Deck 1: The Investment Environment

Question 1

In 2018, ____________ was the most significant asset of U.S. households in terms of total value.

A) real estate
B) mutual fund shares
C) debt securities
D) life insurance reserves
E) pension reserves

Answer 1

A

Question 2

The largest component of domestic net worth in 2018 was

A) nonresidential real estate.
B) residential real estate.
C) inventories.
D) consumer durables.
E) equipment and software.

Answer 2

B

Question 3

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.
E) are of no value to anyone.

Answer 3

B

Question 4

In 2018, ____________ was the most significant real asset of U.S. households in terms of total value.

A) consumer durables
B) automobiles
C) real estate
D) mutual fund shares
E) bank loans

Question 5

_________ financial asset(s).

A) Buildings are
B) Land is a
C) Derivatives are
D) U.S. agency bonds are
E) Derivatives and U.S. agency bonds are

Question 6

The smallest component of domestic net worth in 2018 was

A) nonresidential real estate.
B) residential real estate.
C) inventories.
D) consumer durables.
E) equipment and software.

Question 7

The domestic net worth of the U.S. in 2018 was

A) $9.350 trillion.
B) $22.642 trillion.
C) $32.539 trillion.
D) $72.683 trillion.
E) $80.983 trillion.

Question 8

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.

Question 9

In 2018, ____________ was the least significant financial asset of U.S. households in terms of total value.

A) real estate
B) mutual fund shares
C) debt securities
D) life insurance reserves
E) pension reserves

Question 10

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 11

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.

Question 12

In 2018, ____________ was the most significant financial asset of U.S. households in terms of total value.

A) real estate
B) mutual fund shares
C) debt securities
D) life insurance reserves
E) pension reserves

Question 13

In 2018, which of the following financial assets make up the second highest proportion of the financial assets held by U.S. households?

A) Corporate equity
B) Life insurance reserves
C) Mutual fund shares
D) Debt securities
E) Personal trusts

Question 14

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.
E) is worthless today.

Question 15

In 2018, ____________ were the most significant liability of U.S. households in terms of total value.

A) credit cards
B) mortgages
C) bank loans
D) student loans
E) other forms of debt

Question 16

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.
E) exchange-driven assets.

Question 17

_______ are real assets.

A) Land
B) Machines
C) Stocks and bonds
D) Knowledge
E) Land, machines, and knowledge

Question 18

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.
E) a common share of Microsoft and a call option on Intel stock.

Question 19

In 2018, _______ of the assets of U.S. households were financial assets as opposed to tangible assets.

A) 23.5%
B) 87.2%
C) 28.4%
D) 58.4%
E) 71.6%

Question 20

_______ are financial assets.

A) Bonds
B) Machines
C) Stocks
D) Bonds and stocks
E) Bonds, machines, and stocks

Question 21

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

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

Question 22

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.
E) enhance their balance sheets.

Question 23

In 2018, ____________ 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
E) investment securities

Question 24

________ specialize in helping companies raise capital by selling securities.

A) Commercial bankers
B) Investment bankers
C) Investment issuers
D) Credit raters

Question 25

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 26

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.

Question 27

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.
E) regulated.

Question 28

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.

Question 29

_______ are examples of financial intermediaries.

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

Question 30

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.
E) All of the options.

Question 31

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 32

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 33

In 2018, ____________ 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
E) investment securities

Question 34

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.
E) one-share/one-vote election rules.

Question 35

In 2018, ____________ 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
E) marketable securities

Question 36

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

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

Question 37

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.

Question 38

Which of the following are mechanisms that have evolved to mitigate potential agency problems? I) Using the firm's stock options for compensationII) Hiring bickering family members as corporate spiesIII) Boards of directors forcing out underperforming managementIV) Security analysts monitoring the firm closelyV) Takeover threats

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

Question 39

During the period between 2000 and 2002, a large number of scandals were uncovered. Most of these scandals were related to I) manipulation of financial data to misrepresent the actual condition of the firm.
II) misleading and overly optimistic research reports produced by analysts.
III) allocating IPOs to executives as a quid pro quo for personal favors.
IV) greenmail.

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

Question 40

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

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

Question 41

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

A) primary
B) secondary
C) primary and secondary
D) derivatives

Question 42

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 43

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
E) GNMA and FNMA

Question 44

In 2018, ____________ 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 45

The technology behind cryptocurrencies that is ideal for secure digital transactions is called ______________.

A) bitcoin
B) blockchain
C) distributed ledgers
D) ethereum
E) All of the options

Question 46

In 2018, ____________ 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
E) marketable securities

Question 47

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

A) primary
B) secondary
C) over-the-counter
D) primary and secondary

Question 48

The Economic Growth, Regulatory Relief and Consumer Protection Act of 2019 exempted smaller banks from which rule?

A) Liquidity
B) Reserves
C) Demand deposit
D) Volker
E) All of the options

Question 49

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.

Question 50

Which country has banned initial coin offerings?

A) China
B) Germany
C) Japan
D) USA
E) All of the options

Question 51

In terms of total value, the most significant liability(ies) of U.S. nonfinancial businesses in 2018 was(were)

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

Question 52

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
E) None of the options

Question 53

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
E) None of the options

Question 54

According to the Economic Growth, Regulatory Relief and Consumer Protection Act of 2019 many larger banks are no longer considered ________________.

A) insurable
B) high risk
C) insolvent
D) systematically important
E) All of the options.
Answer Key
Test name: Chapter 1

Question 55

________ 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
E) All of the options

Question 56

In 2018, ____________ 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
E) marketable securities

Question 57

________ 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
E) All of the options

Question 58

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
E) I, II, III, and IV

Question 59

A major problem experienced by cryptocurrency, which makes it problematic to store value is _____________.

A) distributed ledgers
B) blockchain
C) price volatility
D) transaction security
E) All of the options