*

Money market securities have low default risk because their issuers are generally _________ borrower

high quality

In a growing economy, the demand for funds is ____ and interest rates will tend to ____.

high; increase

Foreign investors supply funds to U.S. financial markets when interest rates on U.S. securities are _____ than on comparable securities in their home markets.

higher

Foreign investors supply funds to US financial markets when interest rates rates on US securities are ___________ than on comparable securities in their home markets

higher

callable bonds have _____ return/yield

higher

Sub-prime mortgages have a ______ rate of default than prime mortgages and thus have _______ interest rates than prime mortgages.

higher ; higher

Traditional depository institutions find it difficult to compete with other financial institutions due to

higher costs due to regulation

Traditional depository institutions find it difficult to compete with other financial institutions due to:

higher costs due to regulation

In the early 2000's, lower interest rates and increased liquidity in the banking system led to

higher demand for mortgages.

In a dual-class common stock arrangement, the shareholders with the weaker voting rights are often compensated by receiving

higher dividend rights

in a dual class common stock arrangement, the shareholders with the weaker voting rights are often compensated by receiving

higher dividend rights

In a dual - class common stock arrangement , the shareholders with the weaker voting rights are often compensated by receiving

higher dividend rights .

Due to lack of information on the private placement issuers, interest rates paid to holders of privately placed bonds tend to be ______ interest rates paid on publicly placed issues.

higher than

Interest rates on second mortgages are generally _______ interest rates on primary mortgages.

higher than

The Fisher effect predicts that the _________ expected inflation is, the __________ will be nominal interest rates.

higher, higher & lower, lower

The ____ the annuity payment "PMT," the ____ the future value of the annuity.

higher, higher; lower, lower

The ____ the interest rate "r," the ____ the value of PV.

higher, lower; lower, higher

Since January 2003 the fed has set the discount rate to be _______than the federal fund rate, which tends to _____- borrowing from the fed discount widow over borrowing in the federal funds market.

higher; discourage

Subprime mortgages have a ________ rate of default than prime mortgages and thus have ________ interest rates than prime mortgages.

higher; higher

The __________ the default risk of a security, the _________ the interest rate demanded by the buyer

higher; higher lower; lower

The __________ the interest rate "r", the _______ the future value of the annuity.

higher; higher lower; lower

The ______ the annuity payment "PMT", the _________ the future value of the annuity.

higher; higher & lower; lower

The ______ the level of actual or expected inflation, the _____ the level of interest rates.

higher; higher & lower; lower

Bond insurance guarantees that payment will be made to investors in the event the issuer defaults. Bond insurers generally have a ______ credit rating than the bond ______.

higher; issuer

The _____ the interest rates "r", the _____ the value of PV

higher; lower & lower; higher

Bond insurance guarantees that payment will be made to investors in the event the issuer defaults ,and issuers generally have a _________ credit rating than the bond ________

higher;issuer

On the NASDAQ system, the inside quotes are the:

highest bid & lowest ask

competitve bidders submit bid yields and the ____ bid is accepted is called the ______

highest; stop out yield

Movements in stock market indices based on the same stock market tend to be

highly correlated .

By replacing risky assets (mortgage loans) with cash or lower-risk assets, a mortgage sale can reduce a financial institution's credit risk, liquidity risk and interest rate risk, as well as regulatory costs such as the cost of

holding required capital. reserve requirements.

A holder of a futures contract can liquidate their position by

holding the futures contract expiration and settling ; liquidating the position before the futures contract expires

weak form- what does it do

holds

An increase in which of the following factors will cause households to increase their supply of loanable funds provided?

household wealth; interest rates

The single largest holders of corporate stock in the U.S. are

households .

The largest net supplier of loanable funds in the U.S. is

households.

The single largest holders of corporate stock in the U.S. are

households.

efficient market hypothesis

hypothesis that prices of securities fully reflect available information about securities

Three of the disadvantages of preferred stock to the issuing firm are

if the firm misses preferred dividends, it may be difficult to raise additional capital until all missed payments are paid, preferred stock is a costlier source of funds than bonds, and (unlike coupon payments on debt) preferred dividends are not tax deductible

wash trades

illegally acting as both buyer and seller

Privately placed bonds have traditionally been among the most _______ securities in the bond market.

illiquid

If the forward hedge on a bond portfolio reduced the net interest rate exposure to zero, we say it has _______ the portfolio against interest rate risk.

immunized

calculate abnormal return

impact of new firm specific information

limited liability

important protection for common stock holders. personal wealth outside ownership of the firm is not affected by bankruptcy of the company. cannot lose more than the initial price paid for the stock

many general obligation bonds are insured by a third party to _______

improve the credit rating and liquidity

When economic conditions in a country ____, the supply of loanable funds will tend to ____ in that country.

improve, increase; decline, decrease

NYSE listing has traditionally benefited a firm by:

improving the stock's price, generating increased publicity for the firm, and providing easier access to primary market capital.

because new information is unpredictable, then changes

in stock price are unpredictable

residual claim

in the event of liquidation, common stockholders have the lowest priority in terms of any cash distribution

residual claim status

in the event of liquidation, common stockholders have the lowest priority in terms of any cash distribution. -dividends are paid out of net income -common stockholders have the lowest priority on the corporation's assets in the event of bankruptcy. COMMON STOCK IS RISKIER THAN BONDS OF THE SAME FIRM

If the price of the underlying stock is less than the strike price , the put option is said to be

in the money .

lack of unified framework

inconsistent in terms of support for which irrationality. -is it overconfidence? framing? anchoring bias? recency bias?

When government monetary policy is restrictive and the money supply is constricted, interest rates will

increase

Firms that re - invest profits in positive NPV projects today rather than paying dividends may see their stock price _______ over time and their shareholders rewarded with future _____.

increase ; capital gains

When interest rates _______, the market value of a portfolio of bonds _______.

increase ; decreases decrease ; increases

Spot transactions occur because the buyer of the asset believes its value will

increase in the immediate future

Spot transactions occur because the buyer of the asset believes its value will

increase in the immediate future .

firms that re-invest profits in positive NPV projects today rather than paying dividends may see their stock price ______ over time and their shareholders rewarded with future ______

increase, capital gains

When a US corporation or investor receives foreign currency cash flows, the US dollar value of those cash flows will ______ if the foreign currency _____ against the US dollar.

increase; appreciates & decrease; depreciates

raising domestic interest rates can cause the dollar's foreign exchange rate to _____ resulting in an _____ in US exports

increase; decrease

As an investors' utility (enjoyment) of assets obtained with borrowed funds increases, the demand for borrowed funds will ____ and interest rates will ____.

increase; increase

A consequence of the unbiased expectations theory is that if investors believe that short term interest rates will ___________ in future periods, the yield curve will be ______ sloped

increase; positively & decrease; negatively

As the marker price "S" of the underlying asset decreases, the put buyer's potential profit _______ (increases/decreases) to a limit.

increases

relative changes in yield spreads can result when the default risk (decreases/increases) for a firm that has one bond issue with a sinking fund provision and another issue with a sinking fund provision.

increases

the supply of loanable funds ___________ with increasing interest rates

increases

An exchange rate quote that gives the cost of one U.S. dollar in foreign currency is called a ( n )

indirect quote .

Subprime mortgages are mortgage loans issued to

individuals with poor credit

Another distinctive characteristic of the mortgage market is that the issuers of mortgage debt are often

individuals.

NYSE stocks are divided into 4 subgroups

industrial, transportation, utility, and financial companies

Since 1997, the US Treasury has issued Treasury Inflation Protected Securities (TIPS) whose returns are not fixed but are tied to

inflation rate

A consequence of the assumption that real risk - free interest rates are the same between two countries is that the interest rate differential between the two countries is equal to the

inflation rate differential between the two countries .

For inflation-indexed Treasury notes and bonds, the semiannual coupon payment is calculated using the _______ and the _______.

inflation-adjusted principal value; semiannual coupon rate

The semiannual coupon paid on TIPS securities is based on the _______ and so ________ from period to period.

inflation-adjusted principal; may vary

Interest rates on all bonds are affected by _______ and _______, which is typically measured using Treasury security rates.

inflation; the real risk-free rate

interest rates on all bonds are affected by _______ and ______ which is typically measured using treasury security rates

inflations the real risk free rate

If the issuing firm is in violation of the bond indentures, the bond trustee _______ and _______.

informs the bondholders; initiates legal action

Brokerage firms require that their customers initally post only a portion of their futures contacts, called a(n) _______, whenever they request a trade.

initial margin

Brokerage firms require that their customers initially post only a portion of their futures contracts , called a ( n ) _______ whenever they request a trade .

initial margin

Brokerage firms require that their customers initially post only a portion of their futures contracts, called a(n) ______, whenever they request a trade.

initial margin

When a firm offers its stock to be traded in public stock markets for the first time , this is referred to as a ( n )

initial public offering .

The act of trading on the basis of private firm information is called

insider trading.

The risk that a financial institution will not have enough capital reserves to offset a sudden loss is called:

insolvency risk

Currently, only _____ and ______ as defied by the SEC can participate in private placements of bonds

institutional investors; large investors

Currently, only ______ and _______ as defined by the SEC can participate in private placements of bonds.

institutional investors; large investors

Private Mortgage Insurance (PMI)

insurance contract purchases by a mortgage borrower guaranteeing to pay the financial institution the difference between the value of the property and the balance remaining on the morgage

The major difference between interest- bearing bank deposits and money market mutual funds is that interest bearing deposits are _________ whereas MMMF funds are not.

insured by the FDIC

Bonds backed by insurance will have the credit rating of the ______ and a substantially ______ interest rate than if uninsured.

insurer; lower

The default risk on a swap involves the loss of _______ only, while the default risk on a loan involves loss of ______

interest ; interest and principal

the holder of a bearer bond presents the coupons to the issuer for ____ when they come due

interest payments

(MP) Term to Maturity

interest rate are also related to term to maturity. (The yield curve is the relationship between a security's interest rate and its term to maturity).

Maturity intermediation may expose FI's to

interest rate risk

Maturity intermediation may expose financial institutions to

interest rate risk

The relatively small price changes that short maturity money market securities experience when interest rates change indicates that they have less _________ than longer maturity securities

interest rate risk

the mismatch of maturities between liabilities and assets of financial institutions exposes them to

interest rate risk

Swaps help their users better manage risks, such as

interest rate risk credit risk foreign exchange risk

Interest rate swaps can be effectively used to reduce

interest rate risk .

Treasury notes and bonds are subject to _______ risk and _______. Multiple choice question.

interest rate risk; liquidity risk

Unlike Treasury bill, treasury notes and bonds are subject to _________ risk and __________

interest rate risk; liquidity risk

Unlike Treasury bills, Treasury notes and bonds are subject to _______ risk and _______.

interest rate risk; liquidity risk

In the "originate and hold" model, FI's are exposed to risks, including:

interest rate risks, liquidity risk, and credit risk.

Two FI's that have opposing balance sheet and interest rate risk exposure are good candidates for a(n)

interest rate swap

A collar is used to hedge against

interest rate volatility

Nominal Interest rates

interest rates actually observed (and quoted) in financial markets. (examples: bank prime rate and federal funds rate. They incorporate all the potential risks that the cash flows of the security may/may not produce at PV.)

An increase in which of the following factors will cause households to increase their supply of loanable funds provided.

interest rates and household wealth

Because of their long maturity, t-notes and t-bonds experience wider price fluctuations than money market securities when __________

interest rates change

In order to achieve it's monetary policy goals, the federal reserve can target _______ or _________ but not at the same time.

interest rates; the money supply

the monthly payments of a fixed rate mortgage consist of ______ and ________ payments which sum to a ______ monthly amount

interest, principal, fixed

As a mortgage approaches maturity, the _______ portion of the monthly payment decreases and the ________ portion of the monthly payment increases.

interest; principal

Unlike macrohedging, microhedging ignores the _______ that already exist on the balance sheet.

internal hedges

Another measure introduced post - 2008 to reduce risk in swap markets was

international standardization of credit swap contracts .

At expiration, an option's value is equal to its

intrinsic value

At expiration , an option's value is equal to its

intrinsic value .

A direct quote for a particular exchange rate is the _____ of the indirect quote for that exchange rate , and vice - versa .

inverse

A direct quote for a particular exchange rate is the ______ of the indirect quote for that exchange rate , and vice - versa .

inverse

There exists a(n) _______ relationship between interest rates and the present value of a security.

inverse

Eurobonds are placed in the primary market by _______ using _______ offerings.

investment banks; firm commitment

When a large state or local government issues municipal bonds, many _______ are interested in underwriting the bonds and the bonds can generally be sold in a _______ market.

investment banks; national

Intermediaries in secondary market transactions are usually _____________ and _______________.

investment banks; securities brokers

Certain institutional investors are prohibited by state and federal law from investing in bonds that are below ______ , called ______ due to their risk

investment grade ; junk bonds

fair returns

investors earn a fair return, based on the risk they bear (according to CAPM). earning a fair return for bearing risk differentiates stock market investing from gambling

Similarities between money markets and capital markets?

issued by gov and corp's;

Credit risk protection transfers risk from the FI that _______ to an FI that _______.

issues a loan ; bears the default risk on that loan

Commercial banks participate in money markets as both _______ of and __________ in most types of money market securities.

issues; investors

With best efforts underwriting, the _______ assumes the risk that the entire bond issue might not be sold.

issuing firm

A financial institution can remove recently originated mortgages from its balance sheets by (choose all that apply)

issuing mortgage-backed securities against those mortgages. selling pools of mortgages on the secondary market.

preferred stock is a hybrid security with characteristics between stocks and bonds such as

it represents an ownership interest in the firm it pays a fixed periodic dividend payment it represents a claim on the firm's assets subordinate to the bondholders it pays dividends only after the bondholders have received their payments

A mortgage whose principal exceeds the conventional mortgage conforming limit set by Fannie Mae and Freddie Mac is called a _______ mortgage

jumbo

a mortgage whose principal exceeds the conventional mortgage conforming limit set by Fannie Mae and Freddie Mac is called a ______ Mortgage

jumbo

Unlike cumulative voting , straight voting gives the advantage to _______ in controlling seats on the board of directors .

large shareholders

Unlike cumulative voting, straight voting gives the advantage to _______ in controlling seats on the board of directors.

large shareholders

unlike cumulative voting, straight voting gives the advantage to ______ in controlling seats on the board of directors

large shareholders

Higher coupon bond return a _______ portion of the investor's required rate of return in the form of a coupon payments compared to lower coupon bonds.

larger

The financial sector of US business is the ___________ provider of loanable funds and the ______________ user of loanable funds.

largest; largest

Another risk for the small global investor is that information about foreign stocks is __________ than that for U.S. stocks.

less complete and timely

secured debt issues are _____ and require ____ yields relative to unsecured bonds

less risky, lower

The advantage of a 15-year over a 30-year mortgage (fixed interest) to the borrower is _________. The advantage to the lender is _______.

less total interest paid; lower interest rate risk

Issuers of privately placed bonds tend to be __________ than public issuers

less well know

Issuers of privately placed bonds tend to be _______ than public issuers.

less well known

Because mortgage bonds are backed with a claim on specific assets of the firm, they are ______ risky and have ______ yields than unsecured bonds.

less; lower

If the option never goes "in the money", the option holder can liquidate their position by

letting the option expire unexercised

A public record attached to the title of a property that serves as collateral for a mortgage is called a(n)

lien

A public record attached to the title of a property that serves as collateral for a mortgage is called a(n)

lien.

Financial institutions encourage investment by saver by offering investments in ____________, _________________ and _______________.

life insurance, annuities and pension funds

An order for the broker and designated market maker to transact only at a specific price is called a

limit order .

As the market price "S" of the underlying asset decreases. the call writer's potential gains are

limited to the call premium

Short-term securities have a more active secondary market and hence are more ______ than long term securities

liquid

Bond insurance increases the ______ of bonds by making it easier to sell them on the secondary market.

liquidity

Secondary markets offer buyers of securities the ability to convert them to cash quickly at fair market value, a characteristic known as ____________.

liquidity

Secondary markets offer buyers of securities the ability to convert them to cash quickly at fair market value, and characteristics known as _____

liquidity

bond insurance increases the ______ of bonds by making it easier to sell them on the secondary market

liquidity

The preference of fund suppliers to choose to hold cash versus investing in long-term securities increases that cost of long-term borrowing. This cost can best be described as

liquidity cost

The preference of fund suppliers to choose to hold cash vs. investing in long-term securities increases the cost of long-term borrowing. This cost can best be described as

liquidity cost

The theory that investors must be compensated for the higher price risk and lower liquidity inherent in longer-term securities is called the

liquidity premium theory.

By replacing relatively illiquid mortgage loans with cash or mortgage-backed securities, a mortgage sale can reduce a financial institution's

liquidity risk

T-bonds and t-notes experience _____ because the older ones are traded less frequently than newly issued t-bonds and t-notes

liquidity risk

The claims issued by financial institutions to investors often guarantee the investors immediate access to their funds on demand. This relieves the investors from

liquidity risk

The risk that a financial institution may have inadequate cash to meet requests for demand deposit withdrawal is called

liquidity risk

Firms that wish to list with the NYSE Euronext market must meet the _________ of the exchange, based on firm market value, earnings, total assets, shares outstanding, number of shareholders and trading volume.

listing requirements

Two important characteristics of federally insured mortgage loans are

little or no down payment is required ; there is a maximum loan size limit

Two important characteristics of federally insured mortgage loans are

little or no down payment is required. there is a maximum loan size limit.

home equity loans

loans that let customers borrow on a line of credit secured with a second mortgage on their homes

Mortgages

loans to individuals or businesses to purchase a home, land, or other real property

Swap and forward contracts can be written for _______, while futures and options are generally written for _______

long periods ; short periods

When an investor buys a futures contract, they are taking a

long position

When an investor buys a futures contract , they are taking a

long position .

*According to the liquidity premium theory of interest rates:

long term spot rates are higher than the average of current and expected future short term rates

Bonds are ________ debt obligations traded in _______ markets.

long term; capital

When using a forward contract as a bond portfolio hedge against rising interest rates, the ______ on the bond portfolio is partially or completely offset by the ______ on the forward contract.

loss ; gain

Because Treasury notes and bonds are free from default risk, they pay relatively _______ rates of interest to investors.

low

International sovereign bonds have historically exhibited ________ in returns with U.S. and international stocks. similar movements high correlation low correlation no correlation

low correlation

treasury notes and bonds have ____ to reflect low default risk

low interest rates

The decline of the share of assets held by commercial banks between 1949 and 2016 is due to

low interest rates, regulations imposed during the financial crisis, and strict capital regulations.

for t-notes and t-bonds, a high price paid mean there is a _____

low yield

A financial institution's average cost of monitoring fund users is ________ than the individual investor's cost.

lower

A financial institutions average cost of monitoring fund users is _________ than the individual investors cost

lower

Due to the value of the conversion option, convertible securities generally pay a __________ rate of interest than similar non-convertible securities

lower

A borrower is likely to refinance their mortgage when interest rates on new mortgages are _______ the rate of their current mortgage

lower than

A borrower is likely to refinance their mortgage when interest rates on new mortgages are _________ the rate on their current mortgage.

lower than

Due to the value of the embedded conversion option to investors, the yields on convertible bonds tend to be _______ the yields on nonconvertible bonds.

lower than

The credit risk on a swap is _______ the credit risk on a loan of equivalent dollar size.

lower than

a borrower is likely to refinance their mortgage when interest rates on new mortgages are ______ the rate on their current mortgage

lower than

due to the value of the embedded conversion option to investors, the yields on convertible bonds tend to be _______ the yields on nonconvertible bonds.

lower than

Because repurchase agreements are collateralized by high-quality securities, their yields are generally __________ the yields on un collateralized ___________

lower than; federal funds loans

The _____ the interest rate "r," the ____ the present value of the annuity.

lower, higher; higher, lower

The Fisher effect predicts that the ____ expected inflation is, the ____ will be nominal interest rates.

lower, lower; higher, higher

The ____ the level of actual or expected inflation, the ___ the level of interest rates.

lower, lower; higher, higher

The ___________ the interest rate "r", the ____________ the value of PV.

lower; higher higher; lower

The ______________ the annuity payment "PMT", the ____________ the present value of the annuity

lower; lower higher; higher

The________ the interest rate "r", the ______ the value of FV.

lower; lower & higher; higher

The _____________ the default risk of a security, the ___________ the interested rate demanded by the buyer

lower; lower and higher; higher

Investors will accept ______ interest rates on municipal bonds than on corporate bonds due the the ______ nature of municipal bonds.

lower; tax-exempt

to stabilize financial markets following the 9/11 terrorist attacks, the federal reserve bank

lowered interest rates provided loans to non-bank FI's such as investment banks

Common stockholders have the ______ claim on the assets of the firm in the event of bankruptcy , referred to as a _________.

lowest , residual claim

A single payment received at the beginning or end of an investment period is called a

lump sum payment

A single payment received at the beginning or end of an investment period is called a

lump sum payment.

An FI is _______ when it employs derivative securities contracts to hedge the entire balance sheet duration gap.

macrohedging

If at the end of the trading day , the level of funds in a margin account drops below the _______ the customer receives a margin call requesting they add funds to their account to bring it back up to the _______ level .

maintenance margin ; initial margin

bond market indexes are managed by _______

major investment banks

fast thinking

make quick decisions, low effort. Problem is that you may be prone to errors

Clearinghouses are able to perform their function as guarantor of an exchange's futures contracts by requiring all member firms to deposit sufficient funds from customer's _________ to ensure that the firm's customers will meet the terms of any futures contract entered into on the exchange .

margin accounts

The Financial Accounting Standards Board has since 2000 required that all firms reflect the _______ value of their derivative positions in their financial statements

mark to market

An order for the broker and designated market maker to transact at the best price available when the order reaches the trading post is called a

market order .

An order for the broker and designated market maker to transact at the best price available when the order reaches the trading post is called at

market order .

Similar to trading in the stock market, futures trades may be placed as _______ or _______.

market order ; limit orders

Similar to trading in the stock market, options trades may be placed as _______ or _______.

market order ; limit orders

Similar to trading in the stock market , futures trades may be placed as _______ or _______.

market orders ; limit orders

The theory that argues that investors have specific maturity preferences and must be paid a premium to hold securities of a different maturity is the:

market segmentation theory

The theory that argues that investors have specific maturity preferences and must be paid a premium to hold securities of a different maturity is the

market segmentation theory.

Both the unbiased expectations theory and the liquidity premium theory ignore investor preference regarding the ____ of the securities they hold.

maturity

Both the unbiased expectations theory and the liquidity premium theory ignore investor preferences regarding the __________ of the securities they hold.

maturity

Collateralized mortgage obligations (CMO) give investors greater control over the _______ of the mortgage-backed securities they buy

maturity

Collateralized mortgage obligations (CMO) give investors greater control over the _______ of the mortgage-backed securities they buy.

maturity

Financial institutions frequently transform short-maturity liabilities provided by investors into a portfolio of long-maturity assets. This is known as

maturity intermediation

Two important characteristics of money market securities are

maturity of one year or less, and low interest rate risk

The difference between the required yield on long and short term securities of the same characteristics except maturity is called the

maturity premium

The difference between the required yield on long and short-term securities of the same characteristics except maturity is called the

maturity premium

The difference between the required yield on long and short-term securities of the same characteristics except maturity is called

maturity premium.

In addition to electing the board of directors, shareholders may vote on other major firm changes, such as ______ and ______.

mergers ::: dividend changes

if evidence for weak,

messes up other two

treasury notes and bonds are issued in _____ denominations of ______

minimum; multiples of $100

The advantage of cumulative voting is that it allows _________ to have a real effect on the outcome of the election of the board .

minority shareholders

In a world without financial institutions where suppliers provided funds directly to users, suppliers of funds would face three types of risks/costs. These are

monitoring cost, price risk and liquidity cost

2-year notes are auctioned ______

monthly

a bond index reflects both the ________ plus ________ on a particular type of bond

monthly capital gain or loss coupon interest paid

A bond index reflects both the _________ plus _________ on a particular type of bond.

monthly capital gain or loss; coupon interest paid

A bond index reflects both the _________ plus _________ on a particular type of bond. monthly capital gain; coupon interest paid monthly capital gain or loss; coupon interest paid monthly capital loss; coupon interest paid monthly capital gain; monthly capital loss

monthly capital gain or loss; coupon interest paid

The prices of securities with longer maturities are _______ sensitive to changes in interest rates when compared to shorter maturity securities.

more

The prices of securities with longer maturities are ____________ sensitive to changes in interest rates when compared to shorter maturity securities

more

Because jumbo mortgages are larger than most mortgages and cannot be sold to Fannie Mae or Freddie Mac, they are considered to be _______ and have _______ interest rates.

more risky; higher

The farther the bond is from maturity, the _______ the price of the bond is to interest rate changes.

more sensitive

When the non price restrictions on borrowing are reduced, borrowers will demand _________ funds and interest rates will __________.

more, increase

When non-price restrictions on borrowing are reduced, borrowers will demand _________ funds and interest rates will ________.

more; increase

When the non-price restrictions on borrowing are reduced, borrowers will demand ____ funds and interest rates will ____.

more; increase

Bonds that are issued to finance specific projects whose assets are pledged as collateral for the bond issue are called

mortgage bonds

______ issued to finance specific projects, which are pledged as collateral for the bond issue

mortgage bonds

Bonds that are issued to finance specific projects whose assets are pledged as collateral for the bond issue are called

mortgage bonds.

