Chapter 2: the Domestic and International Financial Marketplace

Chapter 2: The Domestic and International Financial Marketplace

CHAPTER 2: THE DOMESTIC AND INTERNATIONAL FINANCIAL MARKETPLACE

1.A multinational firm.

a.hasdirectinvestmentsinmanufacturingfacilitiesinmorethanonecountry

b.exportsfinishedgoodsforsaleinanothercountry

c.importsrawmaterialsfromanothercountry

d.hasamanufacturingrepresentativeinanothercountry

ANSWER: a

2.Thedifferencebetweenmerchandiseexportsandimportsisknownasthe.

a.transactionexposure

b.differenceinpurchasingpower

c.goodsandservicestradebalance

d.import/exportreserve

ANSWER: c

3.TheinterestrateatwhichbanksintheEurocurrencymarketlendtoeachotherisknownasthe.

a.Eurocurrencycurrencyrate(ECR)

b.Londoninterbankofferrate

c.exchangerate

d.interestrateparity

ANSWER: b

4.Anexchangeratequotedas$1.47perBritishpoundisknownasaquote.

a.hedge

b.direct

c.futures

d.indirect

ANSWER: b

5.IfJapaneseyenaredepositedinabankinParis,thedepositswouldbecalled

a.Eurofrancs

b.EuropeanCurrencyUnit

c.Eurobond

d.Euroyen

ANSWER: d

6.IfthespotrateforSwissfrancsis$0.6658/francandthe180-dayforwardrateis$0.6637,themarketisindicatingthattheSwissfrancisexpectedto

a.strengthenrelativetothedollar

b.weakenrelativetotheECU

c.losevaluerelativetothedollaroverthenext6months

d.gainvaluerelativetothedollaroverthenext6months

ANSWER: c

7.Whichofthefollowingisnotacorrectstatementaboutforeigncurrencyfutures?

a.futurescontractshaveastandardizedmaturitydate

b.futurescontractsareanexchange-tradedagreement

c.futurescontractsarenotliquid

d.futurescontractsare"markedtomarket"daily

ANSWER: c

8.ThemostimportantforeigncurrencyfuturesmarketintheUnitedStatesisthe.

a.ChicagoBoardofTrade

b.NewYorkMercantileExchange

c.CommodityExchange

d.ChicagoMercantileExchange

ANSWER: d

9.Thebuyerofaforeigncurrencycalloptionhastheafixedamountofaforeigncurrency.

a.righttosell

b.rightbutnottheobligationtobuy

c.obligationtobuy,onlyatexpiration,

d.obligation to buy

ANSWER: b

10.EurodollarsareU.S.dollarsthathavebeendepositedin

a.foreignbanks

b.foreignbranchesofU.S.banks

c.foreignsubsidiaries

d.foreignbanksandforeignbranchesofU.S.banks

ANSWER: d

11.IftheexchangeratefromU.S.dollarstoCanadiandollarsis$0.80/Canadiandollar,thentheexchangeratefromCanadiandollarstoU.S.dollarsis

a.0.80Canadian$/USdollar

b.$1.25Canadian$/USdollar

c.$1.20Canadian$/USdollar

d.$8.00Canadian$/USdollar

ANSWER: b

12.IftheexchangeratefromU.S.dollarstoSwissfrancsis$0.20/franc,thentheexchangeratefromfrancstodollarsis

a.0.20francs/dollar

b.0.80francs/dollar

c.5.0francs/dollar

d.2.0francs/dollar

ANSWER: c

13.Ifthespotrate(inU.S.dollars)forJapaneseYenis0.00703andthe180dayforwardrateis0.00717,thentheYenistradingata(n) .

a.expectedgain

b.premium

c.reciprocal

d.discount

ANSWER: b

14.Iftheforward(directquote)exchangerateislowerthanthespotrate,thenthecurrencyissaidtobetradingata _____.

a.forwardpremium

b.forwardgain

c.forwarddiscount

d.forwardloss

ANSWER: c

15.Financialmiddlemeninclude

a.securitiesbrokers

b.securitiesdealers

c.investmentbankers

d.allofthese

ANSWER: d

16.ThefollowingarelistedsecurityexchangesintheUnitedSates:

a.NewYorkStockExchange

b.PacificExchange

c.CincinnatiExchange

d.Allof thesearelistedexchanges

ANSWER: d

17.TheStandardandPoor's500StockPriceIndexisaindex.

a.priceweighted

b.marketvalueweighted

c.priceaverage

d.noneoftheseanswersiscorrect

ANSWER: b

18.Securitiesnotlistedonexchangesaresaidtobetraded

a.ontheAMEX

b.ascompositetransactions

c.overthecounter

d.ontheregionalexchanges

ANSWER: c

19.Financial intermediaries include

a.securities brokers

b.commercial banks

c.securities dealers

d.all of these

ANSWER: b

20.marketsdealinlong-termsecuritieshavingmaturitiesgreaterthanoneyear.

a.Credit

b.Money

c.Commodityfutures

d.Capital

ANSWER: d

21.marketsdealinshort-termsecuritieshavingmaturitiesofoneyearorless.

a.Credit

b.Money

c.Capital

d.Capitalandcredit

ANSWER: b

22.Whichofthefollowing(ifany)arenotfinancialintermediaries?

a.commercialbank

b.thriftinstitution

c.securitiesbroker

d.allarefinancialintermediaries

ANSWER: c

23.In themarket,thefirmreceivestheproceedsfromthesaleofitssecurities.

a.over-the-counter

b.secondary

c.fullyintegrated

d.primary

ANSWER: d

24.Asavingsandloanassociationisanexampleofwhichtypeoffinancialintermediary?

a.commercialbank

b.investmentcompany

c.financecompany

d.thriftinstitution

ANSWER: d

25.Inanyeconomyasawhole,theactualsavingsforagivenperiodoftimemusttheactualinvestments.

a.begreaterthan

b.beunrelatedto

c.equal

d.belessthan

ANSWER: c

26.Financialintermediaries

a.issuesecondaryclaimstothelender

b.arecompensatedfortheirservicesbyfixedfees

c.includebothbrokersanddealers

d.issueprimaryclaimstothelender

ANSWER: a

27.Themainpurposeofaneconomy'sfinancialsystemistofacilitatethetransferoffundsfrom

a.financialmiddlementofinancialintermediaries

b.surplusspendingunitstodeficitspendingunits

c.primaryclaimholderstosecondaryclaimholders

d.lenderstofinancialintermediaries

ANSWER: b

28.Moneymarketsdealinsecuritieshavingmaturitiesof;capitalmarketsecuritieshavematurities.

a.lessthan18months,greaterthan18months

b.oneyearorless,greaterthanoneyear

c.lessthan9months,greaterthan9months

d.lessthan6months,greaterthan6months

ANSWER: b

29.Commercialbanksareanimportantsourceof

a.mortgageloans

b.equityloans

c.realestateloans

d.short-termloansandtermloans

ANSWER: d

30.Financecompaniesobtainasignificantamountoftheirfundsby

a.issuingtheirownequitysecurities

b.acceptingbothdemandandtimedeposits

c.issuingtheirowndebtsecurities

d.poolingfunds

ANSWER: c

31.Whenaninvestorpurchasessharesinano-loadcommonstockmutualfund,sheisusinga(n)

a.primaryintermediary

b.financialintermediary

c.over-the-countermarket

d.broker

ANSWER: b

32.TheinterestrateintheEurodollarmarketisrelatedto

a.theDOW

b.thestockmarket

c.theLIBOR

d.interestratesintheUnitedStates

ANSWER: c

33.Capitalmarketsinfinanciallysophisticatedeconomiesarenotperfectlyefficientbecauseof

a.anomalousevents

b.theSunSpottheory

c.irrationalinvestorbehavior

d.anomalouseventsandirrationalinvestorbehavior

ANSWER: d

34.Commercial banks are a major source of term loans. These loans are best used for:

a.financing the expansion of the business.

b.financing the establishment of overseas operations.

c.financing current assets like inventory and accounts receivable.

d.financing the payment of dividends.

ANSWER: c

35.TheDowJonesIndustrialAverageiscalculatedusingthe

a.totalmarketvalueof30stocks

b.priceof30stocks

c.aweightedindexof30stocks

d.industrial,railroad,financial,andutilitystocks

ANSWER: b

36.Insidertradingisdefinedas

a.anindividualusingpropertradingrules

b.anindividualbuyingorsellingusingnon-SECdisclosurerules

c.anindividualbuyingorsellingonthebasisofmaterialnonpublicinformation

d.azero-plusgame

ANSWER: c

37.TheU.S.financialmarketsaresaidtobehighlyinformationallyefficient.Thismeans

a.theyprocessstocktradesaccuratelyandquickly

b.themarketprovidesquickaccesstoafirm'sfinancialstatements

c.theyquicklyreflectinformationrelevanttodeterminingstockvalue

d.accuratestockquotesarequicklyavailabletoallinvestors

ANSWER: c

38.Expostreturnsdifferfromreturnsinthattheyrepresentvaluesratherthanvalues.

a.exante;estimated;actual

b.expost;accounting;economic

c.exante;actual;estimated

d.exante;economic;accounting

ANSWER: c

39.Thefactthatnoinvestorcanexpecttoearnexcessreturnsbasedonaninvestmentstrategyusingonlyhistoricalstockpriceorreturninformationisanexampleof marketefficiency.

a.strong-form

b.weak-form

c.semiweak-form

d.semistrong-form

ANSWER: b

40.Withsemistrong-formmarketefficiency,noinvestorcanexpecttoearnexcessreturnsbasedonaninvestmentstrategyusing any information.

a.pastmarketprice

b.marketvalue

c.publiclyavailable

d.private

ANSWER: c

41.Inanefficientcapitalmarket,allsecurityinvestmentswillhave:

a.arequiredrateofreturnthatexceedsthecostofcapital

b.apositiveNPV

c.arequiredrateofreturnthatiszero

d.aNPVofzero

ANSWER: d

42.Inanefficientcapitalmarket,corporatediversificationis.

a.unnecessary

b.inexpensive

c.ofbenefittocorporatemanagers

d.ofgreatbenefit

ANSWER: a

43.Thebarrierstothefreeflowofcapitalamongthemajorworldcapitalmarketsincludeallofthefollowingexcept:

a.lowtransactioncosts

b.taxationpolicies

c.foreignexchangerisks

d.legalrestrictions

ANSWER: a

44.For the financial manager, taxes have important implications for

a.dividend policy

b.financial restructurings

c.capital structure policy

d.all of these

ANSWER: d

45.Changesinthetaxcodethatslowdowndepreciation,thepresentvalueofinvestmentcashflowsand,therefore,maketheinvestment desirable.

a.decrease,more

b.decrease,less

c.increase,more

d.increase,less

ANSWER: b

46.In an efficient capital market

a.requiredreturnsequalexpectedreturns

b.investorswillhaveholdingperiodreturnsequaltozero

c.purchaseofanysecurityyieldszeroprofit

d.purchasingstocksisnobetterthangambling

ANSWER: a

47.IfthespotratefortheBritishpoundis$1.5077andthe180-dayforwardrateis$1.4934,whatistheannualizedpremium(discount)?

a.premiumof1.90%

b.premiumof0.97%

c.discountof(-)1.90%

d.discountof(-)0.97%

ANSWER:c

RATIONALE: Solution:[($1.4934-$1.5077)/($1.5077)](12/6)(100%)=-1.897%

48.IfthespotratefortheJapaneseyenis$0.009204andthe90-dayforwardrateis$0.009227,whatistheannualizedpremium(discount)?

a.premiumof1.00%

b.premiumof0.50%

c.discountof-0.99%

d.premiumof0.25%

ANSWER:a

RATIONALE: Solution:[(.009227-.009204)/(.009204)](12/3)(100%)=0.9996%

49.Christypurchased100sharesofGoodIdeastockfor$48lastyear.Yesterdayshesoldthestockfor$45.Ifshereceived$4individendsduringthetimesheheldthesecurity,whatisherholdingperiodreturn?

a.2.08%

b.8.30%

c.-6.30%

d.14.60%

ANSWER:a

RATIONALE: Solution:($45-$48+$4)/$48=0.0208or2.08%

50.Ifaninvestorpurchased100sharesofBiggeestockfor$30pershare,6monthsago,andthensoldthestocktodayfor$33pershare,whatwastheinvestor'sholdingperiodreturnifatotalof$1pershareindividendswasreceivedoverthe6monthperiod?

a.10%

b.27.1%

c.17.1%

d.13.3%

ANSWER:d

RATIONALE: Solution:HPR=($33-$30+$1)/$30=13.3%

51.Whatistheholdingperiodreturntoaninvestorwhobought100sharesofOilSlickstockninemonthsagofor$36pershare,receivedtwo$50dividendchecks,andsoldthestocktodayat$38ashare.

a.5.56%

b.8.33%

c.11.11%

d.6.94%

ANSWER:b

RATIONALE: Solution:($38+$1-$36)/$36=0.0833or8.33%

52.If a treasury bond can be purchased for $9,450 today and the bond holder will receive $850 in interest and the$10,000 face value at maturity, what is the percentage holding period return?

a. 14.8%

b.5.8%

c.6.7%

d.12.6%

ANSWER:a

RATIONALE: Solution:($10,000- $9,450+$850)/$9,450=0.148or14.8%

53.Youbought100sharesofRiskyVenturestocksixmonthsagofor$14pershareandsoldityesterdayfor$12.Thecompanypaidatotalof$0.24pershareindividendstoyouduringthetimeyouheldthestock.Whatwasyourholdingperiodreturn?

a.-25.14%

b.-16.67%

c.-12.57%

d.16.00%

ANSWER:c

RATIONALE: Solution:HPR=($12-$14+$0.24)/$14=-0.1257or-12.57%

54.Maher purchased 100 shares of Chill Pill Pharmaceuticals at $30 per share last spring and sold them in six monthsfor $36 per share. The stock paid no dividend. What was Maher's holding period return?

a.40%

b.20%

c.10%

d.5%

ANSWER:b

RATIONALE: Solution:HPR=(36003000)/3000×100%=20%

55.Two years ago you bought 100 shares of Big Bubba convertible preferred stock at $25 per share. The preferred stock had an annual dividend of $2.125 per share, and a total of $3.19 in dividends per share have been paid so far. Today the company announced that the stock is redeemable for $26.70 plus accrued and unpaid dividends, for a total of $27.76. Alternatively, holders may convert their shares of preferred stock at a conversion rate of 1.6393 shares of Big Bubba common stock for each share of preferred stock. If the closing price of Big Bubba common stock is$27.50, what is your holding period return?

a.93.08%

b.23.80%

c.80.32%

d.64.60%

ANSWER:a

RATIONALE: Solution:Endingprice=$27.50(1.6393)=$45.08

HPR=($45.08-$25+$3.19)/$25=0.9308or93.08%

56.Ifthespotrate(inU.S.dollars)forJapaneseYenis0.00703andthe180dayforwardrateis0.00717,thentheYenistradingatanannualized

a.premiumof4.04%

b.premiumof3.98%

c.premiumof3.91%

d.discountof3.89%

ANSWER:b

RATIONALE: Solution:Premium=[(0.00717-0.00703)/0.00703](12/6)=0.0398

57.Learpurchased100sharesofQuitchaTwitchinAnti-inchCreamstockat$30persharelastyearandsoldthemelevenmonthslaterfor$24pershare.Thesharessplit2for1shortlyafterLearpurchasedthestock.Ifthestockpaid$0.25pershareindividendslastyear,whatisLear'sholdingperiodreturn?

a.61.67%

b.-19.17%

c.21.67%

d.6.17%

ANSWER:a

RATIONALE: Solution:HPR=[24001500+.25(100)]/1500×100%=61.67%

58.Whichofthefollowingreflect(reflects)theimplicationsofincometaxesforfinancialmanagers:

I.Interestpaymentsondebtincurredbythefirmarenottaxdeductibleforthefirm.

II.Preferredstockandcommonstockdividendsaretaxdeductibleforthefirmandareusedasoftenaspossibletoraisecapital.

a.OnlystatementIiscorrect.

b.OnlystatementIIiscorrect.

c.BothstatementsIandIIarecorrect.

d.NeitherstatementInorIIiscorrect.

ANSWER: d

59.Savingsandloanassociationsareconsidered:

a.commercialbanks

b.investmentcompanies

c.thriftinstitutions

d.loansharks

ANSWER: c

60.Whichofthefollowingiscorrectregardingtheformsofmarketefficiency?

I. Inanefficientcapitalmarketstockpricesprovideanunbiasedestimateofthetruevalueofanenterprise.

II.Inanefficientcapitalmarket,stockpricesreflectthepresentvalueofthefirm’sexpectedcashflows.

a.OnlystatementIiscorrect

b.OnlystatementIIiscorrect

c.BothstatementsIandIIarecorrect

d.NeitherstatementInorIIiscorrect

ANSWER: c

61.Whichofthefollowingstatementsis/arecorrectaboutfinancialintermediaries?

I.Financialintermediariesprimarilyoperatewithinthesecondarymarket.

II.Examplesoffinancialintermediariesare:commercialbanks,thriftcompaniesandtheinternalrevenueservice.

a.OnlystatementIiscorrect.

b.OnlystatementIIiscorrect.

c.BothstatementsIandIIarecorrect.

d.NeitherstatementInorIIiscorrect.

ANSWER: d

62.Therearethreeformsofmarketefficiency.AllofthefollowingstatementsarecorrectEXCEPT:

a.Theweakformefficiencystatesthatnoinvestorcanearnexcessreturnsbasedonhistoricalpriceinformation.

b.Thestrongformofefficiencystatesthatnoinvestorcanconsistentlyearnexcessreturnssinceallpublicandprivateinformationisreflectedinstockprices.

c.Thesemi-strongformofefficiencystatesthatnoinvestorcanearnexcessreturnsbasedonaninvestmentstrategyusingpublicinformation.

d.Marketefficiencyisahardandfastrulethathasbeenverifiedinreal-worldsituations.

ANSWER: d

63.There are highly publicized hedge fund problems, for example Julian Robertson’s Tiger fund or Long Term CapitalManagement. The impact that this has had on hedge funds is:

a.minimal.Theyhavecontinuedtogrowinsizeandnumber.

b.huge.Hedgefundsarebeingdiscontinued.

c.beingfeltintheoverallreallocationofhedgefundsintobonds.

d.inconsequentialandirrelevant.Investorsmayrelyontheduediligenceofthefundmanagersforsafeinvesting.

ANSWER: a

64.Anexampleofafinancialmiddlemanisa:

a.commercialbank

b.stockbroker

c.insurancecompany

d.thriftinstitution

ANSWER: b

65.Anexampleofalistedsecurityexchangewithinthesecondarymarketis:

a.OTC

b.NYSE

c.NASDAQ

d.Automatedquotations

ANSWER: b

66.Asagroup,netsaversare:

a.businesses

b.households

c.government

d.partnerships

ANSWER: b

67.Trading on the NYSE is conducted by members of the exchange. The members that execute orders and act asagents on behalf of their clients are:

a.FloorBrokers

b.ExchangeRunners

c.DesignatedMarketMakers

d.SECAgents

ANSWER: a

68.Thedifferencebetweenthebidpriceandtheaskpriceonasecurityisthe:

a.spread

b.value

c.assetfactor

d.commission

ANSWER: a

69.Therearemanyreasonswhytherewasafinancialcrisisin2007.Themostsignificanteventcloselyassociatedwiththiscrisisis:

a.thestockmarketcrash

b.therealestatebubble

c.governmentoverspending

d.theuseoffinancialhedging

ANSWER: b

70.Inthefinancialcrisisof2007therewascheapmoneycomingfromemergingmarkets.ExamplesofemergingmarketsareallofthefollowingEXCEPT:

a.SouthKorea

b.Australia

c.India

d.China

ANSWER: b

71.Althoughtherewasafinancialcrisisin2007-2010,somefirmswereabletoweatherthecrisis.ThesefirmshadallofthefollowingcharacteristicswhichweredirectlyresponsiblefortheirabilitytosurvivethecrisisEXCEPT:

a.Tightcontroloverfixedandvariablecosts

b.Lowbusinessrisk

c.Abusinessmodelwhichencouragedrisktakingbymanagementthatpaidoff

d.Lowproductpricing

ANSWER: c

72.Whatarethedifferencesbetweentheprimaryandsecondarymarkets?

ANSWER: Theprimarymarketallowstheinvestortopurchasenewsecurities.Netproceedsfromsuchsalesgototheissuingcorporation.

Thesecondarymarketallowstheinvestortopurchasesecuritiesthatarealreadyincirculation.Thesearepurchasedthroughanorganizedsecurityexchange,forexampleNYSE,orintheover-the-countermarket,andnoneoftheproceedsgototheissuingcorporation.

73.Whatisthepurposeandimportanceofthestockmarketindexes?

ANSWER: Stockmarketindexesgiveabroadindicationofhowthestockmarketorasegmentofitperformedduringaparticularday.ThemostknownindexistheDowJonesIndustrialAverage(DJIA),whichiscomposedof30stocks.Theindexgivesanoverviewofhowwellstocksaredoing,theoverallhealthoftheeconomy,andtheanticipatedmarketabilityofsecurities.

74.Explainthedegreesofmarketefficiencyandtheirapplicabilitytothestockmarket.

ANSWER: 1.Weakformmarketefficiency:Noinvestorcanearnexcessreturnsbasedonhistoricalpriceinformationorpastreturninformation.

2.Semi-strongmarketefficiency:Noinvestorcanearnexcessreturnsbasedonaninvestmentstrategyusinganypublicinformation.Stockpricesconsistentlyincorporateanynewinