Q&A Hero

Q: ______ would not be included in the EAFE index. A. Australia B. Canada C. France D. Japan

Q: An investor in a T-bill earns interest by _________. A. receiving interest payments every 90 days B. receiving dividend payments every 30 days C. converting the T-bill at maturity into a higher-valued T-note D. buying the bill at a discount from the face value to be received at maturity

Q: The minimum tick size, or spread between prices in the Treasury bond market, is A. 1/8 of a point. B. 1/16 of a point. C. 1/32 of a point. D. 1/128 of a point.

Q: The most marketable money market security is _____. A. Treasury bills B. bankers' acceptances C. certificates of deposit D. common stock

Q: Money market securities are sometimes referred to as cash equivalents because _____. A. they are safe and marketable B. they are not liquid C. they are high-risk D. they are low-denomination

Q: A dollar-denominated deposit at a London bank is called _____. A. eurodollars B. LIBOR C. fed funds D. bankers' acceptance

Q: When computing the bank discount yield, you would use ____ days in the year. A. 260 B. 360 C. 365 D. 366

Q: T-bills are issued with initial maturities of: I. 4 weeks II. 16 weeks III. 26 weeks IV. 32 weeks A. I and II only B. I and III only C. I, II, and III only D. I, II, III, and IV

Q: Which of the following is not a money market instrument? A. Treasury bill B. commercial paper C. preferred stock D. bankers' acceptance

Q: Which insurance company sold more than $400 billion of CDS contracts on subprime mortgages prior to the 2008 market crash?A. MetlifeB. AIGC. Northwestern MutualD. New York Life

Q: The Dodd-Frank Reform Act does all of the following except: A. reduces capital requirements for banks. B. increases transparency in the derivatives market C. limits the risk-taking in which banks can engage D. requires public companies to set "claw-back" provisions E. creates an office within the SEC to oversee credit rating agencies.

Q: The difference between LIBOR and the Treasury-bill rate A. is called the TED spread. B. measures credit risk in the banking sector. C. was very low just before the 2008 financial crisis. D. All of the options.

Q: Until 1999, the __________ Act separated commercial banking and investment banking activities. A. Dodd-Frank Wall Street Reform and Consumer Protection B. Sarbanes-Oxley C. Glass-Steagall D. Volker Rule

Q: The Volker Rule A. prohibits banks from proprietary trading. B. restricts banks' investments in hedge funds. C. restricts banks' investments in private equity funds. D. All of the options.

Q: An investment adviser has decided to purchase gold, real estate, stocks, and bonds in equal amounts. This decision reflects which part of the investment process? A. asset allocation B. investment analysis C. portfolio analysis D. security selection

Q: The systemic risk that led to the financial crisis of 2008 was increased by _____ . A. collateralized debt obligations B. subprime mortgages C. credit default swaps D. all of the options

Q: Which of the following is (are) true about nonconforming mortgage loans? A. They are also known as subprime loans. B. They have higher default risk than conforming loans. C. They were able to be offered without due diligence. D. All of the options are true.

Q: In recent years the greatest dollar amount of securitization occurred for which type of loan? A. home mortgages B. credit card debt C. automobile loans D. equipment leasing

Q: A major cause of the mortgage market meltdown in 2007 and 2008 was linked to ________. A. private equity investments B. securitization C. negative analyst recommendations D. online trading

Q: Real assets are ______. A. assets used to produce goods and services B. always the same as financial assets C. always equal to liabilities D. claims on a company's income

Q: The inability of shareholders to influence the decisions of managers, despite overwhelming shareholder support, is a breakdown in what process or mechanism? A. auditing B. public finance C. corporate governance D. public reporting

Q: In 2008 the largest corporate bankruptcy in U.S. history involved the investment banking firm of ______. A. Goldman Sachs B. Lehman Brothers C. Morgan Stanley D. Merrill Lynch

Q: When a pass-through mortgage security is issued, what does the issuing agency expect to receive? A. the amount of the original loan plus a servicing fee B. the principal and interest that are paid by the homeowner C. the principal and interest that are paid by the homeowner, minus a servicing fee D. the interest paid by the homeowner, plus a servicing fee

Q: Financial institutions that specialize in assisting corporations in primary market transactions are called _______. A. mutual funds B. investment bankers C. pension funds D. globalization specialists

Q: An intermediary that pools and manages funds for many investors is called ______. A. an investment company B. a credit union C. an investment banker D. a commercial bank

Q: Accounting scandals can often be attributed to a particular concept in the study of finance known as the _____ . A. agency problem B. risk-return trade-off C. allocation of risk D. securitization

Q: Which of the following firms was not engaged in a major accounting scandal between 2000 and 2005? A. General Electric B. Parmalat C. Enron D. WorldCom

