8/12/2019 Chap 00163
1/44
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 assetsB. all real assetsC. all financial and real assets. all physical assetsE. none of the a!ove
". _______ are real assets.
A. #andB. $achinesC. %toc&s and !onds. 'nowled(eE. A) B and
*. The means !y which individuals hold their claims on real assets in a well-developedeconomy areA. Investment assets.
B. epository assets.C. erivative assets.. +inancial assets.E. E,chan(e-driven assets.
. _______ are financial assets.A. BondsB. $achinesC. %toc&s
. A and CE. A) B and C
1-1
8/12/2019 Chap 00163
2/44
Chapter 01 - The Investment Environment
. _________ financial asset/s.A. Buildin(s areB. #and is a
C. erivatives are. .%. A(ency !onds areE. C and
2. +inancial assets ______.A. directly contri!ute to the country3s productive capacityB. indirectly contri!ute to the country3s productive capacityC. 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 .%. households in terms oftotal value.A. consumer dura!lesB. automo!ilesC. real estate. mutual fund sharesE. !an& loans
6. In "005) ____________ was the least si(nificant financial asset of .%. households in termsof total value.A. real estateB. mutual fund sharesC. de!t securities. life insurance reservesE. pension reserves
1-"
8/12/2019 Chap 00163
3/44
Chapter 01 - The Investment Environment
5. In "005) ____________ was the most si(nificant financial asset of .%. households interms of total value.A. real estate
B. mutual fund sharesC. de!t securities. life insurance reservesE. pension reserves
10. In "005) ____________ was the most si(nificant asset of .%. households in terms of totalvalue.A. real estateB. mutual fund shares
C. de!t securities. life insurance reservesE. pension reserves
11. In "005) ____________ was the most si(nificant lia!ility of .%. households in terms oftotal value.A. credit cardsB. mort(a(esC. !an& loans
. student loansE. other de!t
1". 7hich of the followin( financial assets made up the (reatest proportion of the financialassets held !y .%. households8A. 9ension reservesB. #ife insurance reservesC. $utual fund shares. e!t securities
E. 9ersonal trusts
1-*
8/12/2019 Chap 00163
4/44
Chapter 01 - The Investment Environment
1*. In "005) _______ of the assets of .%. households were financial assets as opposed totan(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 estateB. residential real estateC. inventories
. consumer dura!lesE. e;uipment and software
1. The smallest component of domestic net worth in "005 was ____________.A. non-residential real estateB. residential real estateC. inventories. consumer dura!lesE. e;uipment and software
12. The national net worth of the .%. in "005 was _________.A.
8/12/2019 Chap 00163
5/44
Chapter 01 - The Investment Environment
14. A fi,ed-income security pays ____________.A. a fi,ed level of income for the life of the ownerB. a fi,ed stream of income or a stream of income that is determined accordin( to a specified
formula for the life of the securityC. 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 ownerE. none of the a!ove
16. A de!t security pays ____________.A. a fi,ed level of income for the life of the ownerB. a varia!le level of income for owners on a fi,ed incomeC. 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 specifiedformula for the life of the securityE. none of the a!ove
15. $oney mar&et securities ____________.A. are short termB. are hi(hly mar&eta!leC. 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 $icrosoftB. a call option on Intel stoc&C. a commodity futures contract. B and CE. A and B
1-
8/12/2019 Chap 00163
6/44
Chapter 01 - The Investment Environment
"1. The value of a derivative security _______.A. depends on the value of the related securityB. 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( theseinstrumentsE. is worthless today
"". Althou(h derivatives can !e used as speculative instruments) !usinesses most often usethem toA. 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 andshareholders.A. a(ency pro!lemB. diversification pro!lemC. li;uidity pro!lem. solvency pro!lemE. re(ulatory pro!lem
1-2
8/12/2019 Chap 00163
7/44
Chapter 01 - The Investment Environment
". A disadvanta(e of usin( stoc& options to compensate mana(ers is thatA. 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& pricetemporarily) (ivin( them a chance to cash out !efore the price returns to a level reflective ofthe 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(encypro!lems8I Compensation in the form of the firm3s stoc& options
II >irin( !ic&erin( family mem!ers as corporate spiesIII nderperformin( mana(ement teams !ein( forced out !y !oards of directorsI? %ecurity analysts monitorin( the firm closely? Ta&eover threatsA. 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 !yA. 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(ementB. increased stoc& priceC. increased !enefits to e,istin( mana(ement of ta&en over firm. A and BE. A) B) and C
1-4
8/12/2019 Chap 00163
8/44
Chapter 01 - The Investment Environment
"5. urin( the period !etween "000 and "00") a lar(e num!er of scandals were uncovered.$ost of these scandals were related toI $anipulation of financial data to misrepresent the actual condition of the firm.
II $isleadin( and overly optimistic research reports produced !y analysts.III Allocatin( I9s to e,ecutives as a ;uid pro ;uo for personal favors.I? reenmail.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-,ley Act ____________.A. re;uires corporations to have more independent directorsB. re;uires the firm3s C+ to personally vouch for the firm3s accountin( statementsC. prohi!its auditin( firms from providin( other services to clients. nly 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 safe securitiesC. the allocation of assets into !road asset classes. !ottom-up analysisE. all of the a!ove
*". %ecurity selection refers to ____________.A. choosin( which securities to hold !ased on their valuationB. investin( only in safe securitiesC. the allocation of assets into !road asset classes
. top-down analysisE. all of the a!ove
1-6
8/12/2019 Chap 00163
9/44
Chapter 01 - The Investment Environment
**. 7hich of the followin( portfolio construction methods starts with security analysis8A. Top-downB. Bottom-up
C. $iddle-out. Buy and holdE. Asset allocation
*. 7hich of the followin( portfolio construction methods starts with asset allocation8A. Top-downB. Bottom-upC. $iddle-out. Buy and hold
E. Asset allocation
*. _______ are e,amples of financial intermediaries.A. Commercial !an&sB. Insurance companiesC. Investment companies. Credit unionsE. All of the a!ove
*2. +inancial intermediaries e,ist !ecause small investors cannot efficiently ________.A. diversify their portfoliosB. assess credit ris& of !orrowersC. advertise for needed investments. all of the a!ove.E. A and B only.
1-5
8/12/2019 Chap 00163
10/44
Chapter 01 - The Investment Environment
*4. ________ specialiDe in helpin( companies raise capital !y sellin( securities.A. commercial !an&ersB. investment !an&ers
C. investment issuers. credit ratersE. all of the a!ove.
*6. Commercial !an&s differ from other !usinesses in that !oth their assets and their lia!ilitiesare mostlyA. illi;uid.B. financial.C. real.
. owned !y the (overnment.E. re(ulated.
*5. In "005) ____________ was the most si(nificant financial asset of .%. commercial !an&sin terms of total value.A. loans and leasesB. cashC. real estate. deposits
E. investment securities
0. In "005) ____________ was the most si(nificant lia!ility of .%. commercial !an&s interms of total value.A. loans and leasesB. cashC. real estate. depositsE. investment securities
1-10
8/12/2019 Chap 00163
11/44
Chapter 01 - The Investment Environment
1. In "005) ____________ was the most si(nificant real asset of .%. nonfinancial !usinessesin terms of total value.A. e;uipment and software
B. inventoryC. real estate. trade creditE. mar&eta!le securities
". In "005) ____________ was the least si(nificant real asset of .%. nonfinancial !usinessesin terms of total value.A. e;uipment and softwareB. inventory
C. real estate. trade creditE. mar&eta!le securities
*. In "005) ____________ was the least si(nificant lia!ility of .%. nonfinancial !usinessesin terms of total value.A. !onds and mort(a(esB. !an& loansC. inventories
. trade de!tE. mar&eta!le securities
. In terms of total value) the most si(nificant lia!ility of .%. nonfinancial !usinesses in"005 was _______.A. !an& loansB. !onds and mort(a(esC. trade de!t. other loans
E. mar&eta!le securities
1-11
8/12/2019 Chap 00163
12/44
Chapter 01 - The Investment Environment
. In "005) ____________ was the least si(nificant financial asset of .%. nonfinancial!usinesses in terms of total value.A. cash and deposits
B. trade creditC. trade de!t. inventoryE. mar&eta!le securities
2. ew issues of securities are sold in the ________ mar&et/s.A. primaryB. secondaryC. over the counter
. primary and secondaryE. A and C.
