Question 1

Which of the following is not characteristic of systemic risk?
A) Affects the larger economy
B) Cannot be diversified away
C) Arose from the mortgage housing crisis
D) Affects a specific sector of the economy

Accepted Answer

Systemic risk refers to the risk of collapse of an entire financial system or entire market, as opposed to risk associated with any one individual entity, sector, or part of a system. It is characterized by its broad impact on the economy rather than being confined to a specific sector. Choices A, B, and C correctly describe aspects of systemic risk, while D incorrectly suggests it is limited to a specific sector.

Question 2

Lack of available loans for businesses is best described as:
A) stress test.
B) systemic risk.
C) subprime mortgages.
D) credit crunch or credit squeeze.

Accepted Answer

A credit crunch or credit squeeze occurs when there is a lack of available loans or credit for businesses and consumers, making it difficult for them to borrow money.

Question 3

Which of the following is a government program designed to assist financial institutions in response to the financial crisis of 2007-2008?
A) Glass-Steagall Act
B) Troubled Asset Relief Program (TARP)
C) Government- sponsored entities (GSEs)
D) Financial Industry Regulatory Authority (FINRA)

Accepted Answer

The Troubled Asset Relief Program (TARP) was specifically created to help stabilize the financial system during the crisis of 2007-2008 by purchasing toxic assets and equity from financial institutions.

Question 4

The debt obligation secured by a person's primary home is best described as a:
A) stock.
B) mortgage.
C) debenture.
D) margin loan.

Accepted Answer

A mortgage is a type of loan specifically designed for the purpose of purchasing real estate. The property being purchased serves as collateral for the loan, making it a secured debt obligation.

Question 5

Uncertainty that affects the larger economy is best described as:
A) volatility risk.
B) systemic risk.
C) systematic risk.

Accepted Answer

Systemic risk refers to uncertainty that affects the entire economy, such as a recession or a financial crisis.

Question 6

The primary responsibility of the Federal Open Market Committee is:
A) U.S. monetary policy.
B) regulate banks and insurance companies.
C) to bring the U.S. out of a recession in a timely manner.

Accepted Answer

The Federal Open Market Committee (FOMC) is primarily responsible for overseeing the nation's monetary policy, which includes influencing money and credit conditions in the economy to pursue objectives of maximum employment, stable prices, and moderate long-term interest rates.

Question 7

The predominant regulator of insurance companies in the U.S.
A) are the States.
B) is the Federal government.
C) is the Securities and Exchange Commission.

Accepted Answer

Insurance companies in the U.S. are primarily regulated by state governments, not the federal government or the Securities and Exchange Commission. Each state has its own insurance department that oversees the operations of insurers within its jurisdiction.

Question 8

Which of the following U.S. securities laws created the Financial Stability Oversight Council, created criteria and standards for systemically important financial companies, provided for orderly liquidation of insolvent financial companies, and regulated derivatives and hedge funds?
A) Securities Act of 1933
B) Sarbanes-Oxley Act of 2002
C) Investment Company Act of 1940
D) Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

Accepted Answer

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was enacted in response to the financial crisis of 2008. It aimed to increase financial stability by creating the Financial Stability Oversight Council, setting criteria for systemically important financial institutions, providing mechanisms for the orderly liquidation of insolvent financial companies, and imposing regulations on derivatives and hedge funds.

Question 9

Suppose homeowners own a home that has an appraised value of $200,000. The homeowners have a mortgage loan outstanding on the home of $180,000. The loan to value ratio is closest to:
A) 0.9.
B) 1.0.
C) 1.05

Accepted Answer

The loan to value ratio (LTV) is calculated by dividing the loan amount by the appraised value of the property. In this case, $180,000 / $200,000 = 0.9.

Question 10

Suppose homeowners own a home that has an appraised value of $250,000. The homeowners have a mortgage loan outstanding on the home of $260,000. Which of the following statements is incorrect regarding the mortgage loan?
A) This loan is underwater.
B) The loan to value ratio is 0.9615
C) The homeowners owe more than what the home is worth.

Accepted Answer

The loan-to-value (LTV) ratio is calculated by dividing the mortgage amount by the appraised value of the property. In this case, it should be $260,000 / $250,000 = 1.04, not 0.9615. This means the homeowners owe more on their mortgage than the home's current value, making the loan underwater, as correctly described in options A and C.

Question 11

Financial managers learned many lessons following the financial crisis of 2007 - 2008. These lessons include all of the following except:
A) financial risk management is important.
B) executive compensation should be tied to some measure of risk, not just earnings
C) reliance on bank financing for short-term needs is recommended during a credit crunch.
D) companies that rely on securitizing their assets should be prepared for the associated risks.

