Deck 1: The Investment Environment

Question 1

The largest component of domestic net worth in 2009 was ____________.

A)non-residential real estate
B)residential real estate
C)inventories
D)consumer durables
E)equipment and software

Answer 1

B

Question 2

_________ financial asset(s).

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

Answer 2

E

Question 3

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)none of the above

Answer 3

B

Question 4

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 5

In 2009,____________ was the most significant financial asset of U.S.households in terms of total value.

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

Question 6

In 2009,____________ was the least significant financial asset of U.S.households in terms of total value.

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

Question 7

_______ are real assets.

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

Question 8

An example of a derivative security is ______.

A)a common share of Microsoft
B)a call option on Intel stock
C)a commodity futures contract
D)B and C
E)A and B

Question 9

In 2009,____________ was the most significant liability of U.S.households in terms of total value.

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

Question 10

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)none of the above

Question 11

Which of the following financial assets made up the greatest proportion of the financial assets held by U.S.households?

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

Question 12

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 13

_______ are financial assets.

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

Question 14

In 2009,____________ was the most significant real asset of U.S.households in terms of total value.

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

Question 15

The national net worth of the U.S.in 2009 was _________.

A)$15.411 trillion
B)$26.431 trillion
C)$42.669 trillion
D)$39.139 trillion
E)$70.983 trillion

Question 16

Money market securities ____________.

A)are short term
B)are highly marketable
C)are generally very low risk
D)all of the above
E)B and C only.

Question 17

A debt security pays ____________.

A)a fixed level of income for the life of the owner
B)a variable level of income for owners on a fixed income
C)a fixed or variable income stream at the option of the owner
D)a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security
E)none of the above

Question 18

In 2009,_______ of the assets of U.S.households were financial assets as opposed to tangible assets.

A)20.4%
B)34.2%
C)63.0%
D)71.7%
E)82.5%

Question 19

In 2009,____________ was the most significant asset of U.S.households in terms of total value.

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

Question 20

The smallest component of domestic net worth in 2009 was ____________.

A)non-residential real estate
B)residential real estate
C)inventories
D)consumer durables
E)equipment and software

Question 21

A disadvantage of using stock options to compensate managers is that

A)it encourages mangers to undertake projects that will increase stock price.
B)it encourages managers to engage in empire building.
C)it can create an incentive for mangers to manipulate information to prop up a stock price temporarily, giving them a chance to cash out before the price returns to a level reflective of the firm's true prospects.
D)all of the above.
E)none of the above.

Question 22

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 23

The value of a derivative security _______.

A)depends on the value of the related security
B)is unable to be calculated
C)is unrelated to the value of the related security
D)has been enhanced due to the recent misuse and negative publicity regarding these instruments
E)is worthless today

Question 24

In 2009,____________ was the most significant financial asset of U.S.commercial banks in terms of total value.

A)loans and leases
B)cash
C)real estate
D)deposits
E)investment securities

Question 25

Security selection refers to ____________.

A)choosing which securities to hold based on their valuation
B)investing only in "safe" securities
C)the allocation of assets into broad asset classes
D)top-down analysis
E)all of the above

Question 26

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

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

Question 27

________ specialize in helping companies raise capital by selling securities.

A)commercial bankers
B)investment bankers
C)investment issuers
D)credit raters
E)all of the above.

Question 28

Asset allocation refers to ____________.

A)choosing which securities to hold based on their valuation
B)investing only in "safe" securities
C)the allocation of assets into broad asset classes
D)bottom-up analysis
E)all of the above

Question 29

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

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

Question 30

_______ are examples of financial intermediaries.

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

Question 31

Financial assets permit all of the following except ____________.

A)consumption timing
B)allocation of risk
C)separation of ownership and control
D)elimination of risk
E)all of the above

Question 32

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 33

Although derivatives can be used as speculative instruments,businesses most often use them to

A)attract customers.
B)appease stockholders.
C)offset debt.
D)hedge risks.
E)enhance their balance sheets.

Question 34

In 2009,____________ was the most significant liability of U.S.commercial banks in terms of total value.

A)loans and leases
B)cash
C)real estate
D)deposits
E)investment securities

Question 35

The Sarbanes-Oxley Act ____________.

A)requires corporations to have more independent directors
B)requires the firm's CFO to personally vouch for the firm's accounting statements
C)prohibits auditing firms from providing other services to clients
D)Only A and B are correct.
E)A,B,and C are correct.

Question 36

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

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

Question 37

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 38

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

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

Question 39

Commercial banks differ from other businesses in that both their assets and their liabilities are mostly

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

Question 40

Financial intermediaries exist because small investors cannot efficiently ________.

A)diversify their portfolios
B)assess credit risk of borrowers
C)advertise for needed investments
D)all of the above.
E)A and B only.

Question 41

________ are in essence an insurance contract against the default of one or more borrowers.

A)Credit default swaps
B)CMOs
C)ETFs
D)Collateralized debt obligations
E)all of the above.

Question 42

In terms of total value,the most significant liability of U.S.nonfinancial businesses in 2009 was _______.

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

Question 43

________ were designed to concentrate the credit risk of a bundle of loans on one class of investor,leaving the other investors in the pool relatively protected from that risk.

A)Stocks
B)Bonds
C)Derivatives
D)Collateralized debt obligations
E)all of the above.

Question 44

Which of the following is true about mortgage-backed securities?
I)They aggregate individual home mortgages into homogeneous pools.
II)The purchaser receives monthly interest and principal payments received from payments made on the pool.
III)The banks that originated the mortgages maintain ownership of them.
IV)The banks that originated the mortgages continue to service them.

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

Question 45

Discuss the agency problem in detail.

Question 46

The spread between the LIBOR and the Treasury-bill rate is called the ________.

A)term spread
B)T-bill spread
C)LIBOR spread
D)TED spread
E)none of the above

Question 47

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 the above

Question 48

Mortgage-backed securities were created when ________ began buying mortgage loans from originators and bundling them into large pools that could be traded like any other financial asset.

A)GNMA
B)FNMA
C)FHLMC
D)B and C
E)A and B

Question 49

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

A)primary
B)secondary
C)over the counter
D)primary and secondary
E)A and C.

Question 50

Until 1999,the ________ Act(s)prohibited banks in the United States from both accepting deposits and underwriting securities.

A)Sarbanes-Oxley
B)Glass-Steagall
C)SEC
D)A and C
E)none of the above

Question 51

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

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

Question 52

In 2009,____________ was the least significant liability of U.S.nonfinancial businesses in terms of total value.

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

Question 53

In 2009,____________ was the most significant real asset of U.S.nonfinancial businesses in terms of total value.

A)equipment and software
B)inventory
C)real estate
D)trade credit
E)marketable securities

Question 54

Investment bankers perform the following role(s)___________.

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

Question 55

In 2009,____________ was the least significant real asset of U.S.nonfinancial businesses in terms of total value.

A)equipment and software
B)inventory
C)real estate
D)trade credit
E)marketable securities

Question 56

Discuss securitization as it relates to the field of investments.

Question 57

Discuss the similarities and differences between real and financial assets.

Question 58

In 2009,____________ was the least significant financial asset of U.S.nonfinancial businesses in terms of total value.

A)cash and deposits
B)trade credit
C)trade debt
D)inventory
E)marketable securities