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Chapter 01 - The Investment Environment

Chapter 01

The Investment Environment

Multiple Choice Questions

1. The material wealth of a society is a function of _________.A. all financial assetsB. all real assetsC. all financial and real assets. all physical assetsE. none of the a!ove

". _______ are real assets.

A. #andB. $achinesC. %toc&s and !onds. 'nowled(eE. A) B and

*. The means !y which individuals hold their claims on real assets in a well-developedeconomy areA. Investment assets.

B. epository assets.C. erivative assets.. +inancial assets.E. E,chan(e-driven assets.

. _______ are financial assets.A. BondsB. $achinesC. %toc&s

. A and CE. A) B and C

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. _________ financial asset/s.A. Buildin(s areB. #and is a

C. erivatives are. .%. A(ency !onds areE. C and

2. +inancial assets ______.A. directly contri!ute to the country3s productive capacityB. indirectly contri!ute to the country3s productive capacityC. contri!ute to the country3s productive capacity !oth directly and indirectly. do not contri!ute to the country3s productive capacity either directly or indirectly

E. are of no value to anyone

4. In "005) ____________ was the most si(nificant real asset of .%. households in terms oftotal value.A. consumer dura!lesB. automo!ilesC. real estate. mutual fund sharesE. !an& loans

6. In "005) ____________ was the least si(nificant financial asset of .%. households in termsof total value.A. real estateB. mutual fund sharesC. de!t securities. life insurance reservesE. pension reserves

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5. In "005) ____________ was the most si(nificant financial asset of .%. households interms of total value.A. real estate

B. mutual fund sharesC. de!t securities. life insurance reservesE. pension reserves

10. In "005) ____________ was the most si(nificant asset of .%. households in terms of totalvalue.A. real estateB. mutual fund shares

C. de!t securities. life insurance reservesE. pension reserves

11. In "005) ____________ was the most si(nificant lia!ility of .%. households in terms oftotal value.A. credit cardsB. mort(a(esC. !an& loans

. student loansE. other de!t

1". 7hich of the followin( financial assets made up the (reatest proportion of the financialassets held !y .%. households8A. 9ension reservesB. #ife insurance reservesC. $utual fund shares. e!t securities

E. 9ersonal trusts

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1*. In "005) _______ of the assets of .%. households were financial assets as opposed totan(i!le assets.A. "0.:

B. *.":C. 2*.0:. 41.4:E. 6".:

1. The lar(est component of domestic net worth in "005 was ____________.A. non-residential real estateB. residential real estateC. inventories

. consumer dura!lesE. e;uipment and software

1. The smallest component of domestic net worth in "005 was ____________.A. non-residential real estateB. residential real estateC. inventories. consumer dura!lesE. e;uipment and software

12. The national net worth of the .%. in "005 was _________.A.

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14. A fi,ed-income security pays ____________.A. a fi,ed level of income for the life of the ownerB. a fi,ed stream of income or a stream of income that is determined accordin( to a specified

formula for the life of the securityC. a varia!le level of income for owners on a fi,ed income. a fi,ed or varia!le income stream at the option of the ownerE. none of the a!ove

16. A de!t security pays ____________.A. a fi,ed level of income for the life of the ownerB. a varia!le level of income for owners on a fi,ed incomeC. a fi,ed or varia!le income stream at the option of the owner

. a fi,ed stream of income or a stream of income that is determined accordin( to a specifiedformula for the life of the securityE. none of the a!ove

15. $oney mar&et securities ____________.A. are short termB. are hi(hly mar&eta!leC. are (enerally very low ris&. all of the a!ove

E. B and C only.

"0. An e,ample of a derivative security is ______.A. a common share of $icrosoftB. a call option on Intel stoc&C. a commodity futures contract. B and CE. A and B

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"1. The value of a derivative security _______.A. depends on the value of the related securityB. is una!le to !e calculated

C. is unrelated to the value of the related security. has !een enhanced due to the recent misuse and ne(ative pu!licity re(ardin( theseinstrumentsE. is worthless today

"". Althou(h derivatives can !e used as speculative instruments) !usinesses most often usethem toA. attract customers.B. appease stoc&holders.

