Chap 00163

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 assets B. all real assets C. all financial and real assets . all physical assets E. none of the a!ove
". _______ are real assets. A. #and B. $achines C. %toc&s and !onds . 'nowled(e E. A) B and
*. The means !y which individuals hold their claims on real assets in a well-developed economy are A. Investment assets. B. epository assets. C. erivative assets. . +inancial assets. E. E,chan(e-driven assets.
-. _______ are financial assets. A. Bonds B. $achines C. %toc&s . A and C E. A) B and C
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.. _________ financial asset/s0. A. Buildin(s are B. #and is a C. erivatives are . 1.%. A(ency !onds are E. C and
2. +inancial assets ______. A. directly contri!ute to the country3s productive capacity B. indirectly contri!ute to the country3s productive capacity C. 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 1.%. households in terms of total value. A. consumer dura!les B. automo!iles C. real estate . mutual fund shares E. !an& loans
6. In "005) ____________ was the least si(nificant financial asset of 1.%. households in terms of total value. A. real estate B. mutual fund shares C. de!t securities . life insurance reserves E. pension reserves
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5. In "005) ____________ was the most si(nificant financial asset of 1.%. households in terms of total value. A. real estate B. mutual fund shares C. de!t securities . life insurance reserves E. pension reserves
10. In "005) ____________ was the most si(nificant asset of 1.%. households in terms of total value. A. real estate B. mutual fund shares C. de!t securities . life insurance reserves E. pension reserves
11. In "005) ____________ was the most si(nificant lia!ility of 1.%. households in terms of total value. A. credit cards B. mort(a(es C. !an& loans . student loans E. other de!t
1". 7hich of the followin( financial assets made up the (reatest proportion of the financial assets held !y 1.%. households8 A. 9ension reserves B. #ife insurance reserves C. $utual fund shares . e!t securities E. 9ersonal trusts
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1*. In "005) _______ of the assets of 1.%. households were financial assets as opposed to tan(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 estate B. residential real estate C. inventories . consumer dura!les E. e;uipment and software
1.. The smallest component of domestic net worth in "005 was ____________. A. non-residential real estate B. residential real estate C. inventories . consumer dura!les E. e;uipment and software
12. The national net worth of the 1.%. in "005 was _________. A. <1..-11 trillion B. <"2.-*1 trillion C. <-".225 trillion . <*5.1*5 trillion E. <40.56* trillion
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14. A fi,ed-income security pays ____________. A. a fi,ed level of income for the life of the owner B. a fi,ed stream of income or a stream of income that is determined accordin( to a specified formula for the life of the security C. 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 owner E. none of the a!ove
16. A de!t security pays ____________. A. a fi,ed level of income for the life of the owner B. a varia!le level of income for owners on a fi,ed income C. 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 specified formula for the life of the security E. none of the a!ove
15. $oney mar&et securities ____________. A. are short term B. are hi(hly mar&eta!le C. 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 $icrosoft B. a call option on Intel stoc& C. a commodity futures contract . B and C E. A and B
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"1. The value of a derivative security _______. A. depends on the value of the related security B. 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( these instruments E. is worthless today
"". Althou(h derivatives can !e used as speculative instruments) !usinesses most often use them to A. 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 and shareholders. A. a(ency pro!lem B. diversification pro!lem C. li;uidity pro!lem . solvency pro!lem E. re(ulatory pro!lem
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".. A disadvanta(e of usin( stoc& options to compensate mana(ers is that A. 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& price temporarily) (ivin( them a chance to cash out !efore the price returns to a level reflective of the 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(ency pro!lems8 I0 Compensation in the form of the firm3s stoc& options II0 >irin( !ic&erin( family mem!ers as corporate spies III0 1nderperformin( mana(ement teams !ein( forced out !y !oards of directors I?0 %ecurity analysts monitorin( the firm closely ?0 Ta&eover threats A. 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 !y A. 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(ement B. increased stoc& price C. increased !enefits to e,istin( mana(ement of ta&en over firm . A and B E. 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 to I0 $anipulation of financial data to misrepresent the actual condition of the firm. II0 $isleadin( and overly optimistic research reports produced !y analysts. III0 Allocatin( I9As to e,ecutives as a ;uid pro ;uo for personal favors. I?0 Breenmail. 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-A,ley Act ____________. A. re;uires corporations to have more independent directors B. re;uires the firm3s C+A to personally vouch for the firm3s accountin( statements C. prohi!its auditin( firms from providin( other services to clients . Anly 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 CsafeC securities C. the allocation of assets into !road asset classes . !ottom-up analysis E. all of the a!ove
*". %ecurity selection refers to ____________. A. choosin( which securities to hold !ased on their valuation B. investin( only in CsafeC securities C. the allocation of assets into !road asset classes . top-down analysis E. all of the a!ove
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**. 7hich of the followin( portfolio construction methods starts with security analysis8 A. Top-down B. Bottom-up C. $iddle-out . Buy and hold E. Asset allocation
*-. 7hich of the followin( portfolio construction methods starts with asset allocation8 A. Top-down B. Bottom-up C. $iddle-out . Buy and hold E. Asset allocation
*.. _______ are e,amples of financial intermediaries. A. Commercial !an&s B. Insurance companies C. Investment companies . Credit unions E. All of the a!ove
*2. +inancial intermediaries e,ist !ecause small investors cannot efficiently ________. A. diversify their portfolios B. assess credit ris& of !orrowers C. 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&ers B. investment !an&ers C. investment issuers . credit raters E. all of the a!ove.
*6. Commercial !an&s differ from other !usinesses in that !oth their assets and their lia!ilities are mostly A. illi;uid. B. financial. C. real. . owned !y the (overnment. E. re(ulated.
*5. In "005) ____________ was the most si(nificant financial asset of 1.%. commercial !an&s in terms of total value. A. loans and leases B. cash C. real estate . deposits E. investment securities
-0. In "005) ____________ was the most si(nificant lia!ility of 1.%. commercial !an&s in terms of total value. A. loans and leases B. cash C. real estate . deposits E. investment securities
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-1. In "005) ____________ was the most si(nificant real asset of 1.%. nonfinancial !usinesses in terms of total value. A. e;uipment and software B. inventory C. real estate . trade credit E. mar&eta!le securities
-". In "005) ____________ was the least si(nificant real asset of 1.%. nonfinancial !usinesses in terms of total value. A. e;uipment and software B. inventory C. real estate . trade credit E. mar&eta!le securities
-*. In "005) ____________ was the least si(nificant lia!ility of 1.%. nonfinancial !usinesses in terms of total value. A. !onds and mort(a(es B. !an& loans C. inventories . trade de!t E. mar&eta!le securities
--. In terms of total value) the most si(nificant lia!ility of 1.%. nonfinancial !usinesses in "005 was _______. A. !an& loans B. !onds and mort(a(es C. trade de!t . other loans E. mar&eta!le securities
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-.. In "005) ____________ was the least si(nificant financial asset of 1.%. nonfinancial !usinesses in terms of total value. A. cash and deposits B. trade credit C. trade de!t . inventory E. mar&eta!le securities
-2. Eew issues of securities are sold in the ________ mar&et/s0. A. primary B. secondary C. over the counter . primary and secondary E. A and C.
-4. Investors trade previously issued securities in the ________ mar&et/s0. A. primary B. secondary C. primary and secondary . derivatives E. A and .
-6. Investment !an&ers perform the followin( role/s0 ___________. A. mar&et new stoc& and !ond issues for firms B. provide advice to the firms as to mar&et conditions) price) etc C. desi(n securities with desira!le properties . all of the a!ove E. none of the a!ove
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-5. 1ntil 1555) the ________ Act/s0 prohi!ited !an&s in the 1nited %tates from !oth acceptin( deposits and underwritin( securities. A. %ar!anes-A,ley B. Blass-%tea(all C. %EC . A and C E. none of the a!ove
.0. The spread !etween the #IBAF and the Treasury-!ill rate is called the ________. A. term spread B. T-!ill spread C. #IBAF spread . TE spread E. none of the a!ove
.1. $ort(a(e-!ac&ed securities were created when ________ !e(an !uyin( mort(a(e loans from ori(inators and !undlin( them into lar(e pools that could !e traded li&e any other financial asset. A. BE$A B. +E$A C. +>#$C . B and C E. A and B
