Question 1

Long-Term Capital Management (LTCM) was a U.S. hedge fund which used trading strategies combined with high leverage. Despite initial enormous profits, it failed spectacularly in 1998. What most likely led to this failure? Select all that apply.

Accepted Answer

A) The uncontrolled use of high leverage. 
B) The Asian Financial crisis in 1997. 
C) The Russian Financial crisis in 1998. 
D) The incompetent board of directors. A, C

Question 2

NASDAQ, the National Association of Securities Dealers Automated Quotations, is an American stock exchange. It is the largest electronic screen-based securities trading market in the United States. What is the authority that oversees NASDAQ operations and regulations?

Accepted Answer

A) NASCAR 
B) NASD 
C) NASB 
D) NASA B

Question 3

What is Fannie Mae?

Accepted Answer

A) A well known wholesale chain in America. 
B) The Federal National Mortgage Association (FNM
A) . 
C) The name of a brand for electronic fans. 
D) The Federal Home Loan Mortgage Corporation. 
E) All of the above. B

Question 4

Bankruptcy refers to a situation when a court judges that a debtor (or a borrower) is unable to make the payments owed to a creditor (or a lender). America's bankruptcy code for corporate entities can be found in

Accepted Answer

A) Chapter 8. 
B) Chapter 9. 
C) Chapter 10. 
D) Chapter 11.

Question 5

Which of the following is considered a "hedge fund"? Select all that apply.

Accepted Answer

A) A venture capital fund. 
B) A private equity fund. 
C) A real estate partnership. 
D) None of the above.

Question 6

On June 30, 2009, Bernard Madoff was sentenced to 150 years for his fraudulent financial activities. He defrauded thousands of investors out of $65 billion. What fraudulent scheme did he use?

Accepted Answer

A) A Ponzi scheme. 
B) A Black-Scholes scheme. 
C) An advance fee scheme. 
D) A bucket shop scheme.

Question 7

What is the primary responsibility of the U.S. Securities and Exchange Commission (SEC)?

Accepted Answer

A) Regulating the securities industry, stocks, and options exchanges. 
B) Enforcing the federal securities laws. 
C) Regulating electronic securities markets. 
D) All of the above.

Question 8

Small and illiquid assets that are unable to be sold individually can be pooled together into financial instruments in order to reduce risk and to be sold to general investors. This strategy is called:

Accepted Answer

A) Diversification. 
B) Securitization. 
C) Investment. 
D) Due diligence.

Question 9

As an investor, Tom is obliged to perform due diligence. What is "due diligence"?

Accepted Answer

A) Education on market regulations. 
B) The paperwork required to make an investment. 
C) The responsibility to gather necessary information on actual or potential risks involved in an investment. 
D) Commitment to be diligent all the time for investment projects in order to prevent actual or potential risks. 
E) None of the above.

Question 10

A bank run is...

Accepted Answer

A) A portable bank service that is convenient for customers to deposit or withdraw their money. 
B) A situation when a bank lends out a lot to customers. 
C) A situation when a large number of customers withdraw their deposits because they believe the bank might be or is insolvent. 
D) A situation when a big bank splits into different smaller banks.

Question 11

Insolvency refers to:

Accepted Answer

A) Having illiquid assets. 
B) Bankruptcy. 
C) Having negative net assets as liabilities exceed assets. 
D) The inability to pay debts when they fall due.

Question 12

WePro Ltd. is considered to be highly leveraged. What does "highly leveraged" refer to in the company situation?

Accepted Answer

A) WePro Ltd. has significantly more debt than its equity. 
B) WePro Ltd. Breaks even in sales. 
C) WePro Ltd. has made huge profit. 
D) WePro Ltd. is facing bankruptcy.

Question 13

Income elasticity of demand is a measure of how demand for a good changes with people's income.

Accepted Answer

A) True 
 B)False

Question 14

A liquidity trap is...

Accepted Answer

A) A strategy that an investor would use to gain his competitor's liquid assets. 
B) A situation where the liquidity in the market created by low interest rates does not stimulate the economy to full employment. 
C) A strategy that banks use to trap house owners to pay their mortgages. 
D) A situation when liquid assets become illiquid because they are unable to be sold or bought.

Question 15

The Sarbanes-Oxley Act of 2002 is a federal law enacted in reaction to which of the following events?

Accepted Answer

A) The Madoff's Ponzi scheme. 
B) The Enron debacle. 
C) The WorldCom collapse. 
D) All of the above.

Question 16

A hedge fund is...

Accepted Answer

A) A fund that can be transferred among investors. 
B) An investment fund open to a limited range of investors permitted to undertake a wider range of investment and trading activities. 
C) An unlimited fund that the Federal Reserve Bank assigns for only limited corporations. 
D) An unconditional fund for the development of venture companies.

Question 17

The Mississippi Scheme was formulated by John Law for the colonization and commercial exploitation of the Mississippi Valley and other French colonial areas. The main reason for its financial collapse in October 1720 was

Accepted Answer

A) The failure to launch a plan to exploit gold in the Mississippi, since there was no gold to be found. 
B) The colonization and commercial exploitation of the Mississippi valley and other French colonial areas faced a strong opposition from the tribal people. 
C) The speculation about the richness of the area. 
D) Decline in investment from other overseas companies.

Exam 6: Terms and Concepts