C. offset de!t.. hed(e ris&s.E. enhance their !alance sheets.

"*. +inancial assets permit all of the followin( e,cept ____________.A. consumption timin(B. allocation of ris&C. separation of ownership and control. elimination of ris&

E. all of the a!ove

". The ____________ refers to the potential conflict !etween mana(ement andshareholders.A. a(ency pro!lemB. diversification pro!lemC. li;uidity pro!lem. solvency pro!lemE. re(ulatory pro!lem

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". A disadvanta(e of usin( stoc& options to compensate mana(ers is thatA. it encoura(es man(ers to underta&e pro=ects that will increase stoc& price.B. it encoura(es mana(ers to en(a(e in empire !uildin(.

C. it can create an incentive for man(ers to manipulate information to prop up a stoc& pricetemporarily) (ivin( them a chance to cash out !efore the price returns to a level reflective ofthe firm3s true prospects.. all of the a!ove.E. none of the a!ove.

"2. 7hich of the followin( are mechanisms that have evolved to miti(ate potential a(encypro!lems8I Compensation in the form of the firm3s stoc& options

II >irin( !ic&erin( family mem!ers as corporate spiesIII nderperformin( mana(ement teams !ein( forced out !y !oards of directorsI? %ecurity analysts monitorin( the firm closely? Ta&eover threatsA. II and ?B. I) III) and I?C. I) III) I?) and ?. III) I?) and ?E. I) III) and ?

"4. Corporate shareholders are !est protected from incompetent mana(ement decisions !yA. the a!ility to en(a(e in pro,y fi(hts.B. mana(ement3s control of pecuniary rewards.C. the a!ility to call shareholder meetin(s.. the threat of ta&eover !y other firms.E. one-share@one-vote election rules.

"6. Theoretically) ta&eovers should result in ___________.

A. improved mana(ementB. increased stoc& priceC. increased !enefits to e,istin( mana(ement of ta&en over firm. A and BE. A) B) and C

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"5. urin( the period !etween "000 and "00") a lar(e num!er of scandals were uncovered.$ost of these scandals were related toI $anipulation of financial data to misrepresent the actual condition of the firm.

II $isleadin( and overly optimistic research reports produced !y analysts.III Allocatin( I9s to e,ecutives as a ;uid pro ;uo for personal favors.I? reenmail.A. II) III) and I?B. I) II) and I?C. II and I?. I) III) and I?E. I) II) and III

*0. The %ar!anes-,ley Act ____________.A. re;uires corporations to have more independent directorsB. re;uires the firm3s C+ to personally vouch for the firm3s accountin( statementsC. prohi!its auditin( firms from providin( other services to clients. nly A and B are correct.E. A) B) and C are correct.

*1. Asset allocation refers to ____________.A. choosin( which securities to hold !ased on their valuation

B. investin( only in safe securitiesC. the allocation of assets into !road asset classes. !ottom-up analysisE. all of the a!ove

*". %ecurity selection refers to ____________.A. choosin( which securities to hold !ased on their valuationB. investin( only in safe securitiesC. the allocation of assets into !road asset classes

. top-down analysisE. all of the a!ove

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**. 7hich of the followin( portfolio construction methods starts with security analysis8A. Top-downB. Bottom-up

C. $iddle-out. Buy and holdE. Asset allocation

*. 7hich of the followin( portfolio construction methods starts with asset allocation8A. Top-downB. Bottom-upC. $iddle-out. Buy and hold

E. Asset allocation

*. _______ are e,amples of financial intermediaries.A. Commercial !an&sB. Insurance companiesC. Investment companies. Credit unionsE. All of the a!ove

*2. +inancial intermediaries e,ist !ecause small investors cannot efficiently ________.A. diversify their portfoliosB. assess credit ris& of !orrowersC. advertise for needed investments. all of the a!ove.E. A and B only.

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*4. ________ specialiDe in helpin( companies raise capital !y sellin( securities.A. commercial !an&ersB. investment !an&ers

C. investment issuers. credit ratersE. all of the a!ove.

*6. Commercial !an&s differ from other !usinesses in that !oth their assets and their lia!ilitiesare mostlyA. illi;uid.B. financial.C. real.

. owned !y the (overnment.E. re(ulated.