.". The sale of a mort(a(e portfolio !y settin( up mort(a(e pass-throu(h securities is an e,ample of ________. A. credit enhancement B. securitiDation C. 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 securities8 I0 They a((re(ate individual home mort(a(es into homo(eneous pools. II0 The purchaser receives monthly interest and principal payments received from payments made on the pool. III0 The !an&s that ori(inated the mort(a(es maintain ownership of them. I?0 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 of investor) leavin( the other investors in the pool relatively protected from that ris&. A. %toc&s B. Bonds C. erivatives . CollateraliDed de!t o!li(ations E. all of the a!ove.
... ________ are in essence an insurance contract a(ainst the default of one or more !orrowers. A. Credit default swaps B. C$As C. ET+s . CollateraliDed de!t o!li(ations E. 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 assets B. all real assets C. all financial and real assets . all physical assets E. 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. $achines C. %toc&s and !onds . 'nowled(e E. A) B and #and) machines and &nowled(e are real assetsG stoc&s and !onds are financial assets.
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*. The means !y which individuals hold their claims on real assets in a well-developed economy are A. 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 to own shares of an auto company than to own an auto company directly.
-. _______ are financial assets. A. Bonds B. $achines C. %toc&s D. A and C E. A) B and C $achines are real assetsG stoc&s and !onds are financial assets.
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.. _________ financial asset/s0. A. Buildin(s are B. #and is a C. erivatives are . 1.%. A(ency !onds are E. C and A and B are real assets.
2. +inancial assets ______. A. directly contri!ute to the country3s productive capacity B. indirectly contri!ute to the country3s productive capacity C. 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 +inancial assets indirectly contri!ute to the country3s productive capacity !ecause these assets permit individuals to invest in firms and (overnments. This in turn allows firms and (overnments to increase productive capacity.
AACSB: Analytic Bloom's: Understand Difficulty: Basic Topic: Assets
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4. In "005) ____________ was the most si(nificant real asset of 1.%. households in terms of total value. A. consumer dura!les B. automo!iles C. real estate . mutual fund shares E. !an& loans %ee Ta!le 1.1.
6. In "005) ____________ was the least si(nificant financial asset of 1.%. households in terms of total value. A. real estate B. mutual fund shares C. de!t securities D. life insurance reserves E. pension reserves %ee Ta!le 1.1.
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5. In "005) ____________ was the most si(nificant financial asset of 1.%. households in terms of total value. A. real estate B. mutual fund shares C. de!t securities . life insurance reserves E. pension reserves %ee Ta!le 1.1.
10. In "005) ____________ was the most si(nificant asset of 1.%. households in terms of total value. A. real estate B. mutual fund shares C. de!t securities . life insurance reserves E. pension reserves %ee Ta!le 1.1.
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11. In "005) ____________ was the most si(nificant lia!ility of 1.%. households in terms of total value. A. credit cards B. mort(a(es C. !an& loans . student loans E. other de!t %ee Ta!le 1.1.
1". 7hich of the followin( financial assets made up the (reatest proportion of the financial assets held !y 1.%. households8 A. 9ension reserves B. #ife insurance reserves C. $utual fund shares . e!t securities E. 9ersonal trusts %ee Ta!le 1.1.
AACSB: Analytic Bloom's: Remember Difficulty: Intermediate Topic: Assets
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1*. In "005) _______ of the assets of 1.%. households were financial assets as opposed to tan(i!le assets. A. "0.-: B. *-.": C. 2*.0: . 41.4: E. 6"..: %ee Ta!le 1.1.
1-. The lar(est component of domestic net worth in "005 was ____________. A. non-residential real estate B. residential real estate C. inventories . consumer dura!les E. e;uipment and software %ee Ta!le 1.".
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1.. The smallest component of domestic net worth in "005 was ____________. A. non-residential real estate B. residential real estate C. inventories . consumer dura!les E. e;uipment and software %ee Ta!le 1.".
12. The national net worth of the 1.%. in "005 was _________. A. <1..-11 trillion B. <"2.-*1 trillion C. <-".225 trillion D. <*5.1*5 trillion E. <40.56* trillion %ee Ta!le 1.".
1-"*
