RM Final INS 415 Chapter 9

D. Income-producing assets for cash.

Question3. An organization can use securitization to exchange Choose one answer. A. Debt for income-producing assets. B. Cash for income-producing assets. C. Liabilities for mortgage receivables. D. Income-producing assets for cash.

D. A special purpose vehicle

Question10. A facility established for the purpose of purchasing income-producing assets from an organization, holding title to them and then using those assets to collateralize securities that will be sold to investors is Choose one answer. A. A forward contract. B. An insurance derivative. C. A catastrophe bond. D. A special purpose vehicle

C. Liquidity risk.

3. On a local television program, a financial reporter stated, "There will be big news this week about Sixth National Bank's bad real estate development loans. Unless they get acquired soon, the bank will be broke." The next morning, long lines of depositors waited outside of each Sixth National Bank branch. When the branches opened, depositors began withdrawing their funds. Sixth National Bank did not have enough funds to pay all the depositors and had to close early, which only further compounded the problem. Which one of the following financial risks is Sixth National Bank facing by not having enough cash on hand to meet the immediate demand? Choose one answer. A. Credit risk. B. Default risk. C. Liquidity risk. D. Exchange rate risk.

C. Swaps are commonly used to manage interest rate and currency rate of exchange risk.

3. Which one of the following statements is true regarding swaps? Choose one answer. A. Swaps decrease portfolio diversification. B. Parties to a swap pay all of the value and price upfront. C. Swaps are commonly used to manage interest rate and currency rate of exchange risk. D. Swaps are negotiated for indefinite time periods.

C. Must consider the overall credit risk of the organization.

6. If an organization directly securitized its income-producing assets without using a special purpose vehicle (SPV) as an intermediary, investors Choose one answer. A. Should not consider the overall credit risk of the organization. B. Would avoid investing in the organization altogether. C. Must consider the overall credit risk of the organization. D. Should examine individual borrowers' payments to the organization.

D. Securitization.

8. The process of creating a marketable investment security based on the expected cash flows from a financial transaction is Choose one answer. A. Derivation. B. Investment. C. Trading. D. Securitization.

D. Forward contract.

A contract that obligates one party to buy and another party to sell a specific financial instrument or physical commodity at a specified future date and price is a Choose one answer. A. Call option. B. Swap. C. Insurance option. D. Forward contract.

D. Organization's balance sheets.

A major benefit of involving a special purpose vehicle (SPV) in a securitization transaction is that investors can decide whether to invest in the securities based on the Choose one answer. A. Risk presented by the income-producing assets held as collateral by the SPV. B. Overall credit risk of the organization. C. Number of borrowers involved and their individual risk. D. Organization's balance sheets.

C. Right, but not the obligation, to buy or sell an asset at a specific price over a period of time.

An option is an agreement that gives the holder the Choose one answer. A. Obligation to sell an asset at a specified time in the future, but the price is negotiable. B. Option to purchase a specified asset at a definite time in the future at a price negotiated in the future. C. Right, but not the obligation, to buy or sell an asset at a specific price over a period of time. D. Duty to sell an asset at a specified price at an unspecified time in the future.

A. Forward contracts on corn.

Corn Oil Company produces vegetable oil for restaurants and for sale at supermarkets. The company just opened a new plant. Given all the other uncertainties with the new plant, Corn Oil Company would like to lock-in a fixed price for 50,000 bushels of corn to be delivered to the plant every other Friday for the next 12 months. Corn Oil Company can accomplish this goal through the purchase of Choose one answer. A. Forward contracts on corn. B. Currency exchange options. C. Put options on corn. D. Securitization of corn futures contracts.

A. Futures contracts.

Each summer, O'Neill Heating Oil Company enters into contracts to deliver heating oil to residential customers in four New England states. The oil will be delivered in October and November, but the customers demand a firm price at which the oil will be delivered. Lacking storage, O'Neill Heating Oil Company cannot purchase oil in the summer and hold it until delivery. There is a risk that the price of oil may increase after O'Neill Heating Oil Company has entered into the contracts. The company can address this risk by using Choose one answer. A. Futures contracts. B. Accounts receivable securitization. C. Interest rate swaps. D. Stock options.