*5. In "005) ____________ was the most si(nificant financial asset of .%. commercial !an&sin terms of total value.A. loans and leasesB. cashC. real estate. deposits

E. investment securities

0. In "005) ____________ was the most si(nificant lia!ility of .%. commercial !an&s interms of total value.A. loans and leasesB. cashC. real estate. depositsE. investment securities

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1. In "005) ____________ was the most si(nificant real asset of .%. nonfinancial !usinessesin terms of total value.A. e;uipment and software

B. inventoryC. real estate. trade creditE. mar&eta!le securities

". In "005) ____________ was the least si(nificant real asset of .%. nonfinancial !usinessesin terms of total value.A. e;uipment and softwareB. inventory

C. real estate. trade creditE. mar&eta!le securities

*. In "005) ____________ was the least si(nificant lia!ility of .%. nonfinancial !usinessesin terms of total value.A. !onds and mort(a(esB. !an& loansC. inventories

. trade de!tE. mar&eta!le securities

. In terms of total value) the most si(nificant lia!ility of .%. nonfinancial !usinesses in"005 was _______.A. !an& loansB. !onds and mort(a(esC. trade de!t. other loans

E. mar&eta!le securities

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. In "005) ____________ was the least si(nificant financial asset of .%. nonfinancial!usinesses in terms of total value.A. cash and deposits

B. trade creditC. trade de!t. inventoryE. mar&eta!le securities

2. ew issues of securities are sold in the ________ mar&et/s.A. primaryB. secondaryC. over the counter

. primary and secondaryE. A and C.

4. Investors trade previously issued securities in the ________ mar&et/s.A. primaryB. secondaryC. primary and secondary. derivativesE. A and .

6. Investment !an&ers perform the followin( role/s ___________.A. mar&et new stoc& and !ond issues for firmsB. provide advice to the firms as to mar&et conditions) price) etcC. desi(n securities with desira!le properties. all of the a!oveE. none of the a!ove

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5. ntil 1555) the ________ Act/s prohi!ited !an&s in the nited %tates from !othacceptin( deposits and underwritin( securities.A. %ar!anes-,ley

B. lass-%tea(allC. %EC. A and CE. none of the a!ove

0. The spread !etween the #IBF and the Treasury-!ill rate is called the ________.A. term spreadB. T-!ill spreadC. #IBF spread

. TE spreadE. none of the a!ove

1. $ort(a(e-!ac&ed securities were created when ________ !e(an !uyin( mort(a(e loansfrom ori(inators and !undlin( them into lar(e pools that could !e traded li&e any otherfinancial asset.A. $AB. +$AC. +>#$C

. B and CE. A and B

". The sale of a mort(a(e portfolio !y settin( up mort(a(e pass-throu(h securities is ane,ample of ________.A. credit enhancementB. securitiDationC. un!undlin(. derivatives

E. none of the a!ove

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*. 7hich of the followin( is true a!out mort(a(e-!ac&ed securities8I They a((re(ate individual home mort(a(es into homo(eneous pools.II The purchaser receives monthly interest and principal payments received from payments

made on the pool.III The !an&s that ori(inated the mort(a(es maintain ownership of them.I? The !an&s that ori(inated the mort(a(es continue to service them.A. II) III) and I?B. I) II) and I?C. II and I?. I) III) and I?E. I) II) III) and I?

. ________ were desi(ned to concentrate the credit ris& of a !undle of loans on one class ofinvestor) leavin( the other investors in the pool relatively protected from that ris&.A. %toc&sB. BondsC. erivatives. CollateraliDed de!t o!li(ationsE. all of the a!ove.

. ________ are in essence an insurance contract a(ainst the default of one or more

!orrowers.A. Credit default swapsB. C$sC. ET+s. CollateraliDed de!t o!li(ationsE. all of the a!ove.

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Short Answer Questions

2. iscuss the a(ency pro!lem in detail.

4. iscuss the similarities and differences !etween real and financial assets.

6. iscuss securitiDation as it relates to the field of investments.

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Chapter 01 The Investment Environment Answer 'ey

Multiple Choice Questions

1. The material wealth of a society is a function of _________.A.all financial assetsB.all real assetsC.all financial and real assets.all physical assetsE.none of the a!ove

The material wealth of a society is a function of all real assets.

AACSB: Analytic

Bloom's: Remember

Difficulty: Basic

Topic: Assets

". _______ are real assets.A.#and

B.$achinesC.%toc&s and !onds.'nowled(eE.A) B and

#and) machines and &nowled(e are real assetsG stoc&s and !onds are financial assets.

