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