D. Price risk.

Four Grains Cereal Company signed a contract to deliver 250,000 boxes of cereal to a national supermarket chain at a specified price per box of cereal six months from today. Between now and when the grain to make the cereal is purchased, the cost of the grain may increase. If the cost of this important ingredient increases, the profitability of the transaction will be altered. This financial risk that Four Grains faces is Choose one answer. A. Market risk. B. Credit risk. C. Exchange rate risk. D. Price risk.

B. Credit risk.

Jeremy purchased some long-term corporate bonds when he retired. He plans to use the periodic interest payments from the bonds to supplement his other sources of retirement income. However, some of the companies that issued the bonds that Jeremy purchased may become insolvent and unable to make periodic interest payments. This risk that Jeremy took when he invested in the corporate bonds is called Choose one answer. A. Exchange-rate risk. B. Credit risk. C. Price risk. D. Interest rate risk.

C. Call option.

Mutual Fund Company operates a family of funds. In one fund, the company is able to use a variety of financial instruments to earn higher returns. One asset in the fund is 10,000 shares of XYZ common stock. XYZ currently sells for $70 per share. The fund manager does not think the price of XYZ will increase much in the next three months. She sold a financial instrument that gives the buyer the right to purchase 10,000 shares of XYZ from Mutual Fund Company at the price of $74 per share in the next three months. If the price does not increase to $74, the financial instrument will not be exercised, and Mutual Fund Company pockets the premium (price) for which it sold the financial instrument. If the price does rise, to say $76 per share, Mutual Fund Company will be obliged to sell the stock to the financial instrument owner at a price of $74 per share. The financial instrument that Mutual Fund Company sold is called a Choose one answer. A. Put option B. Futures contract. C. Call option. D. Forward contract.

A. Specific price at which the holder of an option can buy or sell the asset associated with the option.

Regarding options, the strike price is the Choose one answer. A. Specific price at which the holder of an option can buy or sell the asset associated with the option. B. The price at which the holder of the option will profit. C. The price at which the seller of the assets will make a profit. D. Agreement that gives the holder the right to sell an asset at a specific price over a period of time.

D. Swap.

Steady-Eddy Mortgage Company issues fixed-rate mortgages. RocknRoll Mortgage Company issues variable-rate mortgages. Each company's management is concerned about the impact of market interest rate movements on its portfolio of loans. Steady-Eddy's management would like higher returns when interest rates rise. RocknRoll's management would like less income volatility caused by fluctuating interest rates. An arrangement that the companies could make that would be mutually beneficial would be a Choose one answer. A. Merger. B. Mortgage securitization. C. Forward contract. D. Swap.

D. Accepting the risk that it will have to pay cash to the buyer if the value of the underlying asset exceeds the strike price on an exercised option.

The payment to the seller in an option compensates the seller for Choose one answer. A. The value of the income-producing asset transferred to the investor in exchange for cash. B. The future-value of the present income-producing asset for which the set strike price has been reduced. C. Accepting the risk that the buyer will not exercise the option at a future date. D. Accepting the risk that it will have to pay cash to the buyer if the value of the underlying asset exceeds the strike price on an exercised option.

C. Put option.

The pension fund for Alpha Company owns stock issued by Big Company. Shares of Big have increased in value since the shares were purchased, and currently sell for $90 per share. The pension fund manager is concerned that the price of Big stock could fall, but he does not want to sell the stock. The fund manager decided to purchase a financial instrument that gives him the right to sell shares of Big stock at a specified price ($85 per share) during a specified period. If the price of Big goes up, the fund has lost the price paid for the financial instrument. If price falls, however, say to $80 per share, the financial instrument has value because he can sell the shares for the more than the market price. The financial instrument the pension fund manager purchased is called a Choose one answer. A. Call option. B. Swap. C. Put option. D. Forward contract.

A. Market risk.

The risk that the value of an investment or a portfolio of assets will increase or decrease in value due to the supply and demand for that investment is called Choose one answer. A. Market risk. B. Credit risk. C. Pure risk. D. Price risk.

A. The organization must maintain a high level of disclosure regarding the SPV's assets.

Which one of the following concerns should an organization consider when using a Special Purpose Vehicle (SPV) to generate cash from income-producing assets? Choose one answer. A. The organization must maintain a high level of disclosure regarding the SPV's assets. B. The federal government only allows certain types of loans to be sold to an SPV. C. The cash generated from the sale of income-producing assets to an SPV carries an additional credit risk for the organization. D. The outcome of using an SPV is not very beneficial for the organization in the long run.