AACSB: AnalyticBloom's: Remember

Difficulty: Basic

Topic: Assets

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*. The means !y which individuals hold their claims on real assets in a well-developedeconomy areA.Investment assets.

B.epository assets.C.erivative assets.D.+inancial assets.E.E,chan(e-driven assets.

+inancial assets allocate the wealth of the economy. E,ampleH it is easier for an individual toown shares of an auto company than to own an auto company directly.

AACSB: Analytic

Bloom's: Remember

Difficulty: Basic

Topic: Assets

. _______ are financial assets.A.BondsB.$achinesC.%toc&sD.A and CE.A) B and C

$achines are real assetsG stoc&s and !onds are financial assets.


Difficulty: Basic

Topic: Assets

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. _________ financial asset/s.A.Buildin(s areB.#and is a

C.erivatives are..%. A(ency !onds areE.C and

A and B are real assets.

AACSB: Analytic

Bloom's: RememberDifficulty: Basic

Topic: Assets

2. +inancial assets ______.A.directly contri!ute to the country3s productive capacityB.indirectly contri!ute to the country3s productive capacityC.contri!ute to the country3s productive capacity !oth directly and indirectly.do not contri!ute to the country3s productive capacity either directly or indirectlyE.are of no value to anyone

+inancial assets indirectly contri!ute to the country3s productive capacity !ecause these assetspermit individuals to invest in firms and (overnments. This in turn allows firms and(overnments to increase productive capacity.

AACSB: AnalyticBloom's: Understand

Difficulty: Basic

Topic: Assets

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4. In "005) ____________ was the most si(nificant real asset of .%. households in terms oftotal value.A.consumer dura!les

B.automo!ilesC.real estate.mutual fund sharesE.!an& loans

%ee Ta!le 1.1.

AACSB: Analytic

Bloom's: Remember

Difficulty: Basic

Topic: Assets

6. In "005) ____________ was the least si(nificant financial asset of .%. households in termsof total value.A.real estateB.mutual fund sharesC.de!t securitiesD.life insurance reservesE.pension reserves

%ee Ta!le 1.1.


Difficulty: Basic

Topic: Assets

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5. In "005) ____________ was the most si(nificant financial asset of .%. households interms of total value.A.real estate

B.mutual fund sharesC.de!t securities.life insurance reservesE.pension reserves

%ee Ta!le 1.1.

AACSB: Analytic

Bloom's: Remember

Difficulty: Basic

Topic: Assets

10. In "005) ____________ was the most si(nificant asset of .%. households in terms of totalvalue.A.real estateB.mutual fund sharesC.de!t securities.life insurance reservesE.pension reserves

%ee Ta!le 1.1.


Difficulty: Basic

Topic: Assets

1-"0

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11. In "005) ____________ was the most si(nificant lia!ility of .%. households in terms oftotal value.A.credit cards

B.mort(a(esC.!an& loans.student loansE.other de!t

%ee Ta!le 1.1.

AACSB: Analytic

Bloom's: Remember

Difficulty: Basic

Topic: Assets

1". 7hich of the followin( financial assets made up the (reatest proportion of the financialassets held !y .%. households8A.9ension reservesB.#ife insurance reservesC.$utual fund shares.e!t securitiesE.9ersonal trusts

%ee Ta!le 1.1.


Difficulty: Intermediate

Topic: Assets

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1*. In "005) _______ of the assets of .%. households were financial assets as opposed totan(i!le assets.A."0.:

B.*.":C.2*.0:.41.4:E.6".:

%ee Ta!le 1.1.

AACSB: Analytic

Bloom's: Remember


Topic: Assets

1. The lar(est component of domestic net worth in "005 was ____________.A.non-residential real estateB.residential real estateC.inventories.consumer dura!lesE.e;uipment and software

%ee Ta!le 1.".

AACSB: Analytic

Bloom's: RememberDifficulty: Intermediate

Topic: Assets

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1. The smallest component of domestic net worth in "005 was ____________.A.non-residential real estateB.residential real estate

C.inventories.consumer dura!lesE.e;uipment and software

%ee Ta!le 1.".

AACSB: Analytic


Topic: Assets

12. The national net worth of the .%. in "005 was _________.A.

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14. A fi,ed-income security pays ____________.A.a fi,ed level of income for the life of the ownerB.a fi,ed stream of income or a stream of income that is determined accordin( to a specified

formula for the life of the securityC.a varia!le level of income for owners on a fi,ed income.a fi,ed or varia!le income stream at the option of the ownerE.none of the a!ove

nly answer B is correct.

