Q 41- 60

Question 1

When an investment banking firm agrees to underwrite an issue of securities, this means that

a. the investment bankers guarantee the issue against default
b. the investment bankers buy the issue from the corporation and expect to sell it for a profit
c. the investment bankers sell the entire issue to a bank or insurance company
d. the investment bankers buy the issue and promise to hold it to maturity
e. none of the above happens

Answer 1

b. the investment bankers buy the issue from the corporation and expect to sell it for a profit

Chapter 2, p. 29-35

Question 2

Security dealers

a. are merely agents for buyers and sellers
b. hold a large inventory of securities compared to the volume of their transactions
c. only sell the securities in their inventory
d. are identical to investment banks
e. deal only in the secondary markets

Answer 2

e. deal only in the secondary markets

Chapter 2, p. 38

Question 3

Mutual funds

a. only invest in stocks
b. consistently outperform the market as a whole
c. are owned by the people who invest in them
d. always allow customers to write checks against their accounts
e. are all of the above

Answer 3

c. are owned by the people who invest in them

Chapter 2, p. 33

Question 4

Money-market funds

a. are called depository institutions
b. buy extremely safe and highly liquid short-term securities
c. do not allow customers to write checks against their accounts
d. do not pay interest on the shares in the fund
e. are both a and b

Answer 4

b. buy extremely safe and highly liquid short-term securities

Chapter 2, p. 33

Question 5

Life insurance companies do all of the following except:

a. take deposits
b. provide annuities
c. sell term insurance, also called pure insurance
d. administer pension funds
e. sell policies with a savings feature

Answer 5

a. take deposits

Chapter 2, p. 33-34

Question 6

Equipment leasing is mainly associated with a type of non-depository institution called

a. a casualty company
b. a life insurance company
c. a finance company
d. a mutual fund
e. an underwriter

Answer 6

c. a finance company

Chapter 2, p. 34

Question 7

The Government National Mortgage Association operates by

a. lending directly to home buyers
b. lending mortgage funds to commercial banks
c. selling securities and buying up existing mortgages
d. insuring savings and loan association deposits
e. doing none of the above

Answer 7

c. selling securities and buying up existing mortgages

Chapter 2, p. 34-35

Question 8

The reason for government regulation of depository institutions is that

a. consumers may not know the quality of the bank until it is too late and their deposits are gone
b. the banking sector creates a major part of the money supply and massive bank failures would cause a depression
c. banks may have the incentive to make loans that are too risky and pass the risk on to the insuring agency
d. failure of some banks may cause otherwise healthy banks to fail as well
e. all the above can happen

Answer 8

e. all the above can happen

Chapter 2, p. 35-37

Question 9

Risk, as used in economics, means the

a. probability of a loss
b. probability of a gain
c. probability of a gain and the probability of a loss
d. mathematical value of the return
e. distribution of probabilities around the variance

Answer 9

c. probability of a gain and the probability of a loss

Chapter 3, p. 39-40

Question 10

Purchasing-power risk is

a. the risk that the loan’s real value when repaid, as well as the real value of the interest payments received during its life, are less than the lender expected because of inflation
b. the risk that the lender will go bankrupt and not pay either the interest or the principle
c. also called market risk
d. the risk that the price or a security may fall because interest rates have risen
e. both a and c

Answer 10

a. the risk that the loan’s real value when repaid, as well as the real value of the interest payments received during its life, are less than the lender expected because of inflation

Chapter 3, p. 40

Question 11

Interest-rate risk

a. increases with the maturity of a security
b. decreases with the maturity of a security
c. is unaffected by the maturity of a security
d. exists only for corporate securities
e. exists only for government securities

Answer 11

a. increases with the maturity of a security

Chapter 3, p. 40-41

Question 12

Someone engaged in hedging would be

a. financing the purchase of a long-term asset with a series of short-term liabilities
b. matching the maturities of his assets and liabilities
c. using a long-term liability to finance the purchase of a series of short-term assets
d. holding fixed-rate long-term assets and issuing variable-rate liabilities on himself
e. holding variable-rate assets and issuing fixed-rate liabilities on himself

Answer 12

b. matching the maturities of his assets and liabilities

Chapter 3, p. 41

Question 13

Even with astute portfolio management, one cannot

a. usually eliminate all risk
b. earn a high rate of return
c. avoid excessive risk
d. earn a high rate of return and avoid excessive risk at the same time
e. hedge fully against inflation

Answer 13

a. usually eliminate all risk,

Chatper 3, p. 39-44

Question 14

Contingent claims

a. are liabilities matched to assets in hedging a portfolio
b. are held by households and firms
c. include property insurance and life insurance
d. are all the above
e. are b and c only

Answer 14

d. are all the above

Chapter 3, p 39-44

Question 15

The value of an asset is affected by all the following except:

a. yield
b. undiversifiable risk
c. diversifiable risk
d. liquidity
e. transactions costs

Answer 15

c. diversifiable risk

Chapter 3, p. 43

Question 16

Transactions costs of buying and selling an asset are

a. part of that asset’s risk
b. only the dollars-and-cents costs of a purchase or sale and nothing else
c. an important consideration for big financial institutions
d. a distinct characteristic that determines its desirability
e. part of the yield of the asset

Answer 16

d. a distinct characteristic that determines its desirability

Chapter 3, p. 39-44

Question 17

Corporations can issue equity by

a. selling additional stock on the market
b. not distributing all the earnings to the stockholders and ploughing them back into the business
c. retained earnings
d. doing all of the above
e. doing none of the above

Answer 17

d. doing all of the above

Chapter 3, p. 39-44

Question 18

Efficient-markets theory states that

a. the stock of efficient companies is a better buy than the stock of inefficient companies
b. all opportunities for excess profits are quickly competed away
c. one can project the price of a stock by looking at its past behavior
d. economic analysis can be used to make better-than-normal profits
e. all of the above apply

Answer 18

b. all opportunities for excess profits are quickly competed away

Chapter 3, p. 48-52

Question 19

An implication of efficient-markets theory is that

a. one can use economic analysis much more readily to predict how asset prices will change than to explain why they are what they are
b. one should expect to make a profit greater than the normal rate of return appropriate for the degree of risk
c. better-than-normal rates of return cannot be made even if one has information that other don’t have or one can interpret existing information better
d. if one picks a large enough sample of stocks at random, one can earn as high a rate of return for a given degree of risk as professional portfolio managers do
e. professionally managed portfolios always earn a higher rate of return because they are less risky

Answer 19

d. if one picks a large enough sample of stocks at random, one can earn as high a rate of return for a given degree of risk as professional portfolio managers do

Chapter 3, p. 48-52

Question 20

The behavioral theory of finance

a. cannot be used to explain the anomalies encountered by efficient-market theory
b. explains that most people underestimate the probability that the behavior of the sample is just due to chance
c. indicates that people are much more concerned about a gain they experience than about an equivalent loss
d. states that people overemphasize earlier events relative to recent events
e. includes the idea that people attribute too large a proportion of their successes to good luck

Answer 20

b. explains that most people underestimate the probability that the behavior of the sample is just due to chance

Chapter 3, p. 52-53