The monthly interest and principal payments on the mortgage pool underlying a pass-through security are collected by the _______ for a fee.

mortgage originator or third-party servicer

The monthly interest and principal payments on the mortgage pool underlying a pass-through security are collected by the ________ for a fee.

mortgage originator or third-party servicer

Balloon Payment Mortgage

mortgage that requires a fixed monthly interest payment for a three-to five-year period. full payment of the mortgage principal is then required at the end of the period

The type of mortgage-backed security in which a mortgage is used as collateral for a debt security is a(n)

mortgage-backed bond

The type of mortgage-backed security in which a mortgage is used as collateral for a debt security is a

mortgage-backed bond.

the federal reserve banks carries a large balance of securities issued or guaranteed by the US government agencies, such as ________ backed by fannie mae, freddie mac and Minnie mae.

mortgage-backed securities

pass-through mortgage securities

mortgage-backed securities that "pass through" promised payments of principal and interest on pools of mortgages created by financial institutions to secondary market participants holding interests in the pools

Conventional Mortgages

mortgages issued by financial institutions that are not federally insured

Federally Insured Mortgages

mortgages originated by financial institutions, with repayment guaranteed by either the Federal Housing Administration (FHA) or the Veterans Administration (VA)

Jumbo mortgages

mortgages that exceed the conventional mortgage conforming limits

Subprime mortgages

mortgages to borrowers who have weakened credit histories

NASDAQ has the

most firms listed

issue with equal-weighted

most rebalance portfolio constantly

the repeated issuing of new loans and creation of new deposits triggered by a change in the reserve requirement results in a total change in bank deposits that is many times different than the original change in reserves. This is called _____-

multiplier effect

In order to convert the quoted yield on an federal funds loan to a bond equivalent yield, you must

multiply by 365/360

in order to convert the quoted yield on a negotiable CS to a bond equivalent yield, you must

multiply by 365/360

in order to convert the quoted yield on a repurchase agreement to a bond equivalent yield, you must

multiply by 365/360

_____ are securities issued by state and local governements

municipal bonds

Some corporate bonds and most ______ bonds are ______ bonds, meaning that the bond issue contains many maturity dates with a portion of the principal being paid off on each date.

municipal; serial

Households invest in corporate stock primarily through ________ and ________.

mutual funds :: pension funds

Households invest in corporate stock primarily through _______ and _______.

mutual funds ; pension funds

The second and third largest investors in U.S. stocks are _______ and _______.

mutual funds; foreign investors

The writing of _______ is considered to be especially risky by regulators.

naked options

The cumulative sum of past US government deficits is called the

national debt

the _____ is the sum of historical annual federal deficits

national debt (ND)

what is the evidence against the efficient market hypothesis

need to show that stock price changes are predictable in order to provide evidence against EMH

A financial institution that finances short-term floating rate assets with medium-term fixed rate liabilities will experience a _______ duration gap.

negative

With a minimum payment option ARM, it is possible for a borrower to make a minimum interest payment which is below the current required interest payment, resulting in the unpaid difference being added to the loan principal. This is called

negative amortization

With a minimum payment option ARM, it is possible for a borrower to make a minimum interest payment which is below the current required interest payment, resulting in the unpaid difference being added to the loan principal. This is called

negative amortization.

A firm's overall exposure to foreign exchange risk in any currency can be measured by its ________ in that currency .

net exposure

A firm's net exposure to a foreign currency is the sum of its _______ and its _______ in that currency .

net foreign assets ; net FX bought

A positive net exposure to a foreign currency implies that a firm is overall _________ in that currency .

net long

When on each swap payment date, one party makes a single payment to the other party for the net difference between the fixed and floating payments, it is referred to as

netting of payments

Implied Forward Rate=

nf1=[(1+R)^n/(1+R)^(n-1)]-1 (implied forward rates apply to UET)

limited liability

no matter what financial difficulties the issuing corporation encounters, neither it nor its creditors can seek repayment from the firm's stockholders. This implies that common stockholders' losses are limited to the original amount of their investment

class A

no voting rights. IPO and public

The quoted rates actually observed by investors in financial markets are called ____ rates.

nominal

The quoted rates actually observed by investors in financial markets are called ___________ rates

nominal

evidence for strong

none

issue with value weighted

none. this is the most common way

Empirical evidence suggests that stock market movements are _______ predictors of future economic activity.

not consistently accurate

Empirical evidence suggests that stock market movements are _________ predictors of future economic activity .

not consistently accurate

Unlike interest payments on debt, dividends are ________ and failure to pay dividends will not cause the firm to ________.

not guaranteed ::: default

Unlike interest payments on debt , dividends are ________ and failure to pay dividends will not cause the firm to ______.

not guaranteed ; default

The relationship between bond price sensitivity and maturity is

not linear

on September 20 and October 1, prices are

not random

if evidence against strong, means

nothing for semi and weak

In a forward rate agreement, at maturity the buyer receives (or makes) a payment based on the ______ and the ______.

notional principal; difference between the contract rate and the final market rate

To liquidate a futures contract before expiration , the futures holder calls their and requests a ( n ) ________ thus locking in their gains or losses on the position up to that point .

offsetting trade to their original position

Options are traded _______ and _______.

on exchanges ; over the counter

The final prospectus for the issue is distributed and selling of securities starts

on the day following the SEC registration approval

Electronic communications networks ( ECN ) now process about _______ of all trading and _______ extended - hours trading .

one - third ; almost all

On the NYSE , ______ dealer ( s ) may make a market in a particular stock , while on the NASDAQ , ______ dealer ( s ) may make a market for a particular stock .

one ; many

One "discount point" paid up front equals __________ of the principal value of the mortgage.

one percent

The debt instruments that are traded in the money markets are characterize by original maturities

one year or less

Level 1 ADR

only traded on the OTC market

Like futures trading , options trading on exchanges occurs using a ( n ) _________ method .

open - outcry auction

Like futures trading, options trading on exchanges occurs using a(n) _______ method.

open outcry auction

Futures contract trading on exchanges has traditionally been conducted using an _______ method

open-outcry auction

Because it may not be possible to execute a limit order immediately, the order is recorded in a(n) ________ maintained by the ________ and is executed when and if the current market price of the stock equals the limit price.

order book ::: designated market maker

Because it may not be possible to execute a limit order immediately , the order is recorded in a ( n ) _______ maintained by the _________ and is executed when and if the current market price of the stock equals the limit price .

order book ; designated market maker

Because it may not be possible to execute a limit order immediately , the order is recorded in a ( n ) ________ maintained by the _________ and is executed when and if the current market price of the stock equals the limit price .

order book ; designated market maker

Securitization of mortgages has made it possible for mortgage originators to move from a _______ banking model to a ____________ banking model

originate and hold; originate and sell

Securitization of mortgages has made it possible for mortgage originators to move from a(n) ________ banking model to a(n) ________ banking model.

originate and hold; originate and sell

Mortgage companies are financial institutions that ________ mortgages and earn ongoing income from servicing the mortgages.

originate and sell

the lead investment banks in a syndicate that directly negotiate with the issuing firm on behalf of the syndicate are called the

originating houses

The transfer of default risk to the mortgage buyer loosens the incentive of the ________ to carefully perform each of the steps of the lending process.

originator

If the price of the underlying stock is greater than the strike price , the put option is said to be

out of the money .

t notes have original maturities from _____

over 1 to 10 years

Swaps and forwards are ______ contracts which can be customized to the needs of the customer.

over the counter

securities not sold on one of the organized exchanges such as the NYSE Euronext are traded ______ using an electronic marketplace

over the counter

Forward contracts are _______ contracts with _______ terms and conditions

over the counter (OTC) ; customized

The secondary market for Eurobonds is the Belgian exchange. over-the-counter market. NYSE bond market. NASDAQ.

over-the-counter market.

A flaw of the Bretton Woods Agreement is that some currencies within the system became _______ and other currencies became _______ at the fixed exchange rates .

overvalued : undervalued .

Using a pure credit swap, if an FI lender's loan defaults, the counterparty will cover the default loss by making a payment equal to the _______ minus the _______ of the defaulted loan

par value ; secondary market value

A large bank may sell portions of its loans, called _______, to smaller banks

participations

A large bank may sell portions of its loans, called ________, to smaller banks.

participations

a security that represents a fractional claim on the stream of interest and principal payments made on a mortgage pool underlying the security is called a

pass-through mortgage security

A security that represents a fractional claim on the stream of interest and principal payments made on a mortgage pool underlying the security is called a

pass-through mortgage security.

The two major types of mortgage-backed securities that are created by securitizing mortgages are

pass-through securities ; collateralized mortgage obligations

The two major types of mortgage-backed securities that are created by securitizing mortgages are

pass-through securities. collateralized mortgage obligations.

implications for semi strong

passive strategies are best (index)

When an NYSE stock transaction is settled, the investor has three days to _____ and the floor or commission broker has three days to _______.

pay :: deliver

Due to the possibility of increasing interest payments and the eventual conversion to a fully amortizing loan, interest only option ARM's carry a great deal of

payment-shock risk

Due to the possibility of increasing interest payments and the eventual conversion to a fully-amortizing loan, interest only option ARM's carry a great deal of

payment-shock risk

Due to the possibility of increasing interest payments and the eventual conversion to a fully amortizing loan, interest only option ARM's carry a great deal of

payment-shock risk.

not hold

penny stock

corporate bonds are rated by ______

perceived default risk

Holders of the common stock of a corporation have an ownership claim on the firm that reflects their __________ the firm's total stock they hold .

percentage ownership of

Holders of the common stock of a corporation have an ownership claim on the firm that reflects their __________ the firm's total stock they hold.

percentage ownership of

treasury notes and bonds prices are quoted as _______

percentages of face value

The bond equivalent yield equation can be described in words as the product of the ________ and the ___________

periodic rate; number of periods per year

The quotes for the smallest firms on the OTC bulletin board are recorded manually on _______ published daily and distributed through the National Association of Securities Dealers .

pink sheets

The quotes for the smallest firms on the OTC bulletin board are recorded manually on _______ published daily and distributed through the National Association of Securities Dealers.