14. A fi,ed-income security pays ____________. A. a fi,ed level of income for the life of the owner B. a fi,ed stream of income or a stream of income that is determined accordin( to a specified formula for the life of the security C. 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 owner E. none of the a!ove Anly 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 owner B. a varia!le level of income for owners on a fi,ed income C. a fi,ed or varia!le income stream at the option of the owner D. a fi,ed stream of income or a stream of income that is determined accordin( to a specified formula for the life of the security E. none of the a!ove Anly answer is correct.
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15. $oney mar&et securities ____________. A. are short term B. are hi(hly mar&eta!le C. are (enerally very low ris& D. all of the a!ove E. B and C only. All answers are correct.
"0. An e,ample of a derivative security is ______. A. a common share of $icrosoft B. a call option on Intel stoc& C. a commodity futures contract D. B and C E. A and B The values of B and C are derived from that of an underlyin( assetG the value of A is !ased on the value of the firm only.
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"1. The value of a derivative security _______. A. depends on the value of the related security B. 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( these instruments E. is worthless today Af 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 use them to A. 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.
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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 control D. 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.
"-. The ____________ refers to the potential conflict !etween mana(ement and shareholders. A. a(ency pro!lem B. diversification pro!lem C. li;uidity pro!lem . solvency pro!lem E. 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 Mana ement
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".. A disadvanta(e of usin( stoc& options to compensate mana(ers is that A. 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& price temporarily) (ivin( them a chance to cash out !efore the price returns to a level reflective of the 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 creates an a(ency pro!lem.
AACSB: Analytic Bloom's: Understand Difficulty: Basic Topic: Financial Mana ement
"2. 7hich of the followin( are mechanisms that have evolved to miti(ate potential a(ency pro!lems8 I0 Compensation in the form of the firm3s stoc& options II0 >irin( !ic&erin( family mem!ers as corporate spies III0 1nderperformin( mana(ement teams !ein( forced out !y !oards of directors I?0 %ecurity analysts monitorin( the firm closely ?0 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 Difficulty: Intermediate Topic: Financial Mana ement
1-"6
"4. Corporate shareholders are !est protected from incompetent mana(ement decisions !y A. 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 has the stron(est a!ility to &eep mana(ement on their toes.
"6. Theoretically) ta&eovers should result in ___________. A. improved mana(ement B. increased stoc& price C. increased !enefits to e,istin( mana(ement of ta&en over firm D. A and B E. 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 a loss of e,istin( !enefits.
AACSB: Analytic Bloom's: Remember Difficulty: Basic Topic: Financial Mana ement
1-"5
"5. urin( the period !etween "000 and "00") a lar(e num!er of scandals were uncovered. $ost of these scandals were related to I0 $anipulation of financial data to misrepresent the actual condition of the firm. II0 $isleadin( and overly optimistic research reports produced !y analysts. III0 Allocatin( I9As to e,ecutives as a ;uid pro ;uo for personal favors. I?0 Breenmail. 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.
*0. The %ar!anes-A,ley Act ____________. A. re;uires corporations to have more independent directors B. re;uires the firm3s C+A to personally vouch for the firm3s accountin( statements C. prohi!its auditin( firms from providin( other services to clients . Anly A and B are correct. E. A) B) and C are correct. The %ar!anes-A,ley Act does all of the a!ove.
AACSB: Analytic Bloom's: Remember Difficulty: Intermediate Topic: Re ulation
1-*0
*1. Asset allocation refers to ____________. A. choosin( which securities to hold !ased on their valuation B. investin( only in CsafeC securities C. the allocation of assets into !road asset classes . !ottom-up analysis E. all of the a!ove Asset allocation refers to the allocation of assets into !road asset classes.
AACSB: Analytic Bloom's: Remember Difficulty: Intermediate Topic: Financial Mana ement
