Chapter 01 Flashcards
The material wealth of a society is a function of …
all real assets
… is/are a real asset(s).
Land, machines and knowledge are real assets
The means by which individuals hold their claims on real assets in a well-developed economy are
Financial assets
… is/are financial assets.
Stocks and bonds
… financial asset(s).
Derivatives and U.S. Agency bonds are
Financial assets …
indirectly contribute to the country’s productive capacity
A fixed-income security pays …
a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security
A debt security pays …
a fixed stream of income or a stream of income that is determined according to a specified formula for the life of the security
Money market securities …
are short term, highly marketable, and generally very low risk
An example of a derivative security is/are …
a commodity futures contract and a call option on Intel stock
The value of a derivative security …
depends on the value of the related security
Although derivatives can be used as a speculative instruments, businesses most often use them to
hedge risks
Financial assets can permit all of the following except …
elimination of risk
The … refers to the potential conflict between management and shareholders.
agency problem
A disadvantage of using stock options to compensate managers is that
it can create an incentive for managers to manipulate information to prop up a stock price temporarily, giving them a chance to cash out before the price returns to a level reflective of the firm’s true prospects.
Which of the following are mechanisms that have evolved to mitigate potential agency problems?
I) Compensation in the form of the firm’s stock options
II) Hiring bickering family members as corporate spies
III) Underperforming management teams being forced out by boards of directors
IV) Security analysts monitoring the firm closely
V) Takeover threats
I, III, IV and V
Corporate shareholders are best protected from incompetent management decisions by
the threat of takeover by other firms
Theoretically, takeovers should result in …
improved management and increased stock price
During the period between 2000 and 2002, a large number of scandals were uncovered. Most of these scandals were related to
I) Manipulation of financial data to misrepresent the actual condition of the firm.
II) Misleading and overly optimistic research reports produced by analysts.
III) Allocating IPOs to executives as a quid pro quo for personal favours.
IV) Greenmail
I, II, and III
The Sarbanes-Oxley Act …
requires corporations to have more independent directors and requires the firm’s CFO to personally vouch for their firm’s accounting statements. It also prohibits auditing firms from providing other services to clients.
Asset allocation refers to …
the allocation of assets into broad asset classes
Security selection refers to …
choosing which securities to hold based on their valuation.
Which of the following portfolio construction methods starts with security analysis?
Bottom-up
Which of the following portfolio construction methods starts with assets allocation?
Top-down
… are examples of financial intermediaries.
Commercial banks, insurance companies, investment companies, and credit unions
Financial intermediaries exist because small investors cannot efficiently …
diversify their portfolios, assess credit risk of borrowers, or advertise for needed investments
… specialise in helping companies raise capital by selling securities.
investment bankers
Commercial banks differ from other businesses in that both their assets and their liabilities are mostly
financial
New issues of securities are sold in the … market(s).
primary
Investors trade previously issued securities in the … market(s).
secondary
Investment bankers perform in the following role(s) …
market new stock and bond issues for firms, provide advice to the firms as to market conditions, price, etc, and design securities with desirable properties
Until 1999, the … Act(s) prohibited banks in the United States from both accepting depositis and underwriting securities.
Glass-Steagall
The spread between the LIBOR and the Treasury-bill rate is called the …
TED spread
Mortgage-backed securities were created when … began buying mortgage loans from originators and bundling them into large pools that could be traded like any other financial asset.
FNMA and FHLMC
The sale of a mortgage portfolio by setting up mortgage pass-through securities is an example of …
securitisation
Which of the following is true about mortgage-backed securities?
I) They aggregate individual home mortgages into homogenous pools.
II) The purchases receives monthly interest and principal payments received from payments made on the pool.
III) The banks that originated the mortgages maintain ownership of them.
IV) The banks that originated the mortgages continue to service them.
I, II and IV
… were designed to concentrate the credit risk of a bundle of loans on one class of investor, leaving the other investors in the pool relatively protected from that risk.
Collaterised debt obligations
… are in essence an insurance contract against the default of one or more borrowers.
Credit default swaps
