FIL 241 Exam 3
Which of the following statements is correct?
A. "Pick-a-payment" mortgages helped poor people by allowing them to buy houses they could not afford otherwise. B. One of BB&T principles was never to do anything that in a long run would harm a customer as eventually that would harm the firm. C. Regular banks could not compete with Freddie and Fannie as these two institutions could raise funds at very high interest rates. D. Government actions put many financial institutions in a desperate situation before the financial crisis encouraging them to take less risk in a hope to survive. B
You bought British pound call option at a premium of $0.03 per unit. The exercise price is $1.70. In three months (right before your option expires), you can buy British pounds for $1.73 per unit in the spot market. What will be your net profit?
A. -$0.03 B. $0 C. $0.06 D. $0.09 B
You bought British pound put option at a premium of $0.05 per unit. The exercise price is $1.73. In three months (right before the option expires), one can buy British pounds for $1.53 per unit in the spot market. What will be your net profit?
A. -$0.07 B. $0 C. $0.13 D. $0.15 D
You bought British pound put option at a premium of $0.07 per unit. The exercise price is $1.73. In three months (right before the option expires), one can buy British pounds for $1.93 per unit in the spot market. What will be your net profit?
A. -$0.07 B. $0 C. $0.13 D. $0.20 A
You bought British pound call option at a premium of $0.09 per unit. The exercise price is $1.73. In three months (right before your option expires), you can buy British pounds for $1.53 per unit in the spot market. What will be your net profit?
A. -$0.09 B. $0 C. $0.11 D. $0.20 A
Which of the following statements is incorrect?
A. A swap contract is an agreement to exchange cash flows of different patterns. B. A contract allowing exchanging variable interest payments on a loan for fixed payments is an example of a swap contract. C. A credit default swap is a type of an insurance contract where the buyer makes regular payments and receives money in case of a loan default. D. Credit default swaps caused the last financial crisis in the U.S. which would have been avoided if these securities did not exist. D
Which of the following statements about common stock is incorrect?
A. Allows voting on some major issues. B. In case of dual class shares, one class share can provide more votes than the other class share even when both are entitled to the same cash flows. C. Minority shareholders are more likely to get representation on the board of directors with the straight rather than cumulative voting. D. Usually one share - one vote. C
Which of the following statements is incorrect?
A. As government provides explicit guarantees to Freddie and Fannie, government has to bail them out. B. Many top employees at the U.S. Treasury are from Goldman Sachs. C. Basel regulations pressured banks to use mathematical models to manage their risk. D. Fed's mathematical models were incapable to predict the 2008 financial crisis. A
Which of the following statements is incorrect?
A. Banks take long-term deposits and make short-term loans. B. Everything else being equal, banks are more likely to get into problems when interest rate are increasing rather than when they are decreasing. C. Low interest rate that last for a long time make financial system to accumulate many low paying assets and increase the risk they face when interest rates increase. D. The SEC has motivation to create higher leverage in financial system than what we would have without any government interference. A
Which of the following is not an important secondary market characteristic?
A. Breadth - number of traders trading that stock. B. All of them are important secondary market characteristics. C. Depth - the size of conditional orders to buy and sell. D. Resilience - ability to attract buyers (sellers) when the stock price decreases (increases). B
Which of the following statements is incorrect?
A. Call option allows the buyer to buy an asset at the specified price during the specified period. B. Put option allows the writer to sell an asset at the specified price during the specified period. C. Option premium is the price the buyer pays to obtain an option. D. Exercise price is the price at which option holders can buy or sell the underlying asset. B
Which of the following statements is incorrect?
A. Call options allow the option holder to buy the specified asset at the predetermined price during the specified period if they wish to do so. B. Put option writers have an obligation to buy if the option holder wants to sell. C. One can expect higher profit on a well-diversified portfolio of options and futures contracts than on a well-diversified portfolio of stocks. D. Call option writers have an obligation to sell if the option holder wants to buy. C
Which of the following statements about preferred stock is incorrect?
A. Cannot force unprofitable company to bankruptcy when dividend is not paid. B. Has characteristics of both common stocks and bonds. C. Always pays fixed-rate dividend; cannot pay adjustable-rate like some bonds. D. Usually, no voting. C
Which of the following statements is incorrect?
A. Convertible bonds are bonds that can be exchanged for a predetermined number of common shares at the discretion of the owner. B. Convertible stock is stock that can be exchanged for a predetermined number of common shares at the discretion of the issuer. C. Interest is tax deductible. D. Convertible preferred stock is preferred stock that can be exchanged for a predetermined number of common shares at the discretion of the owner. B
Which of the following statements is incorrect?
A. DJIA is a market value-weighted index. B. Dow Jones Industrial Average is the oldest stock market index. C. DJIA includes leading companies in their industries. D. Market value-weighted indexes are better at reflecting the market performance than price-weighted indexes. A
Which of the following statements is incorrect?
A. Derivatives can be used to hedge the following risk factors: interest rates, commodity prices, stock market prices, and foreign exchange prices. B. The forward price is the price at which the forward contract will be executed. C. The spot price is the price at which the futures contract will be executed. C
Which of the following statements is incorrect?
A. Differently from American options, European options can be exercised only on the specified day. B. Volatility of the underlying asset price increases the value of the option. C. Longer time to expiration increases the value of the option. D. Option buyers potentially can lose much more than option premiums. D
Which of the following was not likely to make the last financial crisis worse?
A. Fed's encouragement of leverage in the banking system. B. Fed's lowering of interest rates before the crisis. C. Fed's over-pessimism about managing the financial system. D. Fed's low requirements for bank capital. C
Which of the following was not likely to make the last financial crisis worse?
A. Federal deposit insurance made it easier for risky financial institutions to raise money. B. The US government encouraged Americans to own their homes and worked to find creative ways to make the houses seem affordable. C. Financial markets punished some financial institutions that made bad decisions. D. Government bailed out some failing financial institutions. C
Which of the following statements is incorrect?
A. Futures contracts are standardized. B. Clearinghouse participation eliminates counterparty risk. C. Margin requirements reduce risk for the clearinghouse but increase risk for investors. D. Margin requirements make investing safer to investors who are subject to these requirements. D
Which of the following statements is incorrect?
A. Futures market instruments can be used for hedging or speculating. B. Creation and survival of futures market instruments is affected by customer demand. C. Exchanges develop new products that they expect to be wanted by their customers. D. None. D
Which of the following statements is incorrect?
A. Government regulations are better than private regulations since there is no conflict of interest between the government and the people. B. Regulations by private sector have an advantage over government regulations since private regulators face competition and have to bear the costs of wrong decisions. C. The number of government regulations tends to increase with time, increasing the costs to financial industry. D. Government regulations create systematic risk. A
Which of the following statements is incorrect?
A. If a company expects receivables in British pounds in one year, the company could hedge this risk by selling British pound futures contracts or buying call option for British pound. B. Call option is a right to buy a specific asset at a predetermined price during predetermined period. C. Writing options is typically not used in risk management since option writer cannot control whether option is exercised or not. D. Companies often use forward contracts to hedge their exchange rate risk. A
Which of the following statements is incorrect?
A. If you have a long position on a forward contract, you have a contract to buy the asset. B. In futures contracts you face a counterparty risk. C. The forward price is the price which makes the net present value of the contract equal to zero. D. Futures contracts are traded on exchanges. B
Which of the following statements about the theory of comparative advantage is incorrect?
A. In free markets the maximum prosperity is achieved when people engage in businesses where they maximize their wealth. B. Increasing tariffs protects domestic industries and thus increases the prosperity of the country. C. To maximize total production, countries should specialize in producing goods and services where they have a comparative advantage. D. This theory can be applied at the level of individuals. B
Which of the following were not the consequences of government bailout of uninsured depositors at the Washington Mutual at the expense of bondholders?
A. Increased trust in the rule of law in the U.S. B. Washington Mutual bondholders experiencing larger than expected losses. C. Reduced people willingness to buy bonds of any financial institution. D. Washington Mutual uninsured depositors getting more than they deserve. A
Which of the following statements is incorrect?
A. Investment bankers underwrite equity offerings often guaranteeing proceeds to the firm. B. Investment bankers receive underwriter's spread - difference between gross and net proceeds. C. Typically, initial public offerings are made in primary markets while seasoned equity offerings are made in secondary markets. D. Firms sell new securities and raise money for projects in primary markets. C
Which of the following statements is incorrect?
A. None. B. Stock exchanges are physical places or electronically connected markets where listed stocks are traded by the members of exchange. C. Examples of stock exchanges include New York Stock Exchange and Chicago Stock Exchange. D. Stocks not listed on organized exchanges are traded in the over-the-counter market which is organized as dealer market. A
Which of the following statements is incorrect?
A. Primary markets provide liquidity to investors who bought securities. B. Secondary markets allow investors and managers to see the current market value of the firm's equity. C. Secondary markets provide liquidity to investors who bought securities. D. Good secondary markets make it easier for firms to raise money in primary markets. A
Which of the following statements about common stock is incorrect?
A. Return is derived from dividends and share appreciation. B. Profitable corporations have a responsibility to pay dividend. C. Represent ownership in corporation. D. Residual claim against the firm's cash flows or assets. B
Which of the following statements is incorrect?
A. Shelf registration allows firms to sell shares for two years without additional registration. B. Shelf registration give a right to current shareholders to buy new shares at a predetermined price. C. Rights offerings give a right to current shareholders to buy new shares at a predetermined price. D. Public offerings are sold to general public while private placements are sold to a small number of sophisticated investors. B
Which of the following statements about speculation is incorrect?
A. Speculation makes markets less efficient. B. Speculation improves liquidity. C. Speculation tends to bring asset prices to correct prices. D. Speculators make money when they buy underpriced assets and sell overpriced assets. A
Which of the following statements is incorrect?
A. TARP transferred wealth from bad banks to good banks. B. TARP did not use the same principles as the free market. C. Bailing out failing financial institutions weakens financial system. D. Forcing innocent people to pay for the mistakes of other people encourages bad behavior. E. Encouraging bad behavior in people is immoral. A
Which of the following did not contribute to creating the financial crisis of 2008?
A. The Fed. B. The U.S. Securities and Exchange Commission. C. The Federal Deposit Insurance Corporation. D. Housing policy before the crisis. E. All of the above contributed to creating the crisis. E
Which of the following statements is incorrect?
A. There are stock indexes for small and medium firms, specific industries, different countries, and different regions. B. Stock market prices do not reflect investor expectations about future performance of companies. C. The percentage change in DJIA or S&P 500 value shows the percentage change in the value of the portfolio that is represented by the index. D. S&P 500 index includes 500 largest companies. B
Which of the following statements is incorrect?
A. Too high money supply causes inflation and devaluation of the currency. B. Purchasing power parity reduces exchange rate risk in a long run. C. Higher prices of goods in one country increases demand for those goods. D. According to the purchasing power parity, prices of the same goods in two countries should be the same when expressed in the same currency. C
Which of the following statements is incorrect?
A. Trading as a dealer is riskier than trading as a broker. B. Brokers trade other people securities while dealers trade on their own account. C. Auctions are never used for selling equity. D. Direct search is seldom used to bring buyers and sellers together in secondary markets. C
Even large, mature company stock can drop more than 30% without a major financial crisis.
A. True. B. False. A
The market reacts to the difference between the information in the announcement and the market expectation about the announcement.
A. True. B. False. A
Which of the following statements is incorrect?
A. Unsystematic risk is diversifiable and thus can be avoided without reducing the expected return on a portfolio. B. Diversification works well for people engaged in passive investing but can cause problems for active investors. C. Higher systematic risk is associated with higher required return. D. Total risk can be measured by standard deviation, variance, and beta. D
Which of the following statements is incorrect?
A. When investing in bond markets, many investors rely on bond credit ratings to evaluate the default risk of these securities. B. Government can reduce the negative effect of financial crises by protecting large financial institutions that they deem to be essential for the economy. C. When interest rates in the market go up, the asset value of a typical bank declines more than the value of their liabilities. D. When government provides help to companies or individuals whenever they get into trouble, companies and individuals are encouraged to behave less responsibly and take more risk. B
Which of the following statements is incorrect?
A. When the risk in financial system significantly increases, people start paying more attention to whom they give their money and are more likely to transfer their money to financial institutions with good reputation. B. Mark-to-market accounting increased the risk in financial system and made it harder for institutions needing cash to sell their illiquid financial assets. C. Government interference in credit rating system weakened the quality of this system, leading to the loss of confidence in credit ratings during the financial crisis. D. Loss of the confidence in the credit rating system significantly affected only securities related to mortgages. D
Which of the following statements is incorrect?
A. While currencies of developing countries are very volatile, currencies of developed countries are very stable. B. Exchange rate is a price of one currency in terms of another, and like all prices it is governed by the laws of demand and supply. C. Writing contracts in foreign currencies can subject companies to significant exchange rate risk. D. Using forward and futures contracts can lead to over-hedging. A
Which of the following statements about bid-ask spread is incorrect?
A. Wider for large block trades. B. Wider for low priced stocks. C. Narrower for very small trades (few shares). C
Which of the following statements about bid-ask spread is incorrect?
A. Wider for trades where one side has inside information. B. Represent transaction costs to sellers and buyers. C. Investors who engage in frequent trading suffer less from bid-ask spreads. D. Wider for less frequently traded stocks. C
Which of the following statements is incorrect?
A. With futures and forward contracts we agree on all conditions of the transaction today but the transactions is executed on a predetermined day in the future. B. Forward contracts are standardized while futures contracts are custom made. C. A derivative is a financial instrument whose value depends on the value of the underlying asset. B