AACSB: Analytic

Bloom's: Remember

Difficulty: Basic

Topic: Asset Types

16. A de!t security pays ____________.A.a fi,ed level of income for the life of the ownerB.a varia!le level of income for owners on a fi,ed incomeC.a fi,ed or varia!le income stream at the option of the ownerD.a fi,ed stream of income or a stream of income that is determined accordin( to a specifiedformula for the life of the securityE.none of the a!ove

nly answer is correct.


Difficulty: Basic

Topic: Asset Types

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15. $oney mar&et securities ____________.A.are short termB.are hi(hly mar&eta!le

C.are (enerally very low ris&D.all of the a!oveE.B and C only.

All answers are correct.

AACSB: Analytic


Topic: Asset Types

"0. An e,ample of a derivative security is ______.A.a common share of $icrosoftB.a call option on Intel stoc&C.a commodity futures contractD.B and CE.A and B

The values of B and C are derived from that of an underlyin( assetG the value of A is !ased onthe value of the firm only.

AACSB: Analytic


Topic: Asset Types

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"1. The value of a derivative security _______.A.depends on the value of the related securityB.is una!le to !e calculated

C.is unrelated to the value of the related security.has !een enhanced due to the recent misuse and ne(ative pu!licity re(ardin( theseinstrumentsE.is worthless today

f the factors cited a!ove) only A affects the value of the derivative and@or is a true statement.

AACSB: Analytic

Bloom's: Understand

Difficulty: Basic

Topic: Asset Types

"". Althou(h derivatives can !e used as speculative instruments) !usinesses most often usethem toA.attract customers.B.appease stoc&holders.C.offset de!t.D.hed(e ris&s.E.enhance their !alance sheets.

+irms may use forward contracts and futures to protect a(ainst currency fluctuations or

chan(es in commodity prices. Interest-rate options help companies control financin( costs.

AACSB: Analytic

Bloom's: Remember

Difficulty: Basic

Topic: Asset Types

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"*. +inancial assets permit all of the followin( e,cept ____________.A.consumption timin(B.allocation of ris&

C.separation of ownership and controlD.elimination of ris&E.all of the a!ove

+inancial assets do not allow ris& to !e eliminated. >owever) they do permit allocation of ris&)consumption timin() and separation of ownership and control.

AACSB: Analytic

Bloom's: Remember


Topic: Assets

". The ____________ refers to the potential conflict !etween mana(ement andshareholders.A.a(ency pro!lemB.diversification pro!lemC.li;uidity pro!lem.solvency pro!lemE.re(ulatory pro!lem

The a(ency pro!lem descri!es potential conflict !etween mana(ement and shareholders. The

other pro!lems are those of firm mana(ement only.

AACSB: Analytic

Bloom's: Remember

Difficulty: Basic

Topic: Financial Manaement

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". A disadvanta(e of usin( stoc& options to compensate mana(ers is thatA.it encoura(es man(ers to underta&e pro=ects that will increase stoc& price.B.it encoura(es mana(ers to en(a(e in empire !uildin(.

C.it can create an incentive for man(ers to manipulate information to prop up a stoc& pricetemporarily) (ivin( them a chance to cash out !efore the price returns to a level reflective ofthe firm3s true prospects..all of the a!ove.E.none of the a!ove.

A is a desired characteristic. B is not necessarily a (ood or !ad thin( in and of itself. C createsan a(ency pro!lem.

AACSB: Analytic

Bloom's: UnderstandDifficulty: Basic


"2. 7hich of the followin( are mechanisms that have evolved to miti(ate potential a(encypro!lems8I Compensation in the form of the firm3s stoc& optionsII >irin( !ic&erin( family mem!ers as corporate spiesIII nderperformin( mana(ement teams !ein( forced out !y !oards of directorsI? %ecurity analysts monitorin( the firm closely? Ta&eover threats

A.II and ?B.I) III) and I?C.I) III) I?) and ?.III) I?) and ?E.I) III) and ?

All !ut the second option have !een used to try to limit a(ency pro!lems.

AACSB: Analytic

Bloom's: Understand



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"4. Corporate shareholders are !est protected from incompetent mana(ement decisions !yA.the a!ility to en(a(e in pro,y fi(hts.B.mana(ement3s control of pecuniary rewards.

C.the a!ility to call shareholder meetin(s.D.the threat of ta&eover !y other firms.E.one-share@one-vote election rules.

9ro,y fi(hts are e,pensive and seldom successful) and mana(ement may often control the!oard or own si(nificant shares. It is the threat of ta&eover of underperformin( firms that hasthe stron(est a!ility to &eep mana(ement on their toes.

AACSB: Analytic

Bloom's: Understand



"6. Theoretically) ta&eovers should result in ___________.A.improved mana(ementB.increased stoc& priceC.increased !enefits to e,istin( mana(ement of ta&en over firmD.A and BE.A) B) and C

Theoretically) when firms are ta&en over) !etter mana(ers come in and thus increase the price

of the stoc&G e,istin( mana(ement often must either leave the firm) !e demoted) or suffer aloss of e,istin( !enefits.

AACSB: Analytic

Bloom's: Remember

Difficulty: BasicTopic: Financial Manaement

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"5. urin( the period !etween "000 and "00") a lar(e num!er of scandals were uncovered.$ost of these scandals were related toI $anipulation of financial data to misrepresent the actual condition of the firm.

II $isleadin( and overly optimistic research reports produced !y analysts.III Allocatin( I9s to e,ecutives as a ;uid pro ;uo for personal favors.I? reenmail.A.II) III) and I?B.I) II) and I?C.II and I?.I) III) and I?E.I) II) and III

I) II) and III are all mentioned as causes of recent scandals.

AACSB: Analytic

Bloom's: Understand



*0. The %ar!anes-,ley Act ____________.A.re;uires corporations to have more independent directorsB.re;uires the firm3s C+ to personally vouch for the firm3s accountin( statementsC.prohi!its auditin( firms from providin( other services to clients.nly A and B are correct.

E.A) B) and C are correct.

The %ar!anes-,ley Act does all of the a!ove.



Topic: Reulation

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*1. Asset allocation refers to ____________.A.choosin( which securities to hold !ased on their valuationB.investin( only in safe securities

C.the allocation of assets into !road asset classes.!ottom-up analysisE.all of the a!ove

Asset allocation refers to the allocation of assets into !road asset classes.

AACSB: Analytic



*". %ecurity selection refers to ____________.A.choosin( which securities to hold !ased on their valuationB.investin( only in safe securitiesC.the allocation of assets into !road asset classes.top-down analysisE.all of the a!ove

%ecurity selection refers to choosin( which securities to hold !ased on their valuation.

AACSB: Analytic

Bloom's: Remember



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**. 7hich of the followin( portfolio construction methods starts with security analysis8A.Top-downB.Bottom-up

C.$iddle-out.Buy and holdE.Asset allocation

Bottom-up refers to usin( security analysis to find securities that are attractively priced. Top-down refers to usin( asset allocation as a startin( point.

AACSB: Analytic

Bloom's: Remember


Topic: !ortfolios

*. 7hich of the followin( portfolio construction methods starts with asset allocation8A.Top-downB.Bottom-upC.$iddle-out.Buy and holdE.Asset allocation

Bottom-up refers to usin( security analysis to find securities that are attractively priced.

AACSB: Analytic


Topic: !ortfolio

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*. _______ are e,amples of financial intermediaries.A.Commercial !an&sB.Insurance companies

C.Investment companies.Credit unionsE.All of the a!ove

All are institutions that !rin( !orrowers and lenders to(ether.

AACSB: Analytic


Topic: Financial Institutions

*2. +inancial intermediaries e,ist !ecause small investors cannot efficiently ________.A.diversify their portfoliosB.assess credit ris& of !orrowersC.advertise for needed investmentsD.all of the a!ove.E.A and B only.

The individual investor cannot efficiently and effectively perform any of the tas&s a!ovewithout more time and &nowled(e than that availa!le to most individual investors.

AACSB: Analytic



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*4. ________ specialiDe in helpin( companies raise capital !y sellin( securities.A.commercial !an&ersB.investment !an&ers

C.investment issuers.credit ratersE.all of the a!ove.

An important role of investment !an&in( is to act as middlemen in helpin( firms place newissues in the mar&et.

AACSB: Analytic

Bloom's: Remember

Difficulty: Basic


*6. Commercial !an&s differ from other !usinesses in that !oth their assets and their lia!ilitiesare mostlyA.illi;uid.B.financial.C.real..owned !y the (overnment.E.re(ulated.

%ee Ta!le 1.*.


Difficulty: Basic


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*5. In "005) ____________ was the most si(nificant financial asset of .%. commercial !an&sin terms of total value.A.loans and leases

B.cashC.real estate.depositsE.investment securities

%ee Ta!le 1.*.

AACSB: Analytic

Bloom's: Remember

Difficulty: Basic


0. In "005) ____________ was the most si(nificant lia!ility of .%. commercial !an&s interms of total value.A.loans and leasesB.cashC.real estateD.depositsE.investment securities

%ee Ta!le 1.*.


Difficulty: Basic


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1. In "005) ____________ was the most si(nificant real asset of .%. nonfinancial !usinessesin terms of total value.A.e;uipment and software

B.inventoryC.real estate.trade creditE.mar&eta!le securities

%ee Ta!le 1..

AACSB: Analytic

Bloom's: Remember

Difficulty: Basic


". In "005) ____________ was the least si(nificant real asset of .%. nonfinancial !usinessesin terms of total value.A.e;uipment and softwareB.inventoryC.real estate.trade creditE.mar&eta!le securities

%ee Ta!le 1..


Difficulty: Basic


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*. In "005) ____________ was the least si(nificant lia!ility of .%. nonfinancial !usinessesin terms of total value.A.!onds and mort(a(es

B.!an& loansC.inventories.trade de!tE.mar&eta!le securities

%ee Ta!le 1..

AACSB: Analytic

Bloom's: Remember

Difficulty: Basic


. In terms of total value) the most si(nificant lia!ility of .%. nonfinancial !usinesses in"005 was _______.A.!an& loansB.!onds and mort(a(esC.trade de!t.other loansE.mar&eta!le securities

%ee Ta!le 1..


Difficulty: Basic


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. In "005) ____________ was the least si(nificant financial asset of .%. nonfinancial!usinesses in terms of total value.A.cash and deposits

B.trade creditC.trade de!t.inventoryE.mar&eta!le securities

%ee Ta!le 1..

AACSB: Analytic

Bloom's: Remember

Difficulty: Basic


2. ew issues of securities are sold in the ________ mar&et/s.A.primaryB.secondaryC.over the counter.primary and secondaryE.A and C.

ew issues of securities are sold in the primary mar&et.

AACSB: Analytic


Topic: Financial Mar"ets

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4. Investors trade previously issued securities in the ________ mar&et/s.A.primaryB.secondary

C.primary and secondary.derivativesE.A and .

Investors trade previously issued securities in the secondary mar&et.

AACSB: Analytic



6. Investment !an&ers perform the followin( role/s ___________.A.mar&et new stoc& and !ond issues for firmsB.provide advice to the firms as to mar&et conditions) price) etcC.desi(n securities with desira!le propertiesD.all of the a!oveE.none of the a!ove

Investment !an&ers perform all of the roles descri!ed a!ove for their clients.

AACSB: Analytic

Bloom's: Understand

Difficulty: Basic


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5. ntil 1555) the ________ Act/s prohi!ited !an&s in the nited %tates from !othacceptin( deposits and underwritin( securities.A.%ar!anes-,ley

B.lass-%tea(allC.%EC.A and CE.none of the a!ove

ntil 1555) the lass-%tea(all Act prohi!ited !an&s in the nited %tates from !oth acceptin(deposits and underwritin( securities.

AACSB: Analytic

Bloom's: Remember

Difficulty: Basic

Topic: Reulation

0. The spread !etween the #IBF and the Treasury-!ill rate is called the ________.A.term spreadB.T-!ill spreadC.#IBF spreadD.TE spreadE.none of the a!ove

The spread !etween the #IBF and the Treasury-!ill rate is called the TE spread.


Difficulty: Basic


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1. $ort(a(e-!ac&ed securities were created when ________ !e(an !uyin( mort(a(e loansfrom ori(inators and !undlin( them into lar(e pools that could !e traded li&e any otherfinancial asset.

A.$AB.+$AC.+>#$CD.B and CE.A and B

$ort(a(e-!ac&ed securities were created when +$A and +>#$C !e(an !uyin( mort(a(eloans from ori(inators and !undlin( them into lar(e pools that could !e traded li&e any otherfinancial asset.


Difficulty: Basic

Topic: Securities

". The sale of a mort(a(e portfolio !y settin( up mort(a(e pass-throu(h securities is ane,ample of ________.A.credit enhancementB.securitiDationC.un!undlin(.derivatives

E.none of the a!ove

The financial asset is secured !y the mort(a(es !ac&in( the instrument.


Difficulty: Basic

Topic: Securities

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*. 7hich of the followin( is true a!out mort(a(e-!ac&ed securities8I They a((re(ate individual home mort(a(es into homo(eneous pools.II The purchaser receives monthly interest and principal payments received from payments

made on the pool.III The !an&s that ori(inated the mort(a(es maintain ownership of them.I? The !an&s that ori(inated the mort(a(es continue to service them.A.II) III) and I?B.I) II) and I?C.II and I?.I) III) and I?E.I) II) III) and I?

III is not correct !ecause the !an& no lon(er owns the mort(a(e investments.

AACSB: Analytic

Bloom's: Understand


Topic: Securities

. ________ were desi(ned to concentrate the credit ris& of a !undle of loans on one class ofinvestor) leavin( the other investors in the pool relatively protected from that ris&.A.%toc&sB.BondsC.erivatives

D.CollateraliDed de!t o!li(ationsE.all of the a!ove.

CollateraliDed de!t o!li(ations were desi(ned to concentrate the credit ris& of a !undle ofloans on one class of investor) leavin( the other investors in the pool relatively protected fromthat ris&.


Difficulty: Basic

Topic: Securities

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. ________ are in essence an insurance contract a(ainst the default of one or more!orrowers.A.Credit default swaps

B.C$sC.ET+s.CollateraliDed de!t o!li(ationsE.all of the a!ove.

Credit default swaps are in essence an insurance contract a(ainst the default of one or more!orrowers.

AACSB: Analytic

Bloom's: Understand

Difficulty: Basic

Topic: Securities

Short Answer Questions

2. iscuss the a(ency pro!lem in detail.

$ana(ers are the a(ents of the shareholders) and should act on their !ehalf to ma,imiDeshareholder wealth /the value of the stoc&. A conflict /the a(ency conflict arises whenmana(ers ta&e self-interested actions to the detriment of shareholders. The roles of the !oard

of directors selected !y the shareholders are to oversee mana(ement and to minimiDe a(encypro!lems. >owever) often these !oards are fi(ureheads) and individual shareholders do notown lar(e enou(h !loc&s of the shares to override mana(ement actions. ne potentialresolution of an a(ency pro!lem occurs when inefficient mana(ement actions cause the priceof the stoc& to !e depressed. The firm may then !ecome a ta&eover tar(et. If the ac;uisition issuccessful) mana(ers may !e replaced and potentially) stoc&holders !enefit.

AACSB: Reflecti#e T$in"inBloom's: Analy%e



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4. iscuss the similarities and differences !etween real and financial assets.

Feal assets represent the productive capacity of the firm) and appear as assets on the firm3s

!alance sheet. +inancial assets are claims a(ainst the firm) and thus appear as lia!ilities on thefirm3s !alance sheet. n the other hand) financial assets are listed on the asset side of the!alance sheet of the individuals who own them. Thus) when financial statements area((re(ated across the economy) the financial assets cancel out) leavin( only the real assets)which directly contri!ute to the productive capacity of the economy. +inancial assetscontri!ute indirectly only.

AACSB: Reflecti#e T$in"in

Bloom's: Analy%e


Topic: Assets

6. iscuss securitiDation as it relates to the field of investments.

%ecuritiDation refers to a((re(atin( underlyin( financial assets) such as mort(a(es) into poolsand then offerin( a security that represents a claim on these underlyin( assets. E,ampleHmort(a(e-!ac&ed securities. %ecuritiDation allows investors to hold partial ownership infinancial assets that would otherwise !e !eyond their reach /e.(.) mort(a(es.+inancial en(ineerin( involves !undlin( or un!undlin(. Bundlin( involves com!inin(separate securities.

AACSB: Reflecti#e T$in"in

Bloom's: Analy%eDifficulty: Intermediate

Topic: Securities

Documents

Chap 00163