Q: Stone Harbor Products takes out a bank loan. It receives $100,000 and signs a promissory note to pay back the loan over 5 years. In this transaction, _____ . A. a new financial asset was created B. a financial asset was traded for a real asset C. a financial asset was destroyed D. a real asset was created

Q: Surf City Software Company develops new surf forecasting software. It sells the software to Microsoft in exchange for 1,000 shares of Microsoft common stock. Surf City Software has exchanged a _____ asset for a _____ asset in this transaction. A. real; real B. financial; financial C. real; financial D. financial; real

Q: Individuals may find it more advantageous to purchase claims from a financial intermediary rather than directly purchasing claims in capital markets because: I. Intermediaries are better diversified than most individuals. II. Intermediaries can exploit economies of scale in investing that individual investors cannot. III. Intermediated investments usually offer higher rates of return than direct capital market claims. A. I only B. I and II only C. II and III only D. I, II, and III

Q: Venture capital is _________. A. frequently used to expand the businesses of well-established companies B. supplied by venture capital funds and individuals to start-up companies C. illegal under current U.S. laws D. most frequently issued with the help of investment bankers

Q: Which of the following is (are) true about hedge funds? I. They are open to institutional investors. II. They are open to wealthy individuals. III. They are more likely than mutual funds to pursue simple strategies. A. I and II only B. I and III only C. II and III only D. I, II, and III

Q: Market signals will help to allocate capital efficiently only if investors are acting _____ . A. on the basis of their individual hunches B. as directed by financial experts C. as dominant forces in the economy D. on accurate information

Q: In a perfectly efficient market the best investment strategy is probably _____ . A. an active strategy B. a passive strategy C. asset allocation D. market timing

Q: The efficient market hypothesis suggests that _______. A. active portfolio management strategies are the most appropriate investment strategies B. passive portfolio management strategies are the most appropriate investment strategies C. either active or passive strategies may be appropriate, depending on the expected direction of the market D. a bottom-up approach is the most appropriate investment strategy

Q: Suppose an investor is considering one of two investments that are identical in all respects except for risk. If the investor anticipates a fair return for the risk of the security he invests in, he can expect to _____ . A. earn no more than the Treasury-bill rate on either security. B. pay less for the security that has higher risk. C. pay less for the security that has lower risk. D. earn more if interest rates are lower.

Q: After considering current market conditions, an investor decides to place 60% of her funds in equities and the rest in bonds. This is an example of _____ . A. asset allocation B. security analysis C. top-down portfolio management D. passive management

Q: After much investigation, an investor finds that Intel stock is currently underpriced. This is an example of ______. A. asset allocation B. security analysis C. top-down portfolio management D. passive management

Q: Money market securities are characterized by: I. Maturity less than 1 year II. Safety of the principal investment III. Low rates of return A. I only B. I and II only C. I and III only D. I, II, and III

Q: Real assets represent about ____ of total assets for commercial banks. A. 1% B. 15% C. 25% D. 40%

Q: Which of the following is not an example of a financial intermediary? A. Goldman Sachs B. Allstate Insurance C. First Interstate Bank D. IBM

Q: Liabilities equal approximately _____ of total assets for nonfinancial U.S. businesses. A. 10% B. 25% C. 45% D. 75%

Q: In 2014 mortgages represented approximately __________ of total liabilities and net worth of American households. A. 10% B. 14% C. 28% D. 42%

Q: In 2014 real assets represented approximately __________ of the total asset holdings of American households. A. 30% B. 42% C. 48% D. 55%

Q: The combined liabilities of American households represent approximately __________ of combined assets. A. 11% B. 14% C. 25% D. 33%

Q: Which of the following is not a financial intermediary? A. a mutual fund B. an insurance company C. a real estate brokerage firm D. a credit union

Q: The 2002 law designed to improve corporate governance is titled the _____ . A. Pension Reform Act B. ERISA C. Financial Services Modernization Act D. Sarbanes-Oxley Act

Q: An example of a real asset is: I. A college education II. Customer goodwill III. A patent A. I only B. II only C. I and III only D. I, II, and III

Q: The average rate of return on U.S. Treasury bills since 1926 was _________. A. less than 1% B. less than 3% C. less than 4% D. less than 7%

Q: The historical average rate of return on large company stocks since 1926 has been _____ . A. 5% B. 8% C. 11.5% D. 20%

Q: The success of common stock investments depends on the success of _________. A. derivative securities B. fixed-income securities C. the firm and its real assets D. government methods of allocating capital

Q: The Sarbanes-Oxley Act tightened corporate governance rules by requiring all but which one of the following? A. Required that corporations have more independent directors. B. Required that the CFO personally vouch for the corporation's financial statements. C. Required that firms could no longer employ investment bankers to sell securities to the public. D. Required the creation of a new board to oversee the auditing of public companies.

