Deck 1: Investments: Background and Issues

Question 1

_______ is/are a real asset(s).

A) Only land
B) Only machines
C) Only stocks and bonds
D) Only knowledge
E) Land,machines and knowledge are real assets

Answer 1

E

Question 2

____________ of an investment bank.

A) BMO Nesbitt Burns is an example
B) CIBC is an example
C) Scotia Capital is an example
D) a and b are examples
E) a and c are examples

Answer 2

E

Question 3

The value of a derivative security _______.

A) depends on the value of the related primitive security
B) can only cause increased risk.
C) is unrelated to the value of the related primitive security
D) has been enhanced due the recent misuse and negative publicity regarding these instruments
E) is worthless today

Answer 3

A

Question 4

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
E) a riskless return that is fixed for life

Question 5

Investment objectives

A) must be consistent with investment constraints.
B) must be in direct contrast with investment constraints.
C) and investment constraints determine investment policies.
D) a and b.
E) a and c.

Question 6

_______ are financial assets.

A) Bonds
B) Machines
C) Stocks
D) a and c
E) a,b and c

Question 7

The stage an individual is in his/her life cycle will affect his/her __________.

A) return requirements
B) risk tolerance
C) asset allocation
D) a and b
E) a,b,and c

Question 8

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
E) all commodities

Question 9

A bond issue is broken up so that some investors will receive only interest payments while others will receive only principal payments,which is an example of ________.

A) bundling
B) credit enhancement
C) unbundling
D) financial engineering
E) c and d

Question 10

_________ financial asset(s).

A) Buildings are
B) Land is a
C) Derivatives are
D) EDC bonds are
E) c and d

Question 11

Which of the following is true about GNMA pass-throughs?
I)They separate individual home mortgages into heterogeneous pools.
II)The purchaser of a GNMA receives monthly interest and principal payments received from payments made on the pool.
III)The banks that originated the mortgages continue to service them.
IV)The banks that originated the mortgages maintain ownership of them.

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

Question 12

Investors seeking to diversify are likely to find that their largest investment is in

A) stocks.
B) bonds.
C) their job.
D) foreign securities.
E) cash.

Question 13

An example of a primitive security is __________.

A) a common share of RBC
B) a call option on CIBC stock
C) a call option on a stock of a firm based in a Third World country
D) a Canada bond
E) a and d.

Question 14

Financial intermediaries exist because small investors cannot efficiently ________.

A) diversify their portfolios
B) gather information
C) monitor their portfolios
D) advertise for needed investments
E) all of these.

Question 15

An example of a derivative security is ______.

A) a common share of Canadian Pacific
B) a call option on BMO stock
C) a commodity futures contract
D) b and c
E) a and b

Question 16

_______ are examples of financial intermediaries.

A) Chartered banks
B) Insurance companies
C) Investment companies
D) Credit unions
E) All of these

Question 17

The net wealth of the aggregate economy is equal to the sum of _________.

A) all financial assets
B) all real assets
C) all financial and real assets
D) all physical assets
E) none of these

Question 18

_______ was the first to introduce mortgage pass-through securities in Canada.

A) CMHC
B) TD Bank
C) FNMA
D) GNMA
E) None of these

Question 19

__________ are an indirect way U.S.investors can invest in foreign companies.

A) ADRs
B) RRSPs
C) SDRs
D) GNMAs
E) Krugerrands

Question 20

The ____________ refers to the potential conflict between management and shareholders due to management's control of pecuniary rewards as well as the possibility of incompetent performance by managers.

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

Question 21

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.
E) enhance their balance sheets.

Question 22

Theoretically,takeovers should result in ___________.

A) improved management
B) increased stock price
C) increased benefits to existing management of taken over firm
D) a and b
E) a,b,and c

Question 23

Discuss the various types of securities markets.Distinguish between initial sale of the assets and subsequent sales.Also distinguish between the middlemen in the different markets.

Question 24

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

A) credit enhancement
B) securitization
C) unbundling
D) derivatives
E) none of these

Question 25

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 26

Firms that specialize in helping companies raise capital by selling securities are called ________.

A) chartered banks
B) investment banks
C) trust companies
D) credit unions
E) all of these.

Question 27

In what roles do investment bankers perform?

A) design securities with desirable properties
B) market new stock and bond issues for firms
C) provide advice to the firms as to market conditions,price,etc.
D) none of these
E) all of these

Question 28

Collateralized mortgage obligations were created to

A) aggregate individual mortgages into relatively homogeneous pools
B) meet the demand for mortgage-backed securities with a range of maturities
C) rebundle separate branches into a single unit
D) circumvent the requirements of Regulation Q
E) provide government insurance for mortgages

Question 29

Money market securities ____________.

A) are short term
B) are highly marketable
C) are generally very low risk
D) are short term,highly marketable,and generally very low risk
E) highly marketable and generally very low risk

Question 30

Which of the following are mechanisms that have evolved to mitigate potential agency problems?
I)compensation in the form of the firm's stock options
II)hiring bickering family members as corporate spies
III)underperforming management teams being forced out by boards of directors
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
E) I,III,and V

Question 31

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

Question 32

The term "human capital" refers to

A) the total amount of capital owned by humans.
B) the value of the earnings potential of the workforce.
C) the value of a firm's management personnel.
D) the value of a firm's blue-collar workers.
E) the value of equipment that is operated by company personnel.

Question 33

Discuss the agency problem in detail.

Question 34

What are the objectives of businesses issuing securities to the public?

A) To get the best possible price for their securities.
B) To market the issues to the public at the lowest cost.
C) To issue fairly simple securities requiring little incremental analysis.
D) All of these are true.
E) None of these is true.

Question 35

Important trends changing the contemporary investment environment are

A) globalization
B) securitization
C) bundling and unbundling
D) financial engineering
E) all of these

Question 36

Stripped Treasury securities are

A) examples of tax-induced innovations.
B) examples of derivative assets.
C) separated into an income component and a principal component.
D) targeted to meet the needs of investors in different income brackets
E) all of these are true

Question 37

Derivative securities are

A) potentially dangerous because they are highly leveraged
B) an effective tool to better manage business returns and risk
C) always structured as option contracts
D) both a and b are true
E) all of these are true

Question 38

Financial intermediaries differ from other businesses in that both their assets and their liabilities are mostly

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

Question 39

A corporation needing financing engages an insurance company to place its credit behind the corporation's credit for a fee,which is an example of ________.

A) bundling
B) credit enhancement
C) securitization
D) unbundling
E) none of these.

Question 40

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 41

Discuss the euro in relation to its impact on globalization.How is it currently used and what are the plans for its future use?