Deck 1: The Investment Environment

Question 1

_______ are financial assets.

A)Bonds
B)Machines
C)Stocks
D)Bonds and stocks

Answer 1

D

Question 2

Which one of the following is a not role of the financial markets?

A)Consumption timing
B)Information
C)Separation of ownership and control
D)Increasing wealth of the economy

Answer 2

D

Question 3

Holding highly diversified portfolios without spending effort or other resources attempting to improve investment performance through security analysis is a characteristic of

A)Active management.
B)Passive management.
C)Both active and passive management.
D)Risk-return trade-off.

Answer 3

B

Question 4

Compared to investments in debt securities, equity investments tend to be

A)equally risky.
B)riskier.
C)less risky.
D)more important.

Question 5

Systemic risk is

A)credit risk.
B)an insurance contract against the default of one or more borrowers.
C)firm-specific risk.
D)default risk.
E)the potential breakdown of the financial system when problems in one market spill over and disrupt others.

Question 6

The attempt to improve performance either by identifying mispriced securities or by timing the performance of broad asset classes is a characteristic of:

A)Active management
B)Passive management
C)Both active and passive management
D)Risk-return trade-off

Question 7

A debt security pays

A)a fixed level of income for the life of the owner.
B)a variable level of income for owners on a fixed income.
C)a fixed or variable income stream at the option of the owner.
D)a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security. A debt security pays a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security.

Question 8

_______ is in an insurance contract against the default of one or more borrowers.

A)Collateralized debt obligation
B)credit default swap
C)Freddie Mac
D)Adjustable-rate mortgage

Question 9

The material wealth of a society is a function of

A)all financial assets.
B)all real assets.
C)all financial and real assets.
D)all physical assets.

Question 10

Financial assets permit all of the following except

A)consumption timing.
B)allocation of risk.
C)separation of ownership and control.
D)elimination of risk. Financial assets do not allow risk to be eliminated.However, they do permit allocation of risk, consumption timing, and separation of ownership and control.

Question 11

Money market securities

A)are short term.
B)are highly marketable.
C)are generally very low risk.
D)are highly marketable and are generally very low risk.
E)All of the options.

Question 12

Although derivatives can be used as speculative instruments, businesses most often use them to

A)attract customers.
B)appease stockholders.
C)offset debt.
D)hedge risks.

Question 13

A fixed-income security pays

A)a fixed level of income for the life of the owner.
B)a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security.
C)a variable level of income for owners on a fixed income.
D)a fixed or variable income stream at the option of the owner. A fixed-income security pays a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security.

Question 14

Financial assets

A)directly contribute to the country's productive capacity.
B)indirectly contribute to the country's productive capacity.
C)contribute to the country's productive capacity, both directly and indirectly.
D)do not contribute to the country's productive capacity, either directly or indirectly.

Question 15

_________ is a commodity.

A)Swap
B)Money
C)Gold
D)Future contract

Question 16

The value of a derivative security

A)depends on the value of the related security.
B)is unable to be calculated.
C)is unrelated to the value of the related security.
D)has been enhanced due to the recent misuse and negative publicity regarding these instruments.

Question 17

A common measure of credit risk in the banking sector is

A)systemic Risk.
B)treasury-bill.
C)TED spread.
D)LIBOR.

Question 18

A security that pays a specified cash flow over a specific period is called

A)fixed income.
B)stock option.
C)mutual fund.
D)real estate.

Question 19

An example of a derivative security is

A)a common share of Microsoft.
B)a call option on Intel stock.
C)a commodity futures contract.
D)a call option on Intel stock and a commodity futures contract.

Question 20

The means by which individuals hold their claims on real assets in a well-developed economy are

A)investment assets.
B)depository assets.
C)derivative assets.
D)financial assets.

Question 21

Commercial banks differ from other businesses in that both their assets and their liabilities are mostly

A)illiquid.
B)financial.
C)real.
D)owned by the government.

Question 22

Asset allocation refers to

A)choosing which securities to hold based on their valuation.
B)investing only in "safe" securities.
C)the allocation of assets into broad asset classes.
D)bottom-up analysis. Asset allocation refers to the allocation of assets into broad asset classes.

Question 23

Corporate shareholders are best protected from incompetent management decisions by

A)the ability to engage in proxy fights.
B)management's control of pecuniary rewards.
C)the ability to call shareholder meetings.
D)the threat of takeover by other firms.

Question 24

The Sarbanes-Oxley Act

A)requires corporations to have more independent directors.
B)requires the firm's CFO to personally vouch for the firm's accounting statements.
C)prohibits auditing firms from providing other services to clients.
D)requires corporations to have more independent directors and requires the firm's CFO to personally vouch for the firm's accounting statements.
E)All of the above.

Question 25

In 2016, ____________ was(were) the least significant real asset(s) of U.S.nonfinancial businesses in terms of total value.

A)equipment and software
B)inventory
C)real estate
D)trade credit

Question 26

The ____________ refers to the potential conflict between management and shareholders.

A)agency problem
B)diversification problem
C)liquidity problem
D)solvency problem

Question 27

In 2016, ____________ was(were) the most significant real asset(s) of U.S.nonfinancial businesses in terms of total value.

