chapter 1 - investment environment
The national net with of the US in 2009 was _____ -$15.411 trillion -$26.431 trillion -$42.669 trillion -$39.139 trillion -$70.983 trillion
$39.139 trillion
In 2009, _____ of the assets of US households were financial assets as opposed to tangible assets. -20.4% -34.2% -63.0% -71.7% -82.5%
63.0%
_____ financial asset(s) -Buildings are -Land is a ... -Derivatives are ... -U.S. Agency bonds are ... -Derivatives and U.S. Agency bonds are ....
Derivatives and U.S. Agency bonds are
An example of a derivative security is/are _____ : -a common share of Microsoft -an Intel bond -a commodity futures contract and a call option on Intel stock -a call option on Intel stock and an Intel bond -a common share of Intel stock
a commodity futures contract and a call option on Intel stock
The ______ refers to the potential conflict between management and shareholders -agency problem -diversification problem -liquidity problem -solvency problem -regulatory problem
agency problem
The material wealth of a society is a function of: -all financial assets -all real assets -all financial and real assets -all physical assets -all commodities
all real assets
Money market securities ______ -are short-term -are highly marketable -are generally very low risk -are short term, highly marketable, and generally very low risk -highly marketable and generally very low risk
are short term, highly marketable, and generally very low risk
In 2009, ______ was the least significant liability of US non-financial businesses in terms of total value -bonds and mortgages -bank loans -inventories -trade debt -marketable securities
bank loans
In 2009, _____ was the least significant financial asset of US non-financial businesses in terms of total value -cash and deposits -trade credit -trade debt -inventory -marketable securities
cash and deposits
Commercial banks differ from other businesses in that both their assets and their liabilities are mostly: -illiquid -financial -real -owned by the government -regulated
financial
The smallest component of domestic net worth in 2009 was _______ : -non-residential real estate -residential real estate -inventories -consumer durables -equipment and software
inventories
In 2009, _____ was the least significant real asset of US non-financial businesses in terms of total value -equipment and software -inventory -real estate -trade credit -marketable securities
inventory
_____ specialize in helping companies raise capital by selling securities -commercial bankers -investment bankers -investment issuers -credit raters -commercial bankers, investment bankers, investment issuers, and credit raters
investment bankers (act as middleman)
Investment bankers perform the following role(s): -market new stock and bond issues for firms -provide advice to the firms as to market conditions, price, etc -=design securities with desirable properties -make traders for small investors -market new stock and bond issues for firms, provide advice to the firms as to market conditions, price, etc, and design securities with desirable properties
market new stock and bond issues for firms, provide advice to the firms as to market conditions, price, etc, and design securities with desirable properties
In 2009, ______ was the most significant liability of US households in terms of total value -credit cards -mortgages -bank loans -student loans -other debt
mortgages
In 2009, _____ was the most significant financial asset of US households in terms of total value. -real estate -mutual fund shares -debt securities -life insurance reserves -pension reserves
pension reserves
New issues of securities are sold in the ____ market(s) -primary -secondary -over the counter -primary and secondary -primary and over the counter
primary
In 2009, _____ was the most significant real asset of US households in terms of total value -consumer durables -automobiles -real estate -mutual fund shares -bank loans
real estate
In 2009, _____ was the most significant real asset of US non financial businesses in terms of total value -equipment and software -inventory -real estate -trade credit -marketable securities
real estate
In 2009, ______ was the most significant asset of US households in terms of total value -real estate -mutual fund shares -debt securities -life insurance reserves -pension reserves
real estate
The largest component of domestic net worth in 2009 was _____ : -non-residential real estate -residential real estate -inventories -consumer durables -equipment and software
residential real estate
_____ is/are financial assets -only bonds -only machines -only stocks -stocks and bonds -knowledge
stocks and bonds
Asset allocation refers to : -choosing which securities to hold based on their valuation -investing only in "safe" securities -the allocation of assets into broad asset classes -bottom-up analysis -top-down analysis
the allocation of assets into broad asset classes
Corporate shareholders are best protected from incompetent management decisions by: -ability to engage in proxy fights -management's control of pecuniary rewards -the ability to call shareholder meetings -the threat of takeover by other firms -one-share/one-vote election rules
the threat of takeover by other firms
Which of the following portfolio construction methods starts with asset allocation? -top-down -bottom-up -middle-out -buy and hold -asst allocation
top-down
Mortgage backed securities were created when ____ began buying mortgage loans from originators and bundling them into large pools that could be traded like any other financial asset -GNMA -FNMA -FHLMC -FNMA and FHLMC -GNMA and FNMA
FNMA and FHLMC
The means by which individuals hold their claims on real assets in a well-developed economy are: -Investment assets -Depository assets -Derivative assets -Financial assets -Exchange-driven assets
Financial assets
Until 1999, the ________ Act(s) prohibited banks in the United States from both accepting deposits and underwriting securities -Sarbanes-Oxley -Glass-Steagall -SEC -Sarbanes-Oxley and SEC -Fair Credit
Glass-Steagall
During the period between 2000 and 2002, a large number of scandals were uncovered. Most of these scandals were related to: I) Manipulation of financial data to misrepresent the actual condition of the firm II) Misleading and overly optimistic research reports produced by analysts III) Allocating IPOs to executives as a quid pro quo for personal favors IV) Greenmail
I, II, III
Which of the following is true about mortgage-backed securities? I)They aggregate individual home mortgages into homogenous pools II) The purchaser receives monthly interest and principal payments received from payments made on the pool III) The banks that originated the mortgages maintain ownership of them IV) The banks that originated the mortgages continue to service them
I, II, and IV
Which of the following are mechanisms that have evolved to mitigate potential agency problems? I) Compensation inn the form of the firm's stock options II) Hiring bickering family members as corporate spies III) Underperforming management teams being forced out by the boards of directors IV) Security analysts monitoring the firm closely V) Takeover threats
I, III, IV, V
Which of the following financial assets made up the greater proportion of the financial assets held by US households? -Pension reserves -Life insurance reserves -Mutual fund shares -Debt securities -Personal trusts
Pension reserves
The spread between the LIBOR and the Treasury-bill rate is called the _____ : -term spread -T-bill spread -LIBOR spread -TED spread -FRED spread
TED spread
A debt security pays ______ -a fixed level of income for the life of the owner -a variable level of income for owners on a fixed income -a fixed or variable income stream at the option of the owner -a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security -a diskless return that is fixed for life
a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security
A fixed-income security pays ____ -a fixed level of income for the life of the owner -a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security -a variable level of income for owners on a fixed income -a fixed or variable income stream at the option of the owner -a riskless return that is fixed for life
a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security
In terms of total value, the most significant liability of US non financial businesses in 2009 was: -bank loans -bonds and mortgages -trade debt -other loans -marketable securities
bonds and mortgages
Which of the following portfolio construction methods starts with security analysis? -top-down -bottom-up -middle-out -buy and hold -asset allocation
bottom-up
Security selection refers to : -choosing which securities to hold based on their valuation -investing only in "safe securities" -the allocation of assets into broad asset classes -top-down analysis -moving assets between stocks and bonds
choosing which securities to hold based on their valuation
_____ were designed to concentrate the credit risk of a bundle of loans on one class of investor, leaving the other investors in the pool relatively protected from that risk -stocks -bonds -derivatives -collaterized debt obligations -TIPS
collaterized debt obligations
______ are examples of financial intermediaries -commercial banks -insurance companies -investment companies -credit unions -commercial banks, insurance companies, investment companies, and credit unions
commercial banks, insurance companies, investment companies, and credit unions
_____ are in essence an insurance contract against the default of one or more borrowers -credit default swaps -CMOs -ETFs -collaterized debt obligations -collars
credit default swaps
The value of a derivative security _____ : -depends on the value of the related security -is unable to be calculated -is unrelated to the value of the related security -has been enhanced due to the recent misuse and negative publicity regarding these instruments -is worthless today
depends on the value of the related security
In 2009, _____ was the most significant liability of US commercial banks in terms of total value -loans and leases -cash -real estate -deposits -investment securities
deposits
Financial intermediaries exist because small investors cannot efficiently ____ : -diversify their portfolios -assess credit risk of borrowers -advertise for needed investments -diversify their portfolios, assess credit risk of borrowers, or advertise for needed in investments -diversify their portfolios or assess credit risk of borrowers
diversify their portfolios, assess credit risk of borrowers, or advertise for needed in investments
Financial assets can permit all of the following except: -consumption timing -allocation of risk -separation of ownership and control -elimination of risk -easy transfer of ownership
elimination of risk
Although derivatives can be used a speculative instruments, businesses most often use them to -attract customers -appease stockholders -offset debt -hedge risks -enhance their balance sheets
hedge risks
Theoretically, takeovers should result in _____ : -improved management -increased stock price -increased benefits to existing management of taken over firm -improved management and increased stock price -worse management and decreased stock price
improved management and increased stock price
Financial assets are _____ : -directly contribute to the country's productive capacity -indirectly contribute to the country's productive capacity -contribute to the country's productive capacity both directly and indirectly -do not contribute to the country's productive capacity either directly or indirectly -are of no value to anyone
indirectly contribute to the country's productive capacity
A disadvantage of using stock options to compensate managers is that: -it encourages managers to undertake projects that will increase stock price -it encourages managers to engage in empire building -it can create an incentive for mangers to manipulate information to prop up a stock price temporarily, giving them a chance to cash out before the price returns to a level reflective of the firm's true prospects -it causes managers to take undue risks -it causes managers to be too conservative
it can create an incentive for mangers to manipulate information to prop up a stock price temporarily, giving them a chance to cash out before the price returns to a level reflective of the firm's true prospects
______ is/are a real asset(s) -only land only machines -only stocks and bonds -only knowledge -land, machines, and knowledge are all real assets
land, machines, and knowledge are all real assets
In 2009, _____ was the least significant financial asset of US households in terms of total value -real estate -mutual fund shares -debt securities -life insurance reserves -pension reserves
life insurance reserves
In 2009, ______ was the most significant financial asset of US commercial banks in terms of total value -loans and leases -cash -real estate -deposits -investment securities
loans and leases
The Sarbanes-Oxley Act ______ : - requires corporations to have more independent directors -requires the firm's CFO to personally vouch for the firm's accounting statements -prohibits auditing firms from providing other services to clients -requires corporations to have more independent directors and requires the firm's CFO to personally vouch for the firm's accounting statements -requires corporations to have more independent directors and requires the firm's CFO to personally vouch for the firm's accounting statements, prohibits auditing firms from providing other services to clients, and requires corporations to have more independent directors and requires the firm's CFO to personally vouch for the firm's accounting statements
requires corporations to have more independent directors and requires the firm's CFO to personally vouch for the firm's accounting statements, prohibits auditing firms from providing other services to clients, and requires corporations to have more independent directors and requires the firm's CFO to personally vouch for the firm's accounting statements
Investors trade previously issued securities in the ____ market(s) -primary -secondary -primary and secondary -derivatives -primary and derivatives
secondary
The sale of a mortgage portfolio by setting up mortgage pass-through securities is an example of _____ : -credit enhancement -securitization -unbundling -derivatives -a Ponzi scheme
securitization