Chapter 01 - Investments: Background and Issues

Chapter 01 Investments: Background and Issues
Multiple Choice Questions

1. Financial assets represent _____ of total assets of U.S. households. A. over 60% B. over 90% C. under 10% D. about 30%

2. Real assets in the economy include all but which one of the following? A. Land B. Buildings C. Consumer durables D. Common stock

3. Net worth represents _____ of the liabilities and net worth of commercial banks. A. about 50% B. about 90% C. about 10% D. about 30%

4. According to the Flow of Funds Accounts of the United States, the largest single asset of U.S. households is ___. A. mutual fund shares B. real estate C. pension reserves D. corporate equity

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Chapter 01 - Investments: Background and Issues

5. According to the Flow of Funds Accounts of the United States, the largest liability of U.S. households is ________. A. mortgages B. consumer credit C. bank loans D. gambling debts

6. ____ is not a derivative security. A. A share of common stock B. A call option C. A futures contract D. All of the above are derivative securities.

7. According to the Flow of Funds Accounts of the United States, the largest financial asset of U.S. households is ____. A. mutual fund shares B. corporate equity C. pension reserves D. personal trusts

8. Active trading in markets and competition among securities analysts helps ensure that __________. I. security prices approach informational efficiency II. riskier securities are priced to offer higher potential returns III. investors are unlikely to be able to consistently find under- or overvalued securities A. I only B. I and II only C. II and III only D. I, II and III

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Chapter 01 - Investments: Background and Issues

9. 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

10. Which of the following is not a money market security? A. U.S. Treasury bill B. Six month maturity certificate of deposit C. Common stock D. Banker's acceptance

11. __________ 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

12. 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

13. __________ are examples of financial intermediaries. A. Commercial banks B. Insurance companies C. Investment companies D. All of the above are financial intermediaries

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All of the answers provide examples of agency problems 1-4 . A.Chapter 01 . analysis of the value of securities C. Chase Manhattan B. A. Managers protect their jobs by avoiding risky projects C. Which one of the following best describes the purpose of derivatives markets? A. A. Investing for retirement D. Investing for a short time period to earn a small rate of return C. A. __________ was the first to introduce mortgage pass-through securities. Asset allocation refers to the _________. _____ is an example of an agency problem. Managers engage in empire building B. analysis of the value of securities C. choice of specific securities within each asset class D. GNMA 17. choice of specific assets within each asset class D. allocation of the investment portfolio across broad asset classes B. Transferring risk from one party to another B. Managers over consume luxuries such as corporate jets D. top down method of investing 18. Security selection refers to the ________. Citicorp C.Investments: Background and Issues 14. allocation of the investment portfolio across broad asset classes B. none of the answers define asset allocation 15. FNMA D. Earning interest income 16.

Bonds B. Stocks D. A. Top-down C. common stock C. _____ is a mechanism to mitigate potential agency problems. Directors defending top management C. Side-to-side 22. Bottom-up B. __________ are real assets. A. Production equipment C. Commercial paper 21. preferred stock 1-5 . call option B. Anti takeover strategies D. fixed-income security D. A.Investments: Background and Issues 19. __________ portfolio construction starts with selecting attractively priced securities. A __________ represents an ownership share in a corporation. Tying income of managers to success of the firm B. Upside-down D.Chapter 01 . the SEC C. investment bankers 23. A. In a capitalist system capital resources are primarily allocated by ____________. governments B. Straight voting method of electing the board of directors 20. financial markets D. A.

all of the answers provide reasons why 1-6 . A. Momentum C. Active B. depends on the value of other related security B. Price securities according to their riskiness C. Market timing 27. Financial intermediaries exist because small investors cannot efficiently _________. Financial markets allow for all but which one of the following? A. Channel funds from lenders of funds to borrowers of funds D. credit enhancement C. __________ portfolio management calls for holding diversified portfolios without spending effort or resources attempting to improve investment performance through security analysis. This is an example of _________. A. Passive D.Chapter 01 . monitor their portfolios D. Allow most participants to routinely earn high returns with low risk 28. A bond issue is broken up so that some investors will receive interest payments while others will receive principal payments. gather information C. securitization D.Investments: Background and Issues 24. A. is unrelated to the value of a related security D. can only be integrated by calculus professors 25. A. The value of a derivative security _________. unbundling 26. affects the value of a related security C. Shift consumption through time from higher income periods to lower B. diversify their portfolios B. bundling B.

REITs 31. Can't tell from the information given 32. Threat of takeover II. Proxy fights for control of the Board of Directors III. __________ are an indirect way U. there should be a risk-return trade-off with higher-risk assets having _________ expected returns than lower-risk assets. IRAs C. In securities markets. lower C. deciding how much to hedge 1-7 . SDRs D. A. pension funds B. ADRs B. deciding how much to invest in each asset-class C. I and II only C. A. higher B. II and III only D. Firms that specialize in helping companies raise capital by selling securities to the public are called _________. A. choosing specific securities within each asset-class B. Methods to encourage managers to act in shareholders' best interest include I.Chapter 01 . investors can invest in foreign companies. I only B. Security selection refers to _________. A. I. deciding how much to invest in the market portfolio versus the riskless asset D.S. II and III 30. savings banks D. the same D.Investments: Background and Issues 29. Tying managers' compensation to stock price performance A. CPCs 33. investment banks C.

eventually resulting in the firm's bankruptcy? A. WorldCom B. __________ portfolio construction starts with asset allocation. I only B. a call option on Intel stock C. An example of a derivative security is _________.8 billion bank account at Bank of America and vastly understated its debts. Bottom-up B. A. A. a stream of income that is determined according to a specific formula III. a U. Top-down C. I or II only C. Enron C. I. a Ford bond D. II or III only 1-8 .Chapter 01 . Debt securities promise _________. Which one of the following firms falsely claimed to have a $4. I and III only D. a share in the profits of the issuing entity A. a common share of General Motors B.S. Side-to-side 36. Treasury bond 35. Upside-down D. Parmalat D.Investments: Background and Issues 34. Global Crossing 37. a fixed stream of income II.

a college education II. I. The creation of a new board to oversee the auditing of public companies 39. I. 8% C.4% C.8% D. The success of common stock investments depends on the success of _________. I only B. The Sarbanes-Oxley Act tightened corporate governance rules by requiring all but which one of the following? A. 5% B. The average rate of return on U. Required that firms could no longer employ investment bankers to sell securities to the public D. II only C. 12% D. fixed income securities C.Investments: Background and Issues 38. derivative securities B. An example of a real asset is _________. a patent A. the firm and its real assets D.S. Required corporations to have more independent directors B. 2. 20% 41. A. customer goodwill III. The historical average rate of return on the large company stocks since 1926 has been A.0% 42. 6. I and III only D.5% B. A. II and III 1-9 . 0. Required the CFO to personally vouch for the corporation's financial statements C. 3. government methods of allocating capital 40. Treasury bills since 1926 was _________.Chapter 01 .

The 2002 law designed to improve corporate governance is titled the A. 21% C. In 2008 mortgages represented approximately __________ percent of total liabilities and net worth of American households. Which of the following is not a financial intermediary? A. 28% D. A. 48% D. ERISA C. 25% D.Investments: Background and Issues 43. a mutual fund B. a savings and loan company 45. Pension Reform Act B. The combined liabilities of American households represent approximately __________ percent of combined assets. Financial Services Modernization Act D. 15% C. a real estate brokerage firm D. 42% 1-10 . an insurance company C. 12% B. In 2008 real assets represented approximately __________ percent of the total asset holdings of American households. 33% 46.Chapter 01 . 11% B. Sarbanes-Oxley Act 44. 37% B. 55% 47. A. 42% C. A.

safety of the principal investment III. This is an example of ______. Which of the following is not an example of a financial intermediary? A.Chapter 01 . 15% C. After much investigation an investor finds that Intel stock is currently under priced. 44% D. 25% D. I. top down portfolio management D. A. low rates of return A. A. Money Market securities are characterized by ________. First Interstate Bank D. A. Real assets represent about ____ of total assets for financial institutions. I and III only D. 25% C. 10% B. Goldman Sachs B. asset allocation B. 40% 51. 75% 49. IBM 50. I only B. Liabilities equal approximately _____ of total assets for nonfinancial U. I and II only C. businesses. II and III 52. maturity less than one year II. I.S.Investments: Background and Issues 48. security analysis C. 1% B. Allstate Insurance C. passive management 1-11 .

A. This is an example of A. financial engineering B. A. passive strategy C. asset allocation B. security analysis C. active portfolio management strategies are the most appropriate investment strategies B.Investments: Background and Issues 53. passive management 54. pay less for the security that has lower risk D. If the investor anticipates a fair return for the risk of the security they invest in they can expect to A. either active or passive strategies may be appropriate. earn more if interest rates are lower 55. securitization D. depending on the expected direction of the market D. all three of the other answers 1-12 . a bottom up approach is the most appropriate investment strategy 56. globalization C. market timing 57. The efficient markets hypothesis suggests that _______. asset allocation D. An important trend that has changed the contemporary investment market is _________.Chapter 01 . passive portfolio management strategies are the most appropriate investment strategies C. earn no more than the Treasury bill rate on either security B. After considering current market conditions an investor decides to place 60% of their funds in equities and the rest in bonds. top down portfolio management D. Suppose an investor is considering one of two investments which are identical in all respects except for risk. active strategy B. pay less for the security that has higher risk C. In a perfectly efficient market the best investment strategy is probably a/an A.

pass through securities 60. bundling D. A. selling individual cash flows of a security or loan B. I and II only C. taking an illiquid asset and converting it into a marketable security D. mortgagization C. intermediaries are better diversified than most individuals II. Brady bonds were an example of _________. intermediated investments usually offer higher rates of return than direct capital market claims A. A. financial C. Individuals may find it more advantageous to purchase claims from a financial intermediary rather than directly purchasing claims in capital markets because I. II and III only D.S. 59. repackaging individual cash flows of a security or loan into a new payment pattern C. selling financial services overseas as well as in the U. financial D. II and III 61. Surf City Software has exchanged a _____ asset for a _____ asset in this transaction.Chapter 01 . It sells the software to Microsoft in exchange for 1000 shares of Microsoft common stock. Surf City Software Company develops new surf forecasting software. intermediaries can exploit economies of scale in investing that individual investors cannot III. A. financial. securitization B. I only B.Investments: Background and Issues 58. real. financial. real. real B. Securitization refers to the creation of new securities by _________. I. real 1-13 .

C. savings and loan C. agency problem B. mutual funds B. A.000 and signs a promissory note to pay back the loan over 5 years. A financial asset was traded for a real asset in this transaction. 63. ADR 66. investment bankers C. Enron D. investment banker D. B. An intermediary that pools and manage funds for many investors is called a/an ______. A. Parmalat C.Chapter 01 . investment company B. pension funds D. It receives $100. A new financial asset was created in this transaction. A real asset was created in this transaction.return trade . allocation of risk D. Financial institutions that specialize in assisting corporations in primary market transactions are called _______. A.off C.Investments: Background and Issues 62. D. WorldCom 64. securitization 65. risk . Which of the following firms was not engaged in a major accounting scandal between 2000 and 2005? A. A financial asset was destroyed in this transaction. globalization specialists 1-14 . General Electric B. Stone Harbor Products takes out a bank loan. Accounting scandals can often be attributed to a particular concept in the study of finance known as the A.

Real assets are ______. Public reporting 70.S. claims on company's income 71. online trading 1-15 . avoid any exposure to foreign exchange risk 68.Chapter 01 . is a breakdown in what process or mechanism? A. history involved the investment banking firm of ______.Investments: Background and Issues 67. invest in a portfolio of foreign stocks D. negative analyst recommendations D. securitization C. mortgage backed securities B. always equal to liabilities D. despite overwhelming shareholder support. A. Merrill Lynch 69. Lehman Brothers C. In 2008 the largest corporate bankruptcy in the U. invest in an individual foreign stock C. A. are assets used to produce goods and services B. A. A major cause of mortgage market meltdown in 2007 and 2008 was linked to ________. Goldman Sachs B. invest in U.S. globalization B. Corporate governance D. Morgan Stanley D. Public finance C. The inability of shareholders to influence the decisions of managers. A. Auditing B. WEBS allow investors to _______. always the same as financial assets C.

A. securitization D. security selection 75. Investment analysis C. This is an example of ___________. A. In recent years the greatest dollar amount of securitization occurred for which type loan? A.Investments: Background and Issues 72. and bonds in equal amounts.Chapter 01 . The U. U. Asset allocation B. real estate. Portfolio analysis D. Pass-throughs B. stocks. Treasury routinely sells individual interest payments on these bonds to investors.S. FHLMC participation certificates 74. bundling C. The process of securitizing poor quality bank loans made to developing nations resulted in the creation of __________. An investment advisor has decided to purchase gold. Credit card debt C. Automobile loans D. Brady bonds C. WEBS D. Treasury bonds pay interest every six months and repay the principal at maturity.S. Security selection Chapter 01 Investments: Background and Issues Answer Key Multiple Choice Questions 1-16 . This decision reflects which part of the investment process? A. Home mortgages B. Equipment leasing 73. unbundling B.

about 30% Difficulty: Medium 4. households. pension reserves D. the largest single asset of U.S. about 90% C.S. Common stock Difficulty: Easy 3. A. A. A. Financial assets represent _____ of total assets of U. Real assets in the economy include all but which one of the following? A. about 50% B.Investments: Background and Issues 1. over 60% B. Buildings C. real estate C. Land B. about 10% D. under 10% D. Net worth represents _____ of the liabilities and net worth of commercial banks. over 90% C. corporate equity Difficulty: Medium 1-17 . households is ___. mutual fund shares B. about 30% Difficulty: Easy 2.Chapter 01 . According to the Flow of Funds Accounts of the United States. Consumer durables D.

S. gambling debts Difficulty: Medium 6. All of the above are derivative securities. the largest financial asset of U. According to the Flow of Funds Accounts of the United States. households is ________. A share of common stock B. A. ____ is not a derivative security. A.Investments: Background and Issues 5. A futures contract D. consumer credit C. A. mortgages B. personal trusts Difficulty: Medium 1-18 . Difficulty: Easy 7. corporate equity C. mutual fund shares B. bank loans D.S. the largest liability of U. pension reserves D. A call option C.Chapter 01 . According to the Flow of Funds Accounts of the United States. households is ____.

productive capacity. Treasury bill B.or overvalued securities A. The material wealth of society is determined by the economy's _________. I and II only C. riskier securities are priced to offer higher potential returns III. I.S.Chapter 01 . investment bankers. security prices approach informational efficiency II.Investments: Background and Issues 8. II and III only D. Active trading in markets and competition among securities analysts helps ensure that __________. A. investors are unlikely to be able to consistently find under. investment bankers. U. Which of the following is not a money market security? A. financial assets D. Common stock D. real assets Difficulty: Medium 10. productive capacity. which is a function of the economy's _________. Six month maturity certificate of deposit C. real assets C. Banker's acceptance Difficulty: Medium 1-19 . II and III Difficulty: Hard 9. financial assets B. I only B. I.

Financial. A. analysis of the value of securities C. allocation of the investment portfolio across broad asset classes B. Debt securities II. All of the above are financial intermediaries Difficulty: Easy 14.Chapter 01 .Investments: Background and Issues 11. Real. choice of specific assets within each asset class D. Insurance companies C. I only B. A. Financial. Derivative securities A. II and III Difficulty: Hard 13. Which of the following are financial assets? I. real Difficulty: Medium 12. none of the answers define asset allocation Difficulty: Easy 1-20 . real C. financial B. __________ are examples of financial intermediaries. Investment companies D. Equity securities III. Asset allocation refers to the _________. II and III only D. financial D. Real. Commercial banks B. A. __________ assets generate net income to the economy and __________ assets define allocation of income among investors. I and II only C. I.

top down method of investing Difficulty: Medium 18. A. Investing for a short time period to earn a small rate of return C. Managers over consume luxuries such as corporate jets D. Which one of the following best describes the purpose of derivatives markets? A. Chase Manhattan B. _____ is an example of an agency problem.Investments: Background and Issues 15. Earning interest income Difficulty: Medium 16. analysis of the value of securities C. Transferring risk from one party to another B.Chapter 01 . Security selection refers to the ________. GNMA Difficulty: Easy 17. FNMA D. All of the answers provide examples of agency problems Difficulty: Easy 1-21 . Investing for retirement D. A. choice of specific securities within each asset class D. Managers engage in empire building B. allocation of the investment portfolio across broad asset classes B. A. __________ was the first to introduce mortgage pass-through securities. Managers protect their jobs by avoiding risky projects C. Citicorp C.