Q: Debt securities promise: I. A fixed stream of income. II. A stream of income that is determined according to a specific formula. III. A share in the profits of the issuing entity. A. I only B. I or II only C. I and III only D. II or III only

Q: Which one of the following firms falsely claimed to have a $4.8 billion bank account at Bank of America and vastly understated its debts, eventually resulting in the firm's bankruptcy? A. WorldCom B. Enron C. Parmalat D. Global Crossing

Q: __________ portfolio construction starts with asset allocation. A. Bottom-up B. Top-down C. Upside-down D. Side-to-side

Q: An example of a derivative security is _________. A. a common share of General Motors B. a call option on Intel stock C. a Ford bond D. a U.S. Treasury bond

Q: Security selection refers to _________. A. choosing specific securities within each asset class B. deciding how much to invest in each asset class C. deciding how much to invest in the market portfolio versus the riskless asset D. deciding how much to hedge

Q: When the market is more optimistic about a firm, its share price will ______; as a result, it will need to issue _______ shares to raise funds that are needed. A. rise; fewer B. fall; fewer C. rise; more D. fall; more

Q: In securities markets, there should be a risk-return trade-off with higher-risk assets having _________ expected returns than lower-risk assets. A. higher B. lower C. the same D. The answer cannot be determined from the information given.

Q: Firms that specialize in helping companies raise capital by selling securities to the public are called _________. A. pension funds B. investment banks C. savings banks D. REITs

Q: Methods of encouraging managers to act in shareholders' best interest include: I. Threat of takeover. II. Proxy fights for control of the board of directors. III. Tying managers' compensation to stock price performance. A. I only B. I and II only C. II and III only D. I, II, and III

Q: Financial intermediaries exist because small investors cannot efficiently _________. A. diversify their portfolios B. gather information C. assess and monitor the credit risk of borrowers D. all of the options

Q: Financial markets allow for all but which one of the following? A. shift consumption through time from higher-income periods to lower B. price securities according to their riskiness C. channel funds from lenders of funds to borrowers of funds D. allow most participants to routinely earn high returns with low risk

Q: __________ portfolio management calls for holding diversified portfolios without spending effort or resources attempting to improve investment performance through security analysis. A. Active B. Momentum C. Passive D. Market-timing

Q: Commodity and derivative markets allow firms to adjust their _________. A. management styles B. focus from their main line of business to their investment portfolios C. ways of doing business so that they"ll always have positive returns D. exposure to various business risks

Q: The value of a derivative security _________. A. depends on the value of another related security B. affects the value of a related security C. is unrelated to the value of a related security D. can be integrated only by calculus professors

Q: __________ represents an ownership share in a corporation. A. A call option B. Common stock C. A fixed-income security D. Preferred stock

Q: In a market economy, capital resources are primarily allocated by ____________. A. governments B. corporation CEOs C. financial markets D. investment bankers

Q: __________ portfolio construction starts with selecting attractively priced securities. A. Bottom-up B. Top-down C. Upside-down D. Side-to-side

Q: __________ is (are) real assets. A. Bonds B. Production equipment C. Stocks D. Life insurance

Q: _____ is a mechanism for mitigating potential agency problems. A. Tying income of managers to success of the firm B. Directors defending top management C. Antitakeover strategies D. All of the options.

Q: Which of the following is an example of an agency problem? A. Managers engage in empire building. B. Managers protect their jobs by avoiding risky projects. C. Managers overconsume luxuries such as corporate jets. D. All of the options are examples of agency problems.

Q: Security selection refers to the ________. A. allocation of the investment portfolio across broad asset classes B. analysis of the value of securities C. choice of specific securities within each asset class D. top-down method of investing

Q: Which one of the following best describes the purpose of derivatives markets? A. Transferring risk from one party to another. B. Investing for a short time period to earn a small rate of return. C. Investing for retirement. D. Earning interest income.

Q: Asset allocation refers to _________. A. the allocation of the investment portfolio across broad asset classes B. the analysis of the value of securities C. the choice of specific assets within each asset class D. none of the options

Q: __________ are examples of financial intermediaries. A. Commercial banks B. Insurance companies C. Investment companies D. All of the options

Q: Which of the following are financial assets? I. Debt securities II. Equity securities III. Derivative securities A. I only B. I and II only C. II and III only D. I, II, and III

Q: __________ assets generate net income to the economy, and __________ assets define allocation of income among investors. A. Financial, financial B. Financial, real C. Real, financial D. Real, real

Q: Which of the following is not a money market security? A. U.S. Treasury bill B. 6-month maturity certificate of deposit C. common stock D. All of the options.

Q: The material wealth of society is determined by the economy's _________, which is a function of the economy's _________. A. investment bankers; financial assets B. investment bankers; real assets C. productive capacity; financial assets D. productive capacity; real assets