pink sheets

Banks that borrow in the federal funds market are not usually required to ________ for the funds they receive.

pledge collateral

Among the professional traders working in futures exchanges , the _______ take a position in the futures market based on their expectations of the future direction of prices of the underlying assets .

position traders

anomalies

predictable returns for small versus large, value versus growth, momentum, January effect

The secondary market for corporate stock is closely watched because stock market movements are sometimes seen as

predictors of future economic activity

When the firm's charter requires that new secondary stock issues be offered to existing shareholders before the general public , this is called the

preemptive right .

participating preferred stock

preferred stock in which actual dividends paid in any year may be greater than the promised dividends

noncumulative preferred stock

preferred stock in which dividend payments do not go into arrears and are never paid

cumulative preferred stock

preferred stock in which missed dividend payments go into arrears and must be made up before any common stock dividends can be paid

nonparticipating preferred stock

preferred stock in which the dividend is fixed regardless of any increase or decrease in the issuing firm's profits

Pass-through mortgage backed securities are subject to _______, an issue which the collateralized mortgage obligation was designed to address

prepayment risk

Pass-through mortgage backed securities are subject to _______, an issue which the collateralized mortgage obligation was designed to address.

prepayment risk

The risk that mortgage borrowers will repay or refinance their mortgages early, thus removing their monthly payment cash flows from the underlying mortgage backed security, is called

prepayment risk

The risk that mortgage borrowers will repay or refinance their mortgages early, thus removing their monthly payment cash flows from the underlying mortgage backed security, is called

prepayment risk.

The price of a STRIP security is the ________ of the face value of the STRIP discounted using the _________ and ________.

present value; yield to maturity; semiannual compounding

Nominal interest rates are important because they affect the ___________ of most securities traded in the money and capital markets, at home and abroad.

price

A stock market index in which the stock prices of the companies in the index are added together and divided by an adjusted value is called a _______ average .

price - weighted

All of the Dow Jones and Company stock indexes are ______ indexes .

price - weighted

The default risk of a future contract is less than the default risk of a forward contract for four reasons, which are

price movement limits daily marketing to market default guarantees by the exchange margin requirements

Long maturity securities have more _________ than short maturity securities.

price risk

Long maturity securities have more__________ than short maturity securities

price risk

The claims issued by FI's to investors often guarantee principal and a fixed rate of interest, compared to the riskier securities in which the FI invests the investor's funds. This form of asset transformation relieves the investor from:

price risk

The risk that price of a security may change between the time it is purchased and the time it is sold is called

price risk

Program trading has been criticized for introducing increased _______ to stock markets

price volatility

Program trading has been criticized for introducing increased _______ to stock markets .

price volatility

A stock market index in which the stock prices of the companies in the index are added together and divided by an adjusted value is called a ______ average.

price-weighted

All of the Dow Jones and Company stock indexes are ________ indexes.

price-weighted

Once authorized , new shares of stock are distributed to existing and new investors through a _________ with the help of investment banks .

primary market sale

Once authorized, new shares of stock are distributed to existing and new investors through a _________ with the help of investment banks.

primary market sale

IPO's are issued on the _____ and facilitated by _______.

primary market; investment banks

IPO's are issued on the ______ and facilitated by ______

primary markets ; investment banks

For inflation-indexed Treasury notes and bonds, the _______ is adjusted to reflect _______.

principal value; inflation

For inflation-indexed Treasury notes and bonds, the _______ is adjusted to reflect _______. coupon payment; LIBOR coupon payment; the federal funds rate principal value; inflation principal value; LIBOR

principal value; inflation

for inflation indexed treasury notes and bonds, the ________ is adjusted to reflect_________

principal value; inflation

give one example of information that is not reflected in stock prices under semi-strong for version of efficient market hypothesis

private discussions between CEO and Board of Directors

One of the major functions of Ginnie Mae (GNMA) is to sponsor the mortgage-backed security programs of

private industry issuers

one of the major functions of Ginnie Mae is to sponsor the mortgage-backed security programs of

private industry issuers

In order for secondary mortgage market buyers to purchase a conventional mortgage with a loan-to-value ratio of greater than 80 percent, the borrower must have

private mortgage insurance

A sale of a bond issue to a large institutional investor or a group of large investors with or without the help of an investment bank and without SEC registration is called a(n)

private placement

_____ bonds are sold to one or a few qualified institutional investors

private placement

a sale of a bond issue to a large institutional investor or a group of large investors with or without the help of an investment bank without SEC registration is called a

private placement

A sale of a bond issue to a large institutional investor or a group of large investors with or without the help of an investment bank and without SEC registration is called a(n)

private placement.

On futures exchanges, ______ perform a similar function as the designated market makers do in the stock exchanges.

professional traders

evidence against strong

profitable insider trading (Martha Stewart)

The greater the number of ____, the greater the demand for funds by businesses.

profitable projects

The greater the number of ________, the greater the demand for funds by businesses

profitable projects

The simultaneous buying and selling of a portfolio of at least 15 different stocks valued at more than $1 million using computer programs to initiate the trades is called

program trading

The simultaneous buying and selling of a portfolio of at least 15 different stocks valued at more than $ 1 million using computer programs to initiate the trades is called

program trading .

To stabilize financial markets following the 9/11 terrorist attacks, the Federal Reserve Bank

provided loans to non-bank FI's such as investment banks ; lowered interest rates

To stabilize financial markets following the 9/11 terrorist attacks, the Federal Reserve Bank

provided loans to non-bank FI's such as investment banks. lowered interest rates.

Specialty Covenants (provisions)

provisions such as convertibility and taxability that alter the interest rate on a security. An SCP captures the effects of these provisions.

In a(n) _______, a lender sends periodic payments to a counterparty, who will make a payment to compensate the lender if the lender's loans default. If the loans do not default, the counterparty keeps the payments.

pure credit swap

what was strategy of federal and state prosecutors regarding potential criminal conduct during financial crisis? Why did they pursue this strategy?

pursue fines against corporations, not criminal charges against individuals. difficult to prove actions were illegal. many immoral/unethical business practices are not illegal

3-, 5-, and 10-year notes are auctioned _______

quarterly (feb, may, aug, nov)

Money markets are efficient at eliminating the opportunity cost of holding excess cash balances by allowing investors to convert cash to securities and back again _______ and _________

quickly; at low cost

The central bank of Hamsterville conducted an open market sale of existing treasury bonds. Which of the following best describes a reason that the bank would do this?

raise interest rates, lower aggregate demand, and lower the price level.

if the efficient market hypothesis holds, then changes to stock prices are

random

returns are

random

Eugene Fama's conclusion

random stock price changes mean that the stock market is efficient *little bit counter intuitive at first*

in some cases, a bank may negotiate the _______, the _______ and the _______ of a CD with a customer.

rate; maturity and size

Factors affecting interest rates:

real rate of interest (RIR) DRP Liquidity risk premium Special Provisions (SCP) Term to Maturity (MP)

The stamp on a prospectus accompanying a new issue that indicates the issue has not yet been approved for sale by the SEC is called the:

red herring

to meet the SEC full disclosure requirements and to provide information to potential investors about the firm, the issuing firm files a ______ with its registration statement

red herring prospectus

In exchange for points paid up front, the financial institution originating the mortgage will

reduce the interest rate

In exchange for points paid up front, the financial institution originating the mortgage will

reduce the interest rate.

_____ are bonds in which payments are made automatically to the owner of record

registered bonds

With a _______ bond, the bond owner's identification information is maintained electronically by the issuer and _______ are mailed or wire transferred to the owner.

registered; coupon payments

With a _______ bond, the bond owner's identification information is maintained electronically by the issuer and _______ are mailed or wire transferred to the owner. registered; periodic announcements bearer; coupon payments bearer; principal repayments registered; coupon payments

registered; coupon payments

The invention of the Eurobond was motivated by the desire to avoid ______ and _______ on debt securities issued by firms in ______.

regulations; high taxes; the US

The risk that mortgage borrowers will repay or refinance their mortgages early, thus removing their monthly payment cash flows from the underlying mortgage backed security, is called

repayment risk

In the U.S. savings banks and savings associations have been directed to provide financing primarily for

residential mortgages

When interest rates are high, businesses prefer to finance investments with

retained earnings.

example of equal weighted

retirement plans. not buy and hold so you have to rebalance

Bonds that are issued to finance a specific revenue-generating project and whose payments are made from those revenues are called _______ bonds.

revenue

_____ are sold to finance specific revenue generating projects

revenue bonds

the majority of municipal bonds are ______

revenue bonds

An option is a contract that gives the holder the _____ but not the _____ to buy or sell an underlying asset at a prespecified price for a specified . time period .

right ; obligation

An option is a contract that gives the holder the _______ but not the _______ to buy and sell an underlying asset at a prespecified price for a specified time period.

right ; obligation

As interest rates _______, the potential for the writer of a put option on a bond to receive a positive payoff _______.

rise ; falls fall ; rises

When interest rates _______, the value of a Eurodollar futures contract _______.

rise ; falls fall ; rises

As interest rates _______, the potential for the writer of a call option on a bond to receive a positive payoff _______.

rise ; rises fall ; falls

Derivative securities allow _____ to be transferred from those that want less to those that are willing to bear more .

risk

Issuing securities through a syndicate of investment banks spreads the ______ associated with the issue among multiple banks, and results in a larger ________.

risk ::: pool of investors

Issuing securities through a syndicate of investment banks spreads the _____ associated with the issue among multiple banks , and results in a larger ___________.

risk ; pool of investors .