4. Investors trade previously issued securities in the ________ mar&et/s.A. primaryB. secondaryC. primary and secondary. derivativesE. A and .
6. Investment !an&ers perform the followin( role/s ___________.A. mar&et new stoc& and !ond issues for firmsB. provide advice to the firms as to mar&et conditions) price) etcC. desi(n securities with desira!le properties. all of the a!oveE. none of the a!ove
1-1"
8/12/2019 Chap 00163
13/44
Chapter 01 - The Investment Environment
5. ntil 1555) the ________ Act/s prohi!ited !an&s in the nited %tates from !othacceptin( deposits and underwritin( securities.A. %ar!anes-,ley
B. lass-%tea(allC. %EC. A and CE. none of the a!ove
0. The spread !etween the #IBF and the Treasury-!ill rate is called the ________.A. term spreadB. T-!ill spreadC. #IBF spread
. TE spreadE. none of the a!ove
1. $ort(a(e-!ac&ed securities were created when ________ !e(an !uyin( mort(a(e loansfrom ori(inators and !undlin( them into lar(e pools that could !e traded li&e any otherfinancial asset.A. $AB. +$AC. +>#$C
. B and CE. A and B
". The sale of a mort(a(e portfolio !y settin( up mort(a(e pass-throu(h securities is ane,ample of ________.A. credit enhancementB. securitiDationC. un!undlin(. derivatives
E. none of the a!ove
1-1*
8/12/2019 Chap 00163
14/44
Chapter 01 - The Investment Environment
*. 7hich of the followin( is true a!out mort(a(e-!ac&ed securities8I They a((re(ate individual home mort(a(es into homo(eneous pools.II The purchaser receives monthly interest and principal payments received from payments
made on the pool.III The !an&s that ori(inated the mort(a(es maintain ownership of them.I? The !an&s that ori(inated the mort(a(es continue to service them.A. II) III) and I?B. I) II) and I?C. II and I?. I) III) and I?E. I) II) III) and I?
. ________ were desi(ned to concentrate the credit ris& of a !undle of loans on one class ofinvestor) leavin( the other investors in the pool relatively protected from that ris&.A. %toc&sB. BondsC. erivatives. CollateraliDed de!t o!li(ationsE. all of the a!ove.
. ________ are in essence an insurance contract a(ainst the default of one or more
!orrowers.A. Credit default swapsB. C$sC. ET+s. CollateraliDed de!t o!li(ationsE. all of the a!ove.
1-1
8/12/2019 Chap 00163
15/44
Chapter 01 - The Investment Environment
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.
1-1
8/12/2019 Chap 00163
16/44
Chapter 01 - The Investment Environment
Chapter 01 The Investment Environment Answer 'ey
Multiple Choice Questions
1. The material wealth of a society is a function of _________.A.all financial assetsB.all real assetsC.all financial and real assets.all physical assetsE.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.$achinesC.%toc&s and !onds.'nowled(eE.A) B and
#and) machines and &nowled(e are real assetsG stoc&s and !onds are financial assets.
AACSB: AnalyticBloom's: Remember
Difficulty: Basic
Topic: Assets
1-12
8/12/2019 Chap 00163
17/44
Chapter 01 - The Investment Environment
*. The means !y which individuals hold their claims on real assets in a well-developedeconomy areA.Investment assets.
B.epository assets.C.erivative assets.D.+inancial assets.E.E,chan(e-driven assets.
+inancial assets allocate the wealth of the economy. E,ampleH it is easier for an individual toown shares of an auto company than to own an auto company directly.
AACSB: Analytic
Bloom's: Remember
Difficulty: Basic
Topic: Assets
. _______ are financial assets.A.BondsB.$achinesC.%toc&sD.A and CE.A) B and C
$achines are real assetsG stoc&s and !onds are financial assets.
AACSB: AnalyticBloom's: Remember
Difficulty: Basic
Topic: Assets
1-14
8/12/2019 Chap 00163
18/44
Chapter 01 - The Investment Environment
. _________ financial asset/s.A.Buildin(s areB.#and is a
C.erivatives are..%. A(ency !onds areE.C and
A and B are real assets.