A)equipment and software
B)inventory
C)real estate
D)trade credit

Question 28

Financial intermediaries exist because small investors cannot efficiently

A)diversify their portfolios.
B)assess credit risk of borrowers.
C)advertise for needed investments.
D)diversify their portfolios and assess credit risk of borrowers.
E)All of the options.

Question 29

A disadvantage of using stock options to compensate managers is that

A)it encourages managers to undertake projects that will increase stock price.
B)it encourages managers to engage in empire building.
C)it can create an incentive for managers to manipulate information to prop up a stock price temporarily, giving them a chance to cash out before the price returns to a level reflective of the firm's true prospects.
D)All of the above.

Question 30

In terms of total value, the most significant liability(ies) of U.S.nonfinancial businesses in 2016 was(were)

A)bank loans.
B)bonds and mortgages.
C)trade debt.
D)other loans.

Question 31

In 2016, ____________ was(were) the most significant financial asset(s) of U.S.commercial banks in terms of total value.

A)loans and leases
B)cash
C)real estate
D)deposits

Question 32

________ specialize in helping companies raise capital by selling securities.

A)Commercial bankers
B)Investment bankers
C)Investment issuers
D)Credit raters An important role of investment banking is to act as middlemen in helping firms place new issues in the market.

Question 33

Which of the following are mechanisms that have evolved to mitigate potential agency problems? I) Using the firm's stock options for compensation
II) Hiring bickering family members as corporate spies
III) Boards of directors forcing out underperforming management
IV) Security analysts monitoring the firm closely
V) Takeover threats

A)II and V
B)I, III, and IV
C)I, III, IV, and V
D)III, IV, and V

Question 34

In 2016, ____________ was(were) the most significant liability(ies) of U.S.commercial banks in terms of total value.

A)loans and leases
B)cash
C)real estate
D)deposits

Question 35

Which of the following portfolio construction methods starts with asset allocation?

A)Top-down
B)Bottom-up
C)Middle-out
D)Buy and hold

Question 36

Which of the following portfolio construction methods starts with security analysis?

A)Top-down
B)Bottom-up
C)Middle-out
D)Buy and hold

Question 37

In 2016, ____________ was(were) the least significant liability(ies) of U.S.nonfinancial businesses in terms of total value.

A)bonds and mortgages
B)bank loans
C)inventories
D)trade debt

Question 38

Security selection refers to

A)choosing which securities to hold based on their valuation.
B)investing only in "safe" securities.
C)the allocation of assets into broad asset classes.
D)top-down analysis. Security selection refers to choosing which securities to hold based on their valuation.

Question 39

Theoretically, takeovers should result in

A)improved management.
B)increased stock price.
C)increased benefits to existing management of the taken-over firm.
D)improved management and increased stock price.

Question 40

_______ are examples of financial intermediaries.

A)Commercial banks
B)Insurance companies
C)Investment companies
D)Credit unions
E)All of the options

Question 41

New issues of securities are sold in the ________ market(s).

A)primary
B)secondary
C)over-the-counter
D)primary and secondary New issues of securities are sold in the primary market.

Question 42

Which of the following is true about mortgage-backed securities? I) They aggregate individual home mortgages into homogeneous pools.
II) The purchaser receives monthly interest and principal payments received from payments made on the pool.
III) The banks that originated the mortgages maintain ownership of them.
IV) The banks that originated the mortgages may continue to service them.

A)II, III, and IV
B)I, II, and IV
C)II and IV
D)I, III, and IV

Question 43

The spread between the LIBOR and the Treasury-bill rate is called the

A)term spread.
B)T-bill spread.
C)LIBOR spread.
D)TED spread. The spread between the LIBOR and the Treasury-bill rate is called the TED spread.

Question 44

Mortgage-backed securities were created when ________ began buying mortgage loans from originators and bundling them into large pools that could be traded like any other financial asset.

A)GNMA
B)FNMA
C)FHLMC
D)FNMA and FHLMC

Question 45

________ were designed to concentrate the credit risk of a bundle of loans on one class of investor, leaving the other investors in the pool relatively protected from that risk.

A)Stocks
B)Bonds
C)Derivatives
D)Collateralized debt obligations

Question 46

The sale of a mortgage portfolio by setting up mortgage pass-through securities is an example of

A)credit enhancement.
B)credit swap.
C)unbundling.
D)derivatives.

Question 47

In 2016, ____________ was(were) the least significant financial asset(s) of U.S.nonfinancial businesses in terms of total value.

A)cash and deposits
B)trade credit
C)trade debt
D)inventory
E)marketable securities

Question 48

Investors trade previously issued securities in the ________ market(s).

A)primary
B)secondary
C)primary and secondary
D)derivatives Investors trade previously issued securities in the secondary market.

Question 49

Investment bankers perform which of the following role(s)?

A)Market new stock and bond issues for firms
B)Provide advice to the firms as to market conditions, price, etc.
C)Design securities with desirable properties
D)All of the options

Question 50

Until 1999, the ________ Act(s) prohibited banks in the United States from both accepting deposits and underwriting securities.

A)Sarbanes-Oxley
B)Glass-Steagall
C)SEC
D)Sarbanes-Oxley and SEC

Question 51

________ are, in essence, an insurance contract against the default of one or more borrowers.

A)Credit default swaps
B)CMOs
C)ETFs
D)Collateralized debt obligations