Stock warrants are attached to bonds by ______ issuers to make the bond more attractive to investors and ______ the interest rate that must be paid.

risk; reduce

An increase in which of the following factors will cause households to decrease their supply of loanable funds provided?

riskiness of investments; immediate consumption needs

Stock warrants are attached to bonds by ______ issuers to make the bond more attractive to investors and ______ the interest rate that must be paid.

risky; reduce

Stock warrants are attached to bonds by ______ issuers to make the bond more attractive to investors and ______ the interest rate that must be paid. risky; reduce risky; increase creditworthy; reduce creditworthy; increase

risky; reduce

Stock warrants are attached to bonds by _______ issuers to make the bond more attracted to investors and ______ the interest rate that must be paid

risky; reduce

mortgage sale

sale of a mortgage originated by a bank with or without recourse to an outside buyer

The sale of a mortgage to an outside buyer who may, under certain circumstances, return the mortgage to the seller is called a(n)

sale with recourse

The sale of a mortgage to an outside buyer who may, under certain circumstances, return the mortgage to the seller is called a

sale with recourse.

Among the professional traders working in futures exchanges , the _______ take positions for very short periods of time in an attempt to profit from the active trading .

scalpers

When a firm's stock is already trading in public stock markets and it offers an additional issue of stock for sale, this is referred to as a(n)

seasoned offering

When a firm's stock is already trading in public stock markets and it offers an additional issue of stock for sale , this is referred to as a ( n )

seasoned offering .

Because commercial paper is usually held by investors to maturity, there is no active ___________ for commercial paper

secondary market

______ municipal bonds trade infrequently due mainly to a lack of information on bond issuers

secondary markets

Debenture holders generally receive their promised payments only after all ________ debt holders have been paid.

secured

Debenture holders generally receive their promised payments only after all ________ debt holders have been paid. commercial paper unsecured short-term secured

secured

debenture holders generally receive their promised payments only after all _________ debt holder have been paid

secured

mortgage bonds are ____

secured debt issues

For a public issue of stock, the investment bank underwriting the issue must register the issue with and get approval from the

securities and exchange commission (SEC)

The FI's that experienced a dramatic increase in their share of total FI assets during the period of 1948 to 2016 are

securities brokers/dealers, investment companies, and pension funds

Securitized

securities packaged and sold as assets backing a publicly traded or privately held debt instrument

Security markets offer issuers of securities important information about how the issuer is performing and how much it will cost to raise additional capital. This information is conveyed through the:

security market price

when demand for money decreases:

sell bonds

In the "originate and distribute" model, financial institutions issue loans then

sell the loans quickly

In an interest rate swap, the _______ agrees to make a number of _______ payments based on a rate and a notional principal.

seller; floating interest rate buyer; fixed interest rate

a financial institution can remove recently originated mortgages from its balance sheets by

selling pools of mortgages on the secondary market, issuing mortgage-backed securities against those mortgages

30-year bonds are auction ______

semi-annually (feb and aug)

A STRIP is a Treasury security in which ________ and ________ can be separated and sold as individual securities.

semiannual coupon payments; repayment of principal

A Strip is a treasury security in which ______ and ________ can be separated and sold as individual securities

semiannual coupon payments; repayment of principal

Municipal bonds pay coupons

semiannually

Municipal bonds pay coupons

semiannually.

Floating-rate Eurobonds pay interest ______ using _____ as the basis.

semiannually; LIBOR

according to the ______ form of market efficiency, as public information arrives about a company it is immediately impounded into its ______ price

semistrong, stock

_____ mature sequentially, meaning the issue contains many maturity dates, with a portion of the issue being paid off on each date

serial bonds

The board of Governors of the Federal Reserve system consists of ____ members headquartered in _______

seven; Washington D.C

If an FI stands to lose on the balance sheet when interest rates rise, then the appropriate hedge is a _______ position in Eurodollar futures.

short

changing the discount rate provides an ______ to the market and the economy that the federal reserve would like to see higher or lower rates in the economy.

signals

The bond indenture that requires that the issuer retire a portion of the bond principal early over a number of years is called a _________ provision. sinking fund retirement fund call and sell buyback fund

sinking fund

a ____ is a requirement that the issuer retire a certain amount of the bond issue early as the bonds approach maturity

sinking fund provision

A rights offering usually allows existing shareholders to purchase shares at a price that is

slightly below the market price .

noncompetitive bids allows _________ investors to participate in the treasury bill auction market with our incurring large ________

small; risk

In the case of ________ and ________, the owners may be liable to satisfy the firm's debts out of their private wealth holdings.

sole proprietorships ::: partnerships

Decentralized Markets

some stocks trade OTC -very small firms but larger number than in organized exchanges. Possibly 30000 stocks. *illiquid stocks, infrequent trading, subject to price manipulation*

The mortgage pool underlying a mortgage pass-through security is actually owned by a _________ to which the mortgages are sold and which issues the securities backed by the mortgages.

special purpose vehicle

In the NYSE, each listed stock is assigned to one _______ who acts as a _______ for that stock.

specialist ::: designated market maker

Investment rates have to be cautious as to not fall into the _____ and send bad signals to the market

speculant rates

A ( n ) _______ in futures contracts buys to profit from a price increase or sells to profit from a price decrease .

speculator

An agreement that involves the immediate and simultaneous exchange of cash for securities is called a

spot contract

An agreement that involves the immediate and simultaneous exchange of cash for securities is called a

spot contract .

Municipal bonds are issued by ______ and ______ governments to fund a temporary imbalance between expenditures and receipts, or to finance long-term capital outlays.

state/ local

Municipal bonds are issued by ______ and ______ governments to fund a temporary imbalance between expenditures and receipts, or to finance long-term capital outlays.

state; local

An investor who thinks the stock market index will rise will buy a _______, and the investor who thinks the stock market index will fall will buy a _______.

stock index call option ; stock index put option

An investor who thinks the stock market index will rise will buy a _______, and the investor who thinks the stock market index will fall will buy a

stock index call option; stock index put option

An option contract for which the underlying asset is the value of a major stock market index is a(n)

stock index option

An option contract for which the underlying asset is the value of a major stock market index is a

stock index option .

A ________ is the composite value of a group of secondary market traded stocks.

stock market index

A _________ is the composite value of a group of secondary market traded stocks .

stock market index

Strong Form Market Efficiency

stock prices fully reflect all public and private information

weak form

stock prices reflect all past trading information. includes history of past prices, trading volume, or short interest

semi-strong

stock prices reflect all publicly available information is regarding the firm. includes past trading information, fundamental data on the firm's product line, quality of management, accounting statements, patents held, earning forecasts, and accounting practices

strong form

stock prices reflect all relevant information, including private information held by insiders of the firm. includes all public information, private information held by insiders of the firm (CEO, Board, etc)

Which of the following information is not usually found in a Wall Street Journal stock quote?

stock rating

NYSE has the largest dollar amount of

stock traded

Bonds issued with _______ attached give the bond holder the opportunity to purchase common stock of the issuing firm at a specified price up to a specified date, without loss of the underlying bond.

stock warrants

Bonds issued with _______ attached give the bond holder the opportunity to purchase common stock of the issuing firm at a specified price up to a specified date, without loss of the underlying bond. stock options stock warrants redemption certificates coupons

stock warrants

_____ give bond holders the opportunity to purchase common stock at a pre-specified price

stock warrants

One of the reasons that _____ are considered to be riskier than _____ is due to their _________ status .

stocks ; bonds ; residual claim

penny stocks

stocks that trade for less than $5 per share

The coupon rate for a Treasury note or bond is determined by rounding the _______ down to the nearest ______ percent.

stop-out yield; 0.125

The coupon rate for a Treasury note or bond is determined by rounding the _______ down to the nearest ______ percent. yield to maturity; 0.100 stop-out yield; 0.125 yield to maturity; 0.150 stop-out yield; 0.050

stop-out yield; 0.125

The process by which board of director seats are put up for election and voted for one director at a time is called

straight voting

The process by which board of director seats are put up for election and voted for one director at a time is called

straight voting .

The decline of the share of assets held by commercial banks between 1948 and 2016 is due to

strict capital regulations, low interest rates and regulations imposed during the financial crisis

Interest rates on Alt-A mortgages tend to be between the rates on _______ and _______ mortgages.

sub-prime ; prime

Interest rates on Alt-A mortgages tend to be between the rates on _______ and _______ mortgages.

sub-prime; prime

interest rates on Alt-a mortgages tend to be between the rates on ______ and ______ mortgages

sub-prime; prime

Debentures which are junior in their rights to both secured debt and regular debentures are called

subordinate debentures

______ are also secured bonds, junior in their rights to mortgage bonds and debentures

subordinated debentures

riskiness level of debentures, mortgage bonds, and subordinated debentures:

subordinated debentures -> debentures -> mortgage bonds

The bonds which are considered to be the riskiest and pay the highest yields are

subordinated debentures.