AACSB: Analytic
Bloom's: RememberDifficulty: Basic
Topic: Assets
2. +inancial assets ______.A.directly contri!ute to the country3s productive capacityB.indirectly contri!ute to the country3s productive capacityC.contri!ute to the country3s productive capacity !oth directly and indirectly.do not contri!ute to the country3s productive capacity either directly or indirectlyE.are of no value to anyone
+inancial assets indirectly contri!ute to the country3s productive capacity !ecause these assetspermit individuals to invest in firms and (overnments. This in turn allows firms and(overnments to increase productive capacity.
AACSB: AnalyticBloom's: Understand
Difficulty: Basic
Topic: Assets
1-16
8/12/2019 Chap 00163
19/44
Chapter 01 - The Investment Environment
4. In "005) ____________ was the most si(nificant real asset of .%. households in terms oftotal value.A.consumer dura!les
B.automo!ilesC.real estate.mutual fund sharesE.!an& loans
%ee Ta!le 1.1.
AACSB: Analytic
Bloom's: Remember
Difficulty: Basic
Topic: Assets
6. In "005) ____________ was the least si(nificant financial asset of .%. households in termsof total value.A.real estateB.mutual fund sharesC.de!t securitiesD.life insurance reservesE.pension reserves
%ee Ta!le 1.1.
AACSB: AnalyticBloom's: Remember
Difficulty: Basic
Topic: Assets
1-15
8/12/2019 Chap 00163
20/44
Chapter 01 - The Investment Environment
5. In "005) ____________ was the most si(nificant financial asset of .%. households interms of total value.A.real estate
B.mutual fund sharesC.de!t securities.life insurance reservesE.pension reserves
%ee Ta!le 1.1.
AACSB: Analytic
Bloom's: Remember
Difficulty: Basic
Topic: Assets
10. In "005) ____________ was the most si(nificant asset of .%. households in terms of totalvalue.A.real estateB.mutual fund sharesC.de!t securities.life insurance reservesE.pension reserves
%ee Ta!le 1.1.
AACSB: AnalyticBloom's: Remember
Difficulty: Basic
Topic: Assets
1-"0
8/12/2019 Chap 00163
21/44
Chapter 01 - The Investment Environment
11. In "005) ____________ was the most si(nificant lia!ility of .%. households in terms oftotal value.A.credit cards
B.mort(a(esC.!an& loans.student loansE.other de!t
%ee Ta!le 1.1.
AACSB: Analytic
Bloom's: Remember
Difficulty: Basic
Topic: Assets
1". 7hich of the followin( financial assets made up the (reatest proportion of the financialassets held !y .%. households8A.9ension reservesB.#ife insurance reservesC.$utual fund shares.e!t securitiesE.9ersonal trusts
%ee Ta!le 1.1.
AACSB: AnalyticBloom's: Remember
Difficulty: Intermediate
Topic: Assets
1-"1
8/12/2019 Chap 00163
22/44
Chapter 01 - The Investment Environment
1*. In "005) _______ of the assets of .%. households were financial assets as opposed totan(i!le assets.A."0.:
B.*.":C.2*.0:.41.4:E.6".:
%ee Ta!le 1.1.
AACSB: Analytic
Bloom's: Remember
Difficulty: Intermediate
Topic: Assets
1. The lar(est component of domestic net worth in "005 was ____________.A.non-residential real estateB.residential real estateC.inventories.consumer dura!lesE.e;uipment and software
%ee Ta!le 1.".
AACSB: Analytic
Bloom's: RememberDifficulty: Intermediate
Topic: Assets
1-""
8/12/2019 Chap 00163
23/44
Chapter 01 - The Investment Environment
1. The smallest component of domestic net worth in "005 was ____________.A.non-residential real estateB.residential real estate
C.inventories.consumer dura!lesE.e;uipment and software
%ee Ta!le 1.".
AACSB: Analytic
Bloom's: RememberDifficulty: Intermediate
Topic: Assets
12. The national net worth of the .%. in "005 was _________.A.
8/12/2019 Chap 00163
24/44
Chapter 01 - The Investment Environment
14. A fi,ed-income security pays ____________.A.a fi,ed level of income for the life of the ownerB.a fi,ed stream of income or a stream of income that is determined accordin( to a specified
formula for the life of the securityC.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 ownerE.none of the a!ove
nly 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 ownerB.a varia!le level of income for owners on a fi,ed incomeC.a fi,ed or varia!le income stream at the option of the ownerD.a fi,ed stream of income or a stream of income that is determined accordin( to a specifiedformula for the life of the securityE.none of the a!ove
nly answer is correct.
AACSB: AnalyticBloom's: Remember
Difficulty: Basic
Topic: Asset Types
1-"
8/12/2019 Chap 00163
25/44
Chapter 01 - The Investment Environment
15. $oney mar&et securities ____________.A.are short termB.are hi(hly mar&eta!le
C.are (enerally very low ris&D.all of the a!oveE.B and C only.
All answers are correct.
AACSB: Analytic
Bloom's: RememberDifficulty: Basic
Topic: Asset Types
"0. An e,ample of a derivative security is ______.A.a common share of $icrosoftB.a call option on Intel stoc&C.a commodity futures contractD.B and CE.A and B
The values of B and C are derived from that of an underlyin( assetG the value of A is !ased onthe value of the firm only.
AACSB: Analytic
Bloom's: RememberDifficulty: Basic
Topic: Asset Types
1-"
8/12/2019 Chap 00163
26/44
Chapter 01 - The Investment Environment
"1. The value of a derivative security _______.A.depends on the value of the related securityB.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( theseinstrumentsE.is worthless today
f 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 usethem toA.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.
AACSB: Analytic
Bloom's: Remember
Difficulty: Basic
Topic: Asset Types
1-"2
8/12/2019 Chap 00163
27/44
Chapter 01 - The Investment Environment
"*. +inancial assets permit all of the followin( e,cept ____________.A.consumption timin(B.allocation of ris&
C.separation of ownership and controlD.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.
AACSB: Analytic
Bloom's: Remember
Difficulty: Intermediate
Topic: Assets
". The ____________ refers to the potential conflict !etween mana(ement andshareholders.A.a(ency pro!lemB.diversification pro!lemC.li;uidity pro!lem.solvency pro!lemE.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 Manaement
1-"4
8/12/2019 Chap 00163
28/44
Chapter 01 - The Investment Environment
". A disadvanta(e of usin( stoc& options to compensate mana(ers is thatA.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& pricetemporarily) (ivin( them a chance to cash out !efore the price returns to a level reflective ofthe 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 createsan a(ency pro!lem.
AACSB: Analytic
Bloom's: UnderstandDifficulty: Basic
Topic: Financial Manaement
"2. 7hich of the followin( are mechanisms that have evolved to miti(ate potential a(encypro!lems8I Compensation in the form of the firm3s stoc& optionsII >irin( !ic&erin( family mem!ers as corporate spiesIII nderperformin( mana(ement teams !ein( forced out !y !oards of directorsI? %ecurity analysts monitorin( the firm closely? 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 Manaement
1-"6
8/12/2019 Chap 00163
29/44
Chapter 01 - The Investment Environment
"4. Corporate shareholders are !est protected from incompetent mana(ement decisions !yA.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 hasthe stron(est a!ility to &eep mana(ement on their toes.
AACSB: Analytic
Bloom's: Understand
Difficulty: Intermediate
Topic: Financial Manaement
"6. Theoretically) ta&eovers should result in ___________.A.improved mana(ementB.increased stoc& priceC.increased !enefits to e,istin( mana(ement of ta&en over firmD.A and BE.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 aloss of e,istin( !enefits.
AACSB: Analytic
Bloom's: Remember
Difficulty: BasicTopic: Financial Manaement
1-"5
8/12/2019 Chap 00163
30/44
Chapter 01 - The Investment Environment
"5. urin( the period !etween "000 and "00") a lar(e num!er of scandals were uncovered.$ost of these scandals were related toI $anipulation of financial data to misrepresent the actual condition of the firm.
II $isleadin( and overly optimistic research reports produced !y analysts.III Allocatin( I9s to e,ecutives as a ;uid pro ;uo for personal favors.I? reenmail.A.II) III) and I?B.I) II) and I?C.II and I?.I) III) and I?E.I) II) and III
I) II) and III are all mentioned as causes of recent scandals.
AACSB: Analytic
Bloom's: Understand
Difficulty: Intermediate
Topic: Financial Manaement
*0. The %ar!anes-,ley Act ____________.A.re;uires corporations to have more independent directorsB.re;uires the firm3s C+ to personally vouch for the firm3s accountin( statementsC.prohi!its auditin( firms from providin( other services to clients.nly A and B are correct.
E.A) B) and C are correct.
The %ar!anes-,ley Act does all of the a!ove.
AACSB: AnalyticBloom's: Remember
Difficulty: Intermediate
Topic: Reulation
1-*0
8/12/2019 Chap 00163
31/44
Chapter 01 - The Investment Environment
*1. Asset allocation refers to ____________.A.choosin( which securities to hold !ased on their valuationB.investin( only in safe securities
C.the allocation of assets into !road asset classes.!ottom-up analysisE.all of the a!ove
Asset allocation refers to the allocation of assets into !road asset classes.
AACSB: Analytic
Bloom's: RememberDifficulty: Intermediate
Topic: Financial Manaement
*". %ecurity selection refers to ____________.A.choosin( which securities to hold !ased on their valuationB.investin( only in safe securitiesC.the allocation of assets into !road asset classes.top-down analysisE.all of the a!ove
%ecurity selection refers to choosin( which securities to hold !ased on their valuation.
AACSB: Analytic
Bloom's: Remember
Difficulty: Intermediate
Topic: Financial Manaement
1-*1
8/12/2019 Chap 00163
32/44
Chapter 01 - The Investment Environment
**. 7hich of the followin( portfolio construction methods starts with security analysis8A.Top-downB.Bottom-up
C.$iddle-out.Buy and holdE.Asset allocation
Bottom-up refers to usin( security analysis to find securities that are attractively priced. Top-down 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 allocation8A.Top-downB.Bottom-upC.$iddle-out.Buy and holdE.Asset allocation
Bottom-up refers to usin( security analysis to find securities that are attractively priced.
AACSB: Analytic
Bloom's: RememberDifficulty: Intermediate
Topic: !ortfolio
1-*"
8/12/2019 Chap 00163
33/44
Chapter 01 - The Investment Environment
*. _______ are e,amples of financial intermediaries.A.Commercial !an&sB.Insurance companies
C.Investment companies.Credit unionsE.All of the a!ove
All are institutions that !rin( !orrowers and lenders to(ether.
AACSB: Analytic
Bloom's: RememberDifficulty: Basic
Topic: Financial Institutions
*2. +inancial intermediaries e,ist !ecause small investors cannot efficiently ________.A.diversify their portfoliosB.assess credit ris& of !orrowersC.advertise for needed investmentsD.all of the a!ove.E.A and B only.
The individual investor cannot efficiently and effectively perform any of the tas&s a!ovewithout more time and &nowled(e than that availa!le to most individual investors.
AACSB: Analytic
Bloom's: RememberDifficulty: Basic
Topic: Financial Institutions
1-**
8/12/2019 Chap 00163
34/44
Chapter 01 - The Investment Environment
*4. ________ specialiDe in helpin( companies raise capital !y sellin( securities.A.commercial !an&ersB.investment !an&ers
C.investment issuers.credit ratersE.all of the a!ove.
An important role of investment !an&in( is to act as middlemen in helpin( firms place newissues in the mar&et.
AACSB: Analytic
Bloom's: Remember
Difficulty: Basic
Topic: Financial Institutions
*6. Commercial !an&s differ from other !usinesses in that !oth their assets and their lia!ilitiesare mostlyA.illi;uid.B.financial.C.real..owned !y the (overnment.E.re(ulated.
%ee Ta!le 1.*.
AACSB: AnalyticBloom's: Understand
Difficulty: Basic
Topic: Financial Institutions
1-*
8/12/2019 Chap 00163
35/44
Chapter 01 - The Investment Environment
*5. In "005) ____________ was the most si(nificant financial asset of .%. commercial !an&sin terms of total value.A.loans and leases
B.cashC.real estate.depositsE.investment securities
%ee Ta!le 1.*.
AACSB: Analytic
Bloom's: Remember
Difficulty: Basic
Topic: Financial Institutions
0. In "005) ____________ was the most si(nificant lia!ility of .%. commercial !an&s interms of total value.A.loans and leasesB.cashC.real estateD.depositsE.investment securities
%ee Ta!le 1.*.
AACSB: AnalyticBloom's: Remember
Difficulty: Basic
Topic: Financial Institutions
1-*
8/12/2019 Chap 00163
36/44
Chapter 01 - The Investment Environment
1. In "005) ____________ was the most si(nificant real asset of .%. nonfinancial !usinessesin terms of total value.A.e;uipment and software
B.inventoryC.real estate.trade creditE.mar&eta!le securities
%ee Ta!le 1..
AACSB: Analytic
Bloom's: Remember
Difficulty: Basic
Topic: Financial Institutions
". In "005) ____________ was the least si(nificant real asset of .%. nonfinancial !usinessesin terms of total value.A.e;uipment and softwareB.inventoryC.real estate.trade creditE.mar&eta!le securities
%ee Ta!le 1..
AACSB: AnalyticBloom's: Remember
Difficulty: Basic
Topic: Financial Institutions
1-*2
8/12/2019 Chap 00163
37/44
Chapter 01 - The Investment Environment
*. In "005) ____________ was the least si(nificant lia!ility of .%. nonfinancial !usinessesin terms of total value.A.!onds and mort(a(es
B.!an& loansC.inventories.trade de!tE.mar&eta!le securities
%ee Ta!le 1..
AACSB: Analytic
Bloom's: Remember
Difficulty: Basic
Topic: Financial Institutions
. In terms of total value) the most si(nificant lia!ility of .%. nonfinancial !usinesses in"005 was _______.A.!an& loansB.!onds and mort(a(esC.trade de!t.other loansE.mar&eta!le securities
%ee Ta!le 1..
AACSB: AnalyticBloom's: Remember
Difficulty: Basic
Topic: Financial Institutions
1-*4
8/12/2019 Chap 00163
38/44
Chapter 01 - The Investment Environment
. In "005) ____________ was the least si(nificant financial asset of .%. nonfinancial!usinesses in terms of total value.A.cash and deposits
B.trade creditC.trade de!t.inventoryE.mar&eta!le securities
%ee Ta!le 1..
AACSB: Analytic
Bloom's: Remember
Difficulty: Basic
Topic: Financial Institutions
2. ew issues of securities are sold in the ________ mar&et/s.A.primaryB.secondaryC.over the counter.primary and secondaryE.A and C.
ew issues of securities are sold in the primary mar&et.
AACSB: Analytic
Bloom's: RememberDifficulty: Basic
Topic: Financial Mar"ets
1-*6
8/12/2019 Chap 00163
39/44
Chapter 01 - The Investment Environment
4. Investors trade previously issued securities in the ________ mar&et/s.A.primaryB.secondary
C.primary and secondary.derivativesE.A and .
Investors trade previously issued securities in the secondary mar&et.
AACSB: Analytic
Bloom's: RememberDifficulty: Basic
Topic: Financial Mar"ets
6. Investment !an&ers perform the followin( role/s ___________.A.mar&et new stoc& and !ond issues for firmsB.provide advice to the firms as to mar&et conditions) price) etcC.desi(n securities with desira!le propertiesD.all of the a!oveE.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
8/12/2019 Chap 00163
40/44
Chapter 01 - The Investment Environment
5. ntil 1555) the ________ Act/s prohi!ited !an&s in the nited %tates from !othacceptin( deposits and underwritin( securities.A.%ar!anes-,ley
B.lass-%tea(allC.%EC.A and CE.none of the a!ove
ntil 1555) the lass-%tea(all Act prohi!ited !an&s in the nited %tates from !oth acceptin(deposits and underwritin( securities.
AACSB: Analytic
Bloom's: Remember
Difficulty: Basic
Topic: Reulation
0. The spread !etween the #IBF and the Treasury-!ill rate is called the ________.A.term spreadB.T-!ill spreadC.#IBF spreadD.TE spreadE.none of the a!ove
The spread !etween the #IBF and the Treasury-!ill rate is called the TE spread.
AACSB: AnalyticBloom's: Remember
Difficulty: Basic
Topic: Financial Mar"ets
1-0
8/12/2019 Chap 00163
41/44
Chapter 01 - The Investment Environment
1. $ort(a(e-!ac&ed securities were created when ________ !e(an !uyin( mort(a(e loansfrom ori(inators and !undlin( them into lar(e pools that could !e traded li&e any otherfinancial asset.
A.$AB.+$AC.+>#$CD.B and CE.A and B
$ort(a(e-!ac&ed securities were created when +$A and +>#$C !e(an !uyin( mort(a(eloans from ori(inators and !undlin( them into lar(e pools that could !e traded li&e any otherfinancial asset.
AACSB: AnalyticBloom's: Remember
Difficulty: Basic
Topic: Securities
". The sale of a mort(a(e portfolio !y settin( up mort(a(e pass-throu(h securities is ane,ample of ________.A.credit enhancementB.securitiDationC.un!undlin(.derivatives
E.none of the a!ove
The financial asset is secured !y the mort(a(es !ac&in( the instrument.
AACSB: AnalyticBloom's: Understand
Difficulty: Basic
Topic: Securities
1-1
8/12/2019 Chap 00163
42/44
Chapter 01 - The Investment Environment
*. 7hich of the followin( is true a!out mort(a(e-!ac&ed securities8I They a((re(ate individual home mort(a(es into homo(eneous pools.II The purchaser receives monthly interest and principal payments received from payments
made on the pool.III The !an&s that ori(inated the mort(a(es maintain ownership of them.I? The !an&s that ori(inated the mort(a(es continue to service them.A.II) III) and I?B.I) II) and I?C.II and I?.I) III) and I?E.I) II) III) and I?
III is not correct !ecause the !an& no lon(er owns the mort(a(e investments.
AACSB: Analytic
Bloom's: Understand
Difficulty: Intermediate
Topic: Securities
. ________ were desi(ned to concentrate the credit ris& of a !undle of loans on one class ofinvestor) leavin( the other investors in the pool relatively protected from that ris&.A.%toc&sB.BondsC.erivatives
D.CollateraliDed de!t o!li(ationsE.all of the a!ove.
CollateraliDed de!t o!li(ations were desi(ned to concentrate the credit ris& of a !undle ofloans on one class of investor) leavin( the other investors in the pool relatively protected fromthat ris&.
AACSB: AnalyticBloom's: Understand
Difficulty: Basic
Topic: Securities
1-"
8/12/2019 Chap 00163
43/44
Chapter 01 - The Investment Environment
. ________ are in essence an insurance contract a(ainst the default of one or more!orrowers.A.Credit default swaps
B.C$sC.ET+s.CollateraliDed de!t o!li(ationsE.all of the a!ove.
Credit default swaps are in essence an insurance contract a(ainst the default of one or more!orrowers.
AACSB: Analytic
Bloom's: Understand
Difficulty: Basic
Topic: Securities
Short Answer Questions
2. iscuss the a(ency pro!lem in detail.
$ana(ers are the a(ents of the shareholders) and should act on their !ehalf to ma,imiDeshareholder wealth /the value of the stoc&. A conflict /the a(ency conflict arises whenmana(ers ta&e self-interested actions to the detriment of shareholders. The roles of the !oard
of directors selected !y the shareholders are to oversee mana(ement and to minimiDe a(encypro!lems. >owever) often these !oards are fi(ureheads) and individual shareholders do notown lar(e enou(h !loc&s of the shares to override mana(ement actions. ne potentialresolution of an a(ency pro!lem occurs when inefficient mana(ement actions cause the priceof the stoc& to !e depressed. The firm may then !ecome a ta&eover tar(et. If the ac;uisition issuccessful) mana(ers may !e replaced and potentially) stoc&holders !enefit.
AACSB: Reflecti#e T$in"inBloom's: Analy%e
Difficulty: Intermediate
Topic: Financial Manaement
1-*
8/12/2019 Chap 00163
44/44
Chapter 01 - The Investment Environment
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 thefirm3s !alance sheet. n 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 area((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 assetscontri!ute indirectly only.
AACSB: Reflecti#e T$in"in
Bloom's: Analy%e
Difficulty: Intermediate
Topic: Assets
6. iscuss securitiDation as it relates to the field of investments.
%ecuritiDation refers to a((re(atin( underlyin( financial assets) such as mort(a(es) into poolsand then offerin( a security that represents a claim on these underlyin( assets. E,ampleHmort(a(e-!ac&ed securities. %ecuritiDation allows investors to hold partial ownership infinancial assets that would otherwise !e !eyond their reach /e.(.) mort(a(es.+inancial en(ineerin( involves !undlin( or un!undlin(. Bundlin( involves com!inin(separate securities.
AACSB: Reflecti#e T$in"in
Bloom's: Analy%eDifficulty: Intermediate
Topic: Securities