financial markets D. investment bankers Difficulty: Easy 1-22 . Anti takeover strategies D. Upside-down D. A. A. Directors defending top management C. Production equipment C.Chapter 01 . governments B. A. __________ are real assets. the SEC C. Stocks D.Investments: Background and Issues 19. Bonds B. Commercial paper Difficulty: Easy 21. In a capitalist system capital resources are primarily allocated by ____________. Top-down C. __________ portfolio construction starts with selecting attractively priced securities. A. Bottom-up B. Tying income of managers to success of the firm B. Side-to-side Difficulty: Easy 22. Straight voting method of electing the board of directors Difficulty: Hard 20. _____ is a mechanism to mitigate potential agency problems.

A. call option B.Chapter 01 . Passive D. __________ portfolio management calls for holding diversified portfolios without spending effort or resources attempting to improve investment performance through security analysis. credit enhancement C. A. securitization D. Momentum C. is unrelated to the value of a related security D. A. bundling B. fixed-income security D. A bond issue is broken up so that some investors will receive interest payments while others will receive principal payments. affects the value of a related security C. A __________ represents an ownership share in a corporation. can only be integrated by calculus professors Difficulty: Easy 25. unbundling Difficulty: Easy 26. preferred stock Difficulty: Easy 24. Active B. common stock C. Market timing Difficulty: Easy 1-23 .Investments: Background and Issues 23. The value of a derivative security _________. A. depends on the value of other related security B. This is an example of _________.

monitor their portfolios D. Threat of takeover II. Price securities according to their riskiness C. diversify their portfolios B. II and III Difficulty: Easy 30. I only B. savings banks D. Shift consumption through time from higher income periods to lower B. Financial markets allow for all but which one of the following? A. Tying managers' compensation to stock price performance A. A. REITs Difficulty: Easy 1-24 . investment banks C.Investments: Background and Issues 27. I. Channel funds from lenders of funds to borrowers of funds D. Financial intermediaries exist because small investors cannot efficiently _________. II and III only D. all of the answers provide reasons why Difficulty: Easy 29.Chapter 01 . Firms that specialize in helping companies raise capital by selling securities to the public are called _________. gather information C. Allow most participants to routinely earn high returns with low risk Difficulty: Moderate 28. I and II only C. A. pension funds B. Methods to encourage managers to act in shareholders' best interest include I. Proxy fights for control of the Board of Directors III.

A. Security selection refers to _________. __________ are an indirect way U. ADRs B. a Ford bond D. there should be a risk-return trade-off with higher-risk assets having _________ expected returns than lower-risk assets. lower C. Can't tell from the information given Difficulty: Easy 32. the same D. investors can invest in foreign companies.S. deciding how much to hedge Difficulty: Easy 34.Chapter 01 . In securities markets. higher B. SDRs D. A. a common share of General Motors B. IRAs C. Treasury bond Difficulty: Easy 1-25 . A. CPCs Difficulty: Easy 33.Investments: Background and Issues 31. a call option on Intel stock C.S. An example of a derivative security is _________. deciding how much to invest in each asset-class C. A. a U. choosing specific securities within each asset-class B. deciding how much to invest in the market portfolio versus the riskless asset D.

Enron C. Debt securities promise _________. Top-down C. I. I or II only C. II or III only Difficulty: Medium 1-26 . Global Crossing Difficulty: Medium 37. a share in the profits of the issuing entity A. I and III only D.Chapter 01 . WorldCom B. A. Side-to-side Difficulty: Easy 36. Bottom-up B.8 billion bank account at Bank of America and vastly understated its debts.Investments: Background and Issues 35. I only B. Parmalat D. Upside-down D. eventually resulting in the firm's bankruptcy? A. __________ portfolio construction starts with asset allocation. a fixed stream of income II. Which one of the following firms falsely claimed to have a $4. a stream of income that is determined according to a specific formula III.

Investments: Background and Issues 38. 8% C. The historical average rate of return on the large company stocks since 1926 has been A. 6.8% D. The average rate of return on U. A. Required that firms could no longer employ investment bankers to sell securities to the public D.4% C. A. The Sarbanes-Oxley Act tightened corporate governance rules by requiring all but which one of the following? A.Chapter 01 .5% B. 3.0% Difficulty: Medium 1-27 . 20% Difficulty: Medium 41. Treasury bills since 1926 was _________. the firm and its real assets D. government methods of allocating capital Difficulty: Easy 40.S. Required the CFO to personally vouch for the corporation's financial statements C. 0. 2. The creation of a new board to oversee the auditing of public companies Difficulty: Medium 39. fixed income securities C. 12% D. Required corporations to have more independent directors B. 5% B. derivative securities B. The success of common stock investments depends on the success of _________.

A.Investments: Background and Issues 42. The 2002 law designed to improve corporate governance is titled the A. an insurance company C. Pension Reform Act B. Which of the following is not a financial intermediary? A. a patent A. II only C. I and III only D. I. I. a mutual fund B. Financial Services Modernization Act D. Sarbanes-Oxley Act Difficulty: Easy 44. The combined liabilities of American households represent approximately __________ percent of combined assets.Chapter 01 . 33% Difficulty: Medium 1-28 . 25% D. customer goodwill III. ERISA C. I only B. a college education II. An example of a real asset is _________. a savings and loan company Difficulty: Medium 45. a real estate brokerage firm D. 21% C. 11% B. II and III Difficulty: Medium 43.

12% B. 25% C. Goldman Sachs B. 44% D. In 2008 mortgages represented approximately __________ percent of total liabilities and net worth of American households. 10% B. Liabilities equal approximately _____ of total assets for nonfinancial U. 75% Difficulty: Medium 49. IBM Difficulty: Easy 1-29 .Chapter 01 . 42% C. 48% D. 42% Difficulty: Medium 48. First Interstate Bank D. 15% C.S. Which of the following is not an example of a financial intermediary? A. 55% Difficulty: Medium 47. 28% D. 37% B.Investments: Background and Issues 46. businesses. A. Allstate Insurance C. In 2008 real assets represented approximately __________ percent of the total asset holdings of American households. A. A.

I only B. A. I. security analysis C. low rates of return A. II and III Difficulty: Easy 52. After much investigation an investor finds that Intel stock is currently under priced. 15% C. 25% D. This is an example of A. Real assets represent about ____ of total assets for financial institutions. passive management Difficulty: Medium 1-30 . A. I and III only D.Investments: Background and Issues 50. I and II only C. 40% Difficulty: Medium 51. This is an example of ______. top down portfolio management D.Chapter 01 . asset allocation B. After considering current market conditions an investor decides to place 60% of their funds in equities and the rest in bonds. 1% B. top down portfolio management D. safety of the principal investment III. maturity less than one year II. security analysis C. Money Market securities are characterized by ________. I. asset allocation B. passive management Difficulty: Medium 53.

securitization D. If the investor anticipates a fair return for the risk of the security they invest in they can expect to A. pay less for the security that has higher risk C. earn no more than the Treasury bill rate on either security B. Suppose an investor is considering one of two investments which are identical in all respects except for risk. a bottom up approach is the most appropriate investment strategy Difficulty: Easy 56. A. active strategy B. asset allocation D. either active or passive strategies may be appropriate. all three of the other answers Difficulty: Easy 1-31 . passive strategy C. An important trend that has changed the contemporary investment market is _________. depending on the expected direction of the market D.Investments: Background and Issues 54. active portfolio management strategies are the most appropriate investment strategies B. earn more if interest rates are lower Difficulty: Hard 55. pay less for the security that has lower risk D. globalization C. financial engineering B. In a perfectly efficient market the best investment strategy is probably a/an A. market timing Difficulty: Easy 57. passive portfolio management strategies are the most appropriate investment strategies C. The efficient markets hypothesis suggests that _______.Chapter 01 . A.

pass through securities Difficulty: Medium 60. Brady bonds were an example of _________.Chapter 01 . Difficulty: Easy 59. Securitization refers to the creation of new securities by _________. selling financial services overseas as well as in the U. repackaging individual cash flows of a security or loan into a new payment pattern C. I. intermediaries are better diversified than most individuals II. II and III Difficulty: Hard 1-32 . Individuals may find it more advantageous to purchase claims from a financial intermediary rather than directly purchasing claims in capital markets because I. selling individual cash flows of a security or loan B. II and III only D. intermediaries can exploit economies of scale in investing that individual investors cannot III. I only B. intermediated investments usually offer higher rates of return than direct capital market claims A. securitization B. mortgagization C.S. A. taking an illiquid asset and converting it into a marketable security D. bundling D. A. I and II only C.Investments: Background and Issues 58.

Parmalat C. A. Surf City Software has exchanged a _____ asset for a _____ asset in this transaction. Surf City Software Company develops new surf forecasting software. real.000 and signs a promissory note to pay back the loan over 5 years. A. financial.Chapter 01 . It receives $100. Enron D. D. risk .Investments: Background and Issues 61. Stone Harbor Products takes out a bank loan. securitization Difficulty: Easy 1-33 . financial. allocation of risk D.return trade . General Electric B. A financial asset was destroyed in this transaction. A real asset was created in this transaction. A new financial asset was created in this transaction. financial D. B. real. A financial asset was traded for a real asset in this transaction. Accounting scandals can often be attributed to a particular concept in the study of finance known as the A. C. WorldCom Difficulty: Easy 64. financial C. Which of the following firms was not engaged in a major accounting scandal between 2000 and 2005? A.off C. It sells the software to Microsoft in exchange for 1000 shares of Microsoft common stock. agency problem B. real Difficulty: Medium 62. Difficulty: Hard 63. real B.

A. investment bankers C. investment company B. Financial institutions that specialize in assisting corporations in primary market transactions are called _______.Investments: Background and Issues 65. In 2008 the largest corporate bankruptcy in the U. pension funds D. mortgage backed securities B. A. WEBS allow investors to _______. globalization specialists Difficulty: Easy 67. history involved the investment banking firm of ______. An intermediary that pools and manage funds for many investors is called a/an ______. A. Lehman Brothers C. ADR Difficulty: Easy 66. Merrill Lynch Difficulty: Medium 1-34 .S. A. Goldman Sachs B.S. savings and loan C. invest in an individual foreign stock C. invest in a portfolio of foreign stocks D. investment banker D. avoid any exposure to foreign exchange risk Difficulty: Medium 68.Chapter 01 . Morgan Stanley D. invest in U. mutual funds B.

The inability of shareholders to influence the decisions of managers. always the same as financial assets C. Real assets are ______. claims on company's income Difficulty: Easy 71. A major cause of mortgage market meltdown in 2007 and 2008 was linked to ________. negative analyst recommendations D.Investments: Background and Issues 69. Public finance C. A. securitization C. Equipment leasing Difficulty: Medium 1-35 . Credit card debt C. Public reporting Difficulty: Medium 70. is a breakdown in what process or mechanism? A. In recent years the greatest dollar amount of securitization occurred for which type loan? A. Corporate governance D. globalization B. are assets used to produce goods and services B. online trading Difficulty: Medium 72. Auditing B. Automobile loans D. Home mortgages B. always equal to liabilities D. despite overwhelming shareholder support.Chapter 01 . A.

A. Security selection Difficulty: Medium 1-36 . bundling C. Asset allocation B. unbundling B. security selection Difficulty: Medium 75. Portfolio analysis D.Investments: Background and Issues 73. This is an example of ___________. Brady bonds C. The U.S. WEBS D. Pass-throughs B. and bonds in equal amounts. stocks. An investment advisor has decided to purchase gold. real estate. FHLMC participation certificates Difficulty: Medium 74.S. A. This decision reflects which part of the investment process? A.Chapter 01 . U. Treasury bonds pay interest every six months and repay the principal at maturity. The process of securitizing poor quality bank loans made to developing nations resulted in the creation of __________. Treasury routinely sells individual interest payments on these bonds to investors. securitization D. Investment analysis C.

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