Accepted Answer

The financial crisis of 2007-2008 highlighted the dangers of relying too heavily on bank financing for short-term needs, especially during a credit crunch, when banks may tighten lending standards or reduce lending altogether. This makes option C incorrect as it suggests the opposite of what was learned.

Question 12

The three primary areas of finance are business finance, corporate finance, and investments.

Accepted Answer

The three primary areas of finance are personal finance, corporate finance, and public finance.

Question 13

The primary area of finance that deals with financing decision making within a business entity would best be described as investments.

Accepted Answer

The primary area of finance that deals with financing decision making within a business entity is best described as corporate finance, not investments. Corporate finance focuses on how corporations manage their capital structure, decide on financing options, and plan for their financial future. Investments, on the other hand, deal with choices regarding the purchase of assets with the expectation of generating returns.

Question 14

Mortgage brokers, real estate brokers, stock brokers, and insurance brokers are all examples of market intermediaries.

Accepted Answer

Market intermediaries, also known as financial intermediaries, facilitate transactions between buyers and sellers in different markets, including real estate, stocks, insurance, and mortgages, by providing expertise, access, and convenience.

Question 15

Mortgage brokers, real estate brokers, stock brokers, and insurance brokers are all examples of financial intermediaries.

Accepted Answer

Financial intermediaries are institutions that facilitate the channeling of funds between lenders and borrowers, such as banks and credit unions. Brokers, on the other hand, act as agents to facilitate transactions in specific markets but do not directly channel funds.

Question 16

A broker is a type of market intermediary.

Accepted Answer

A broker acts as an intermediary between buyers and sellers in various types of markets, facilitating transactions and often providing advice or other services.

Question 17

The primary area of finance that deals with financing decision making within a business entity would best be described as investments.

Accepted Answer

The primary area of finance that deals with financing decision making within a business entity is best described as corporate finance, not investments. Corporate finance focuses on how corporations manage their capital structure, decide on financing, and allocate resources, whereas investments focus on choices made by individuals or institutions regarding the buying and selling of securities or other investment assets.

Question 18

Bank loans, commercial paper, banker's acceptance, and U.S. Treasury bills are all examples of short-term equity securities.

Accepted Answer

These are examples of short-term debt instruments, not equity securities. Equity securities represent ownership interest, while these examples are forms of borrowing.

Question 19

Mortgage loans, municipal bonds, and corporate bonds all represent equity interests.

Accepted Answer

Mortgage loans, municipal bonds, and corporate bonds represent debt obligations, not equity interests. Equity interests refer to ownership stakes, such as those obtained through purchasing stock in a company.

Question 20

An equity security represents a debt obligation.

Accepted Answer

An equity security represents ownership interest in a company, whereas a debt obligation represents a loan that must be repaid.

Quiz 1: An Introduction to Finance

Which of the following is not characteristic of systemic risk?

Lack of available loans for businesses is best described as:

Which of the following is a government program designed to assist financial institutions in response to the financial crisis of 2007-2008?

The debt obligation secured by a person's primary home is best described as a:

Uncertainty that affects the larger economy is best described as:

The primary responsibility of the Federal Open Market Committee is:

The predominant regulator of insurance companies in the U.S.

Which of the following U.S. securities laws created the Financial Stability Oversight Council, created criteria and standards for systemically important financial companies, provided for orderly liquidation of insolvent financial companies, and regulated derivatives and hedge funds?

Suppose homeowners own a home that has an appraised value of $200,000. The homeowners have a mortgage loan outstanding on the home of $180,000. The loan to value ratio is closest to:

Suppose homeowners own a home that has an appraised value of $250,000. The homeowners have a mortgage loan outstanding on the home of $260,000. Which of the following statements is incorrect regarding the mortgage loan?

Financial managers learned many lessons following the financial crisis of 2007 - 2008. These lessons include all of the following except:

The three primary areas of finance are business finance, corporate finance, and investments.

The primary area of finance that deals with financing decision making within a business entity would best be described as investments.

Mortgage brokers, real estate brokers, stock brokers, and insurance brokers are all examples of market intermediaries.

Mortgage brokers, real estate brokers, stock brokers, and insurance brokers are all examples of financial intermediaries.

A broker is a type of market intermediary.

The primary area of finance that deals with financing decision making within a business entity would best be described as investments.

Bank loans, commercial paper, banker's acceptance, and U.S. Treasury bills are all examples of short-term equity securities.

Mortgage loans, municipal bonds, and corporate bonds all represent equity interests.

An equity security represents a debt obligation.