*". %ecurity selection refers to ____________. A. choosin( which securities to hold !ased on their valuation B. investin( only in CsafeC securities C. the allocation of assets into !road asset classes . top-down analysis E. all of the a!ove %ecurity selection refers to choosin( which securities to hold !ased on their valuation.
AACSB: Analytic Bloom's: Remember Difficulty: Intermediate Topic: Financial Mana ement
1-*1
**. 7hich of the followin( portfolio construction methods starts with security analysis8 A. Top-down B. Bottom-up C. $iddle-out . Buy and hold E. Asset allocation Bottom-up refers to usin( security analysis to find securities that are attractively priced. Topdown refers to usin( asset allocation as a startin( point.
AACSB: Analytic Bloom's: Remember Difficulty: Intermediate Topic: !ortfolios
*-. 7hich of the followin( portfolio construction methods starts with asset allocation8 A. Top-down B. Bottom-up C. $iddle-out . Buy and hold E. Asset allocation Bottom-up refers to usin( security analysis to find securities that are attractively priced.
AACSB: Analytic Bloom's: Remember Difficulty: Intermediate Topic: !ortfolio
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*.. _______ are e,amples of financial intermediaries. A. Commercial !an&s B. Insurance companies C. Investment companies . Credit unions E. All of the a!ove All are institutions that !rin( !orrowers and lenders to(ether.
AACSB: Analytic Bloom's: Remember Difficulty: Basic Topic: Financial Institutions
*2. +inancial intermediaries e,ist !ecause small investors cannot efficiently ________. A. diversify their portfolios B. assess credit ris& of !orrowers C. advertise for needed investments D. all of the a!ove. E. A and B only. The individual investor cannot efficiently and effectively perform any of the tas&s a!ove without more time and &nowled(e than that availa!le to most individual investors.
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*4. ________ specialiDe in helpin( companies raise capital !y sellin( securities. A. commercial !an&ers B. investment !an&ers C. investment issuers . credit raters E. all of the a!ove. An important role of investment !an&in( is to act as middlemen in helpin( firms place new issues in the mar&et.
*6. Commercial !an&s differ from other !usinesses in that !oth their assets and their lia!ilities are mostly A. illi;uid. B. financial. C. real. . owned !y the (overnment. E. re(ulated. %ee Ta!le 1.*.
AACSB: Analytic Bloom's: Understand Difficulty: Basic Topic: Financial Institutions
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*5. In "005) ____________ was the most si(nificant financial asset of 1.%. commercial !an&s in terms of total value. A. loans and leases B. cash C. real estate . deposits E. investment securities %ee Ta!le 1.*.
-0. In "005) ____________ was the most si(nificant lia!ility of 1.%. commercial !an&s in terms of total value. A. loans and leases B. cash C. real estate D. deposits E. investment securities %ee Ta!le 1.*.
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-1. In "005) ____________ was the most si(nificant real asset of 1.%. nonfinancial !usinesses in terms of total value. A. e;uipment and software B. inventory C. real estate . trade credit E. mar&eta!le securities %ee Ta!le 1.-.
-". In "005) ____________ was the least si(nificant real asset of 1.%. nonfinancial !usinesses in terms of total value. A. e;uipment and software B. inventory C. real estate . trade credit E. mar&eta!le securities %ee Ta!le 1.-.
1-*2
-*. In "005) ____________ was the least si(nificant lia!ility of 1.%. nonfinancial !usinesses in terms of total value. A. !onds and mort(a(es B. !an& loans C. inventories . trade de!t E. mar&eta!le securities %ee Ta!le 1.-.
--. In terms of total value) the most si(nificant lia!ility of 1.%. nonfinancial !usinesses in "005 was _______. A. !an& loans B. !onds and mort(a(es C. trade de!t . other loans E. mar&eta!le securities %ee Ta!le 1.-.
1-*4
-.. In "005) ____________ was the least si(nificant financial asset of 1.%. nonfinancial !usinesses in terms of total value. A. cash and deposits B. trade credit C. trade de!t . inventory E. mar&eta!le securities %ee Ta!le 1.-.
-2. Eew issues of securities are sold in the ________ mar&et/s0. A. primary B. secondary C. over the counter . primary and secondary E. A and C. Eew issues of securities are sold in the primary mar&et.
AACSB: Analytic Bloom's: Remember Difficulty: Basic Topic: Financial Mar"ets
1-*6
-4. Investors trade previously issued securities in the ________ mar&et/s0. A. primary B. secondary C. primary and secondary . derivatives E. A and . Investors trade previously issued securities in the secondary mar&et.
-6. Investment !an&ers perform the followin( role/s0 ___________. A. mar&et new stoc& and !ond issues for firms B. provide advice to the firms as to mar&et conditions) price) etc C. desi(n securities with desira!le properties D. all of the a!ove E. 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 Topic: Financial Mar"ets
1-*5