Rising interest rates and falling home prices triggered mortgage defaults primarily in the _______ mortgage market

subprime

Rising interest rates and falling home prices triggered mortgage defaults primarily in the ________ mortgage market.

subprime

Interest rates on Alt-A mortgages tend to be between the rates on _______ and _______ mortgages.

subprime; prime

sentiment

sunshine, sports. mood shouldn't affect stock prices

When local government temporarily invest tax revenues in financial markets until the funds are needed, they become a ____ of loanable funds.

supplier

When local governments temporarily invest tax revenues in financial markets until the funds are needed, they become a __________ of loanable funds

supplier

The loanable funds theory categorizes all market participants (consumers, businesses, governments, and foreign participants) as net _____________ or _______________ of funds.

suppliers; demanders

The loanable funds theory views the level of interest rates as being determined by

supply and demand for funds

The loanable funds theory views the level of interest rates as being determined by:

supply and demand for funds

The loanable funds theory views the level of interest rates as being determined by

supply and demand for funds.

The equilibrium interest rate for a security is the interest rate where the ________ and _________ intersect.

supply curve, demand curve

The equilibrium interest rate for a security is the interest rate where the ____ and ____ intersect.

supply curve; demand curve

A ( n ) _____ is an agreement between two parties to exchange specified periodic cash flows in the future based on an underlying instrument or price .

swap

Fannie Mae also conducts a program by which it _______ mortgage-backed securities with a bank or thrift in exchange for original conforming mortgages.

swap

Financial institutions will often function as _______, matching counterparties to a swap or even taking one side of the swap themselves.

swap dealers

Freddie Mac also conducts a program by which it _______ mortgage-backed securities with a thrift in exchange for original conforming mortgages

swaps

A group of investment banks that cooperate to help sell and distribute a new security issue is called a

syndicate .

the primary market of t-notes and t-bonds is similar to that of ______

t-bills

if start at bottom of tower,

take out ones above

The source of funds for repayment of municipal bonds is ______ or _________

tax receipts project revenues

Because general obligation bonds rely upon tax revenues for repayment, ______ is usually required.

taxpayer approval

implications of weak form

technical analysis has no value as a trading strategy

Most corporate bonds are ______ bonds, meaning that the entire issue matures on a single date.

term

Most corporate bonds are ______ bonds, meaning that the entire issue matures on a single date. serial bearer registered term

term

most corporate bonds are ______ bonds, meaning that the entire issue matures on a single date

term

______ mature all at once

term bonds

example of slow thinking

test prep

example of fast thinking

texting

Repayment of federally insured mortgages is guaranteed by either _______ or _______.

the FHA ; the VA

repayment of federally insured mortgages is guaranteed by either ______ or ______

the FHA; the VA

Most secondary bond market trades are carried out on ______ including virtually all _______ transactions.

the OTC market; large

Between 1990 and 2018 , markets in _______ grew more than markets in other parts of the world as a percent of worldwide stock market capitalization .

the Pacific Basin

Stock markets and stock market participants are subject to regulations imposed by _______ and by _______.

the SEC : the exchanges

Private mortgage pass-through securities must be registered with _______ and are _______ in a manner similar to corporate bonds.

the SEC ; rated by a ratings agency

Stock markets and stock market participants are subject to regulations imposed by _______ and by ________.

the SEC; the exchanges

The largest stock markets in the world are in

the US

recourse

the ability of a loan buyer to sell the loan back to the originator should it go bad

A time draft issued by a bank is an order for the bank to pay specified amount to __________ at __________

the bearer; specific date

Electronic trading platforms automatically provide traders with _________ gathered from _________.

the best prices available ; multiple dealers .

the principal amount of a second mortgage is limited by

the borrower's equity in the property

The principal amount of a second mortgage is limited by

the borrower's equity in the property.

Investors demand more funds at lower interest rates because

the cost of borrowing funds is lower

Liquidity preference theory is used to motivate

the demand for money.

Municipal bonds are not free from default risk. Defaults on municipal bonds tend to rise and fall with

the economy

Municipal bonds are not free from default risk. Defaults on municipal bonds tend to rise and fall with

the economy.

Municipal bonds are not free from default risk. Defaults on municipal bonds tend to rise and fall with exchange rates. the economy. taxes. interest rates.

the economy.

The two secondary markets for the trading of corporate bonds are ______ and ______.

the exchange market; the OTC market

The two secondary markets for the trading of corporate bonds are ______ and ______. NYSE bonds; the CME group NASDAQ; the OTC market the exchange market; the OTC market NYSE bonds; NASDAQ

the exchange market; the OTC market

A defining characteristic of a fractional reserve banking system is

the fact that banks do not keep all deposits on reserve.

The problem that arises when individual investors leave it to each other to collect information and monitor the fund users is called

the free rider problem

common stock

the fundamental ownership claim in a public or private corporation (characteristics include discretionary dividend payment, residual claim status, limited liability, and voting rights)

efficient market hypothesis definition

the hypothesis that prices of securities fully reflect all available information about securities.

Since 1997, the U.S. Treasury has issued Treasury Inflation Protected Securities (TIPS) whose returns are not fixed but are tied to

the inflation rate

Since 1997, the U.S. Treasury has issued Treasury Inflation Protected Securities (TIPS) whose returns are not fixed but are tied to

the inflation rate.

The active participants in the secondary market for banker's acceptances are

the largest banks

Once attached to a title, a lien remains in place until

the loan is paid off

Once attached to a title, a lien remains in place until

the loan is paid off.

The U.S. Treasury issues Treasury notes and bonds to finance ______ and ______.

the national debt; other government expenditures

Netting of payments implies that the default exposure of the in-the-money party is limited to _______ rather than either the total fixed or floating payment itself.

the net payment

In straight voting, the total number of votes eligible to vote for each board of directors seat is equal to

the number of shares outstanding

The transfer of default risk to the mortgage buyer loosens the incentive of _______ to carefully preform each of the steps of the lending process.

the originator

In the originate and sell banking model, the default risk of the mortgage loans is passed from _______ to _______

the originator ; the buyer

In the originate and sell banking model, the default risk of the mortgage loans is passed from ______ to ______,

the originator; the buyer

Whether the call option buyer exercises the option profitably or lets it expire un - exercised , the buyer always loses

the premium paid .

syndicate

the process of distributing securities through a group of investment banks

The writer of a put option sells the option to the put buyer for which the writer receives _______ from the buyer.

the put premium

Real Interest Rates

the rate that compensates for the opportunity cost of forgone consumption.

A consequence of the international Fisher effect is that the gains to a U.S. investor from investing in a foreign currency with higher interest rates will be offset by the depreciation of that currency relative to the dollar , so the investor will realize

the same average nominal returns from investing in the U.S. dollar as from investing in the foreign currency .

A consequence of interest rate parity is that the gains to a U.S. investor from investing in a foreign currency with higher interest rates and covering that position with a forward contract will be offset by difference between the forward and spot rates , so the investor will realize

the same returns from investing in the U.S. or the foreign country .

market effeciency

the speed with which financial security prices adjust to unexpected new pertaining to interest rates or a stock-specific characteristic

In terms of severity, the financial crisis of 2008 is generally considered to be

the worst recession in the US since the Great Depression

all noncompetitive bidders and competitive bidders who bid less than the stop out receive _____

their full allotment

Legally, the limited liability feature enjoyed by shareholders implies that their losses are limited to

their original investment in the firm

Investors are willing to supply more funds at higher interest rates because

their reward is higher.

rewards exist

there are rewards for those who keep prices in line. hard work, time, effort, creativity can be rewarded

market prices are not "right" or "wrong"

there is no concept of "right" or "wrong" in efficient markets framework -market prices are simply the best unbiased expectation of future cash flows

summary for evidence against EMH

there is strong evidence against semi-strong form of EMH -the behavioral critique of the efficient market hypothesis is important to our understanding of how markets work -more research is needed in order to validate this critique -our understanding of the behavioral finance is at the early stages

Foreign bonds are long-term bonds issued outside of the issuer's home country and are denominated in the currency of the country in which the

they are issued

Some of the risks of ADR's to U.S. investors looking for foreign stock investments are that (choose all that apply)

they are subject to political risk. they are subject to exchange rate risk. information on the underlying firm may be limited or difficult to understand.

some of the attractions of ADR's to U.S. investors looking for foreign stock investments are

they trade in dollars, not foreign currency they diversify a stock portfolio like foreign securities fees on ADR's are lower than fees on international mutual funds

Today , NYSE Euronext is owned by Intercontinental Exchange ( ICE ) , and the combined ICE - NYSE Euronext is the _______ exchange group globally .

third largest

Today, NYSE Euronext is owned by Intercontinental Exchange (ICE), and the combined ICE-NYSE Euronext is the ________ exchange group globally.

third largest

In addition to commercial banks, __________ also showed a decline in their share of total FI assets between 1948 and 2016.

thrifts

Treasury STRIPS allow investors to match their ______ with the ______ of the STRIP security.

time preference for funds; maturity date

Treasury STRIPS allow investors to match their ______ with the ______ of the STRIP security. time preference for funds; maturity date investment horizon; face value financial needs; face value time preference for funds; payment amount

time preference for funds; maturity date

Circuit breakers promote investor confidence in times of high market volatility by giving investors

time to assimilate incoming information and make investment choices

Circuit breakers promote investor confidence in times of high market volatility by giving investors

time to assimilate incoming information and make investment choices .

The _______ of an option is associated with the probability that the intrinsic value of the option could increase between the option's purchase date and the option's expiration date.

time value

The reason that an out of the money option has value and trades on the option markets is due to its

time value

Another of the major functions of Ginnie Mae (GNMA) is to provide ______, guaranteeing the timely pass-through of interest and principal payments to the security holder.

timing insurance

Another of the major functions of Ginnie Mae (GNMA) is to provide _______, guaranteeing the timely pass-through of interest and principal payments to the security holder.

timing insurance

another of the major functions of Ginnie Mae is to provide ______, guaranteeing the timely pass-through of interest and principal payments to the security holder.

timing insurance

Businesses demand funds for which of the following reasons?

to satisfy short-term, working capital needs for inventory and receivables. to invest in long-term (fixed) assets like plant and equipment.

A ( n ) _______ involves swapping an obligation to pay interest at a fixed or floating rate for payments representing the total return on a loan ( interest and principal value changes ) .

total return swap

A ( n ) ________ involves swapping an obligation to pay interest at a fixed or floating rate for payments representing the total return on a loan ( interest and principal value changes ) .

total return swap

A _______ is used to hedge against an unexpected change in the credit risk of a counterparty to a loan or bond.

total return swap

The Wall Street Reform and Consumer Protection Act of 2010 called for most OTC derivatives to be

traded on regulated exchanges

limits to arbitrage

trading costs, limited attention, restrictions on trading can help explain some findings

dark pools of liquidity

trading networks that provide liquidity but that do not display trades on order books

All transactions on the floor of the NYSE exchange occur at a

trading post .

Collateralized mortgage backed securities provide investors with a guaranteed annual coupon and protection from prepayment risk by repackaging the mortgage pool cash flows into ______ which can be sold separately to investors.

tranches

Collateralized mortgage backed securities provide investors with a guaranteed annual coupon and protection from prepayment risk by repackaging the mortgage pool cash flows into _______ which can be sold separately to investors.

tranches

NYSE stock are divided into four subgroups, each of which has its own index. they are

transportation utility industrial financial

_____ are issued by the US treasury to finance the national debt and other government expenditures

treasury notes and bonds (t-note and t-bond)

True or false: A secondary market for municipal bonds exists, though it is generally less active than the secondary market for Treasury bonds.

true

True or false: Treasury notes and bonds trade in very active secondary markets.

true

dual class firms

two classes of common stock are outstanding with differential voting rights assigned to each class.

dual-class firms

two classes of common stock are outstanding, with differential voting and/or dividend rights assigned to each class

run regression to estimate B and X

typically use 240 daily returns, beginning 60 days before the announcement (or 60 observations monthly). market return can be total market value weighted index or S&P 500 index

Call provisions are _______ to bond holders so callable bonds generally have ______ yields than non-callable bonds.

unattractive; higher

Call provisions are _______ to bond holders so callable bonds generally have ______ yields than non-callable bonds. unattractive; higher unattractive; lower attractive; lower attractive; higher

unattractive; higher

The theory that asserts that the yield curve at a given point in time reflects the market's current expectations of future short-term interest rates is the

unbiased expectation theory

For large interest rate decreases, duration _______ the increase in bond price

under predicts

With firm commitment underwriting, the _______ assumes the risk that the entire bond issue might not be sold.

underwriter

When a firm issues commercial paper directly to buyers, it avoids ________ but must determine the _______ and __________ needed to place the entire issue

underwriting cost; investor demand; interest rates

change in price is

unexpected and random

Two of the advantages of preferred stock to the issuing firm are

unlike debt, the firm can miss a preferred dividend payment without fear of bankruptcy :::: funds raised through its sales can be used to acquire income-generating assets

As the market price "S" of the underlying asset increases. The call buyer's potential profit is

unlimited

A writer of a naked call option on a bond (does not own the bond) faces potentially _______ when interest rates fall.

unlimited losses

The principal value of a TIPS security is adjusted every six months ______ for inflation or ______ for deflation, as measured by the percentage change in the consumer price index.

upward/downward

The principal value of a TIPS security is adjusted every six months ______ for inflation or ______ for deflation, as measured by the percentage change in the consumer price index.

upward; downward

the federal reserves usually implements it's open market operations by buying and selling

us treasury bills

predict the expected return

use actual stock market return and the data from step 1. if no new information.

Primary financial markets bring together __________ with ___________

users of funds; providers of funds

A stock market index in which the current market values of the companies in the index are added together and divided by their total value on a base date is called a _______ average .

value - weighted

Most of the major stock market indexes , with the exception of the Dow , are ________ indexes .

value - weighted

A stock market index in which the current market values of the companies in the index are added together and divided by their total value on a base date is called a ______ average.

value-weighted

Most of the major stock market indexes, with the exception of the Dow, are ______ indexes.

value-weighted

The S&P 500 Index is a ______ index.

value-weighted

The Wilshire 5000 Index is a ______ index.

value-weighted

For fully amortizing option ARM's, the monthly payment is calculated each month using the indexed interest rate. As a result, the monthly payments are

variable

For fully amortizing option ARM's, the monthly payment is calculated each month using the indexed interest rate. As a result, the monthly payments are

variable.

Nominal interest rates tend to ___ over time.

vary

Nominal interest rates tend to __________ over time

vary

One problem with flash trading is that it can be used to execute ________ in which the same trader illegally acts as buyer and seller on the same transaction , thus creating a distorted picture of market activity in a stock .

wash trades

According to the ________ of market efficiency, a firm's current stock price reflects all ________ price and volume information about the firm.

weak form; historic

In 2012 China allowed the yuan to fluctuate much more broadly by _________ against the dollar .

widening the yuan's trading band

Because of their long maturity, t-notes and t-bonds experience _______ than money market securities when interest rates change

wider price fluctuations

In the "originate and sell" model of mortgage markets, mortgage lenders originate loans and sell them _______, thus passing the long-term credit risk to the loan purchaser.

without recourse

In the new model of mortgage markets that became popular in the 1990s and 2000s, mortgage lenders originated loans and sold them ___________, thus passing the long-term credit risk to the loan purchaser.

without recourse

basic premise of behavioral critique is that the underlying assumptions of economic theory are

wrong, therefore the EMH cannot hold

Foreign bonds issued in the U.S. are called ______ bonds while foreign bonds issued in the U.K. are called _______ bonds and foreign bonds issued in Japan are called _______ bonds.

yankee; bulldog; samurai

price weighted: is it buy and hold

yes and 1 share

As an option approaches its expiration date, its time value approaches

zero

The intrinsic value of any out of the money option is

zero

The intrinsic value of any out - of - the - money option is

zero .

Each STRIP security must be valued as a ________ with maturity determined by its original _______.

zero-coupon bond; payment date

Each STRIP security must be valued as a ________ with maturity determined by its original _______. semiannual coupon bond; payment date zero-coupon bond; payment date annual coupon bond; payment date zero-coupon bond; issue date

zero-coupon bond; payment date

_____ interest rates in a country ______ capital which _______ demand for that country's currency .

•Low ; repel ; decreases •High : attract ; increases

The obligations of an NYSE stock specialist include ( choose all that apply )

•buy or sell the stock as needed to make a market •stabilize order flow and prices for the stock

If a foreign currency _______ between the time an investor buys it and the time the investor sells it , the investor ______.

•depreciates ; loses •appreciates ; gains

Swaps help their users better manage risks , such as ( choose all that apply )

•foreign exchange risk •interest rate risk •credit risk

According to interest rate parity , if the interest rate in the US is _______ than the interest rate in a foreign country , the forward rate between the two currencies will be _______ the spot rate , by an approximately equal amount .

•greater than ; greater than •less than ; less than

NYSE stock are divided into four subgroups , each of which has its own index . They are ( select four )

•industrial •transportation •financial •utility

Preferred stock is a hybrid security with characteristics between stocks and bonds , such as ( choose all that apply )

•it pays a fixed periodic dividend payment •it represents an ownership interest in the firm •it pays dividends only after the bondholders have received their payments •it represents a claim on the firm's assets subordinate to the bondholders

In an interest rate swap , the _____ agrees to make a number of _______ payments based on a rate and a notional principal .

•seller ; floating - rate •buyer ; fixed - rate