TB 3826 Ch 1

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

A

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

A

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

B

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

D

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

A

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

A

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

A

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

A

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

A

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

A

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

A

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

A

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

A

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

A

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

A

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

A

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

A

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

A

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

A

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

A

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

A

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

A

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

A (37 REAL ASSETS)

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

A (FOR FIN INS)

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

B

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

B

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

B

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

B

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

B

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

B

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

B

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

B

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

B

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

B

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

B

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

B

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

B

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

B

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

B (15 MORTGAGES)

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

B (21 LIABS)

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

B (DONT CONTROL III)

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

B (SINGLE IS REAL)

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

C

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

C

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

C

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

C

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

C

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

C

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

C

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

C

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

C

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

C

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

C

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

C

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

C

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

C

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

C

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

C

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

C (44 NONFINANCIAL)

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

C (FINANCIAL)

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

D

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

D

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

D

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

D

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

D

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

D

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

D

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

D

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

D

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

D

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

D

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

D

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

D

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

D

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

D