-5. 1ntil 1555) the ________ Act/s0 prohi!ited !an&s in the 1nited %tates from !oth acceptin( deposits and underwritin( securities. A. %ar!anes-A,ley B. Blass-%tea(all C. %EC . A and C E. none of the a!ove 1ntil 1555) the Blass-%tea(all Act prohi!ited !an&s in the 1nited %tates from !oth acceptin( deposits and underwritin( securities.
AACSB: Analytic Bloom's: Remember Difficulty: Basic Topic: Re ulation
.0. The spread !etween the #IBAF and the Treasury-!ill rate is called the ________. A. term spread B. T-!ill spread C. #IBAF spread D. TE spread E. none of the a!ove The spread !etween the #IBAF and the Treasury-!ill rate is called the TE spread.
1--0
.1. $ort(a(e-!ac&ed securities were created when ________ !e(an !uyin( mort(a(e loans from ori(inators and !undlin( them into lar(e pools that could !e traded li&e any other financial asset. A. BE$A B. +E$A C. +>#$C D. B and C E. A and B $ort(a(e-!ac&ed securities were created when +E$A and +>#$C !e(an !uyin( mort(a(e loans from ori(inators and !undlin( them into lar(e pools that could !e traded li&e any other financial asset.
AACSB: Analytic Bloom's: Remember Difficulty: Basic Topic: Securities
.". The sale of a mort(a(e portfolio !y settin( up mort(a(e pass-throu(h securities is an e,ample of ________. A. credit enhancement B. securitiDation C. un!undlin( . derivatives E. none of the a!ove The financial asset is secured !y the mort(a(es !ac&in( the instrument.
AACSB: Analytic Bloom's: Understand Difficulty: Basic Topic: Securities
1--1
.*. 7hich of the followin( is true a!out mort(a(e-!ac&ed securities8 I0 They a((re(ate individual home mort(a(es into homo(eneous pools. II0 The purchaser receives monthly interest and principal payments received from payments made on the pool. III0 The !an&s that ori(inated the mort(a(es maintain ownership of them. I?0 The !an&s that ori(inated the mort(a(es continue to service them. A. II) III) and I? B. I) II) and I? C. II and I? . I) III) and I? E. I) II) III) and I? III is not correct !ecause the !an& no lon(er owns the mort(a(e investments.
AACSB: Analytic Bloom's: Understand Difficulty: Intermediate Topic: Securities
.-. ________ were desi(ned to concentrate the credit ris& of a !undle of loans on one class of investor) leavin( the other investors in the pool relatively protected from that ris&. A. %toc&s B. Bonds C. erivatives D. CollateraliDed de!t o!li(ations E. all of the a!ove. CollateraliDed de!t o!li(ations were desi(ned to concentrate the credit ris& of a !undle of loans on one class of investor) leavin( the other investors in the pool relatively protected from that ris&.
1--"
... ________ are in essence an insurance contract a(ainst the default of one or more !orrowers. A. Credit default swaps B. C$As C. ET+s . CollateraliDed de!t o!li(ations E. all of the a!ove. Credit default swaps are in essence an insurance contract a(ainst the default of one or more !orrowers.
Short Answer Questions
.2. iscuss the a(ency pro!lem in detail. $ana(ers are the a(ents of the shareholders) and should act on their !ehalf to ma,imiDe shareholder wealth /the value of the stoc&0. A conflict /the a(ency conflict0 arises when mana(ers ta&e self-interested actions to the detriment of shareholders. The roles of the !oard of directors selected !y the shareholders are to oversee mana(ement and to minimiDe a(ency pro!lems. >owever) often these !oards are fi(ureheads) and individual shareholders do not own lar(e enou(h !loc&s of the shares to override mana(ement actions. Ane potential resolution of an a(ency pro!lem occurs when inefficient mana(ement actions cause the price of the stoc& to !e depressed. The firm may then !ecome a ta&eover tar(et. If the ac;uisition is successful) mana(ers may !e replaced and potentially) stoc&holders !enefit.
AACSB: Reflecti#e T$in"in Bloom's: Analy%e Difficulty: Intermediate Topic: Financial Mana ement
1--*
.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 the firm3s !alance sheet. An 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 are a((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 assets contri!ute indirectly only.
AACSB: Reflecti#e T$in"in Bloom's: Analy%e Difficulty: Intermediate Topic: Assets
.6. iscuss securitiDation as it relates to the field of investments. %ecuritiDation refers to a((re(atin( underlyin( financial assets) such as mort(a(es) into pools and then offerin( a security that represents a claim on these underlyin( assets. E,ampleH mort(a(e-!ac&ed securities. %ecuritiDation allows investors to hold partial ownership in financial assets that would otherwise !e !eyond their reach /e.(.) mort(a(es0. +inancial en(ineerin( involves !undlin( or un!undlin(. Bundlin( involves com!inin( separate securities.
AACSB: Reflecti#e T$in"in Bloom's: Analy%e Difficulty: Intermediate Topic: Securities
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Chap 00163

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Chap 00163

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Chapter 01 - The Investment Environment

Chapter 01 The Investment Environment

-. _______ are financial assets. A. Bonds B. $achines C. %toc&s . A and C E. A) B and C

Chapter 01 - The Investment Environment

Chapter 01 - The Investment Environment

Chapter 01 - The Investment Environment

Chapter 01 - The Investment Environment

Chapter 01 - The Investment Environment

Chapter 01 - The Investment Environment

Chapter 01 - The Investment Environment

Chapter 01 - The Investment Environment

Chapter 01 - The Investment Environment

Chapter 01 - The Investment Environment

Chapter 01 - The Investment Environment

Chapter 01 - The Investment Environment

Chapter 01 - The Investment Environment

Chapter 01 - The Investment Environment

Short Answer Questions

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

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

Chapter 01 - The Investment Environment

Chapter 01 The Investment Environment Answer 'ey

Multiple Choice Questions

AACSB: Analytic Bloom's: Remember Difficulty: Basic Topic: Assets

AACSB: Analytic Bloom's: Remember Difficulty: Basic Topic: Assets

Chapter 01 - The Investment Environment

AACSB: Analytic Bloom's: Remember Difficulty: Basic Topic: Assets

AACSB: Analytic Bloom's: Remember Difficulty: Basic Topic: Assets

Chapter 01 - The Investment Environment

AACSB: Analytic Bloom's: Remember Difficulty: Basic Topic: Assets

AACSB: Analytic Bloom's: Understand Difficulty: Basic Topic: Assets

Chapter 01 - The Investment Environment

AACSB: Analytic Bloom's: Remember Difficulty: Basic Topic: Assets

AACSB: Analytic Bloom's: Remember Difficulty: Basic Topic: Assets

Chapter 01 - The Investment Environment

AACSB: Analytic Bloom's: Remember Difficulty: Basic Topic: Assets

AACSB: Analytic Bloom's: Remember Difficulty: Basic Topic: Assets

Chapter 01 - The Investment Environment

AACSB: Analytic Bloom's: Remember Difficulty: Basic Topic: Assets

AACSB: Analytic Bloom's: Remember Difficulty: Intermediate Topic: Assets

Chapter 01 - The Investment Environment

AACSB: Analytic Bloom's: Remember Difficulty: Intermediate Topic: Assets

AACSB: Analytic Bloom's: Remember Difficulty: Intermediate Topic: Assets

Chapter 01 - The Investment Environment

AACSB: Analytic Bloom's: Remember Difficulty: Intermediate Topic: Assets

AACSB: Analytic Bloom's: Remember Difficulty: Intermediate Topic: Assets

Chapter 01 - The Investment Environment

AACSB: Analytic Bloom's: Remember Difficulty: Basic Topic: Asset Types

AACSB: Analytic Bloom's: Remember Difficulty: Basic Topic: Asset Types

Chapter 01 - The Investment Environment

AACSB: Analytic Bloom's: Remember Difficulty: Basic Topic: Asset Types

AACSB: Analytic Bloom's: Remember Difficulty: Basic Topic: Asset Types

Chapter 01 - The Investment Environment

AACSB: Analytic Bloom's: Understand Difficulty: Basic Topic: Asset Types

AACSB: Analytic Bloom's: Remember Difficulty: Basic Topic: Asset Types

Chapter 01 - The Investment Environment

AACSB: Analytic Bloom's: Remember Difficulty: Intermediate Topic: Assets

Chapter 01 - The Investment Environment

Chapter 01 - The Investment Environment

Chapter 01 - The Investment Environment

AACSB: Analytic Bloom's: Remember Difficulty: Intermediate Topic: Re ulation

Chapter 01 - The Investment Environment

Chapter 01 - The Investment Environment

AACSB: Analytic Bloom's: Remember Difficulty: Intermediate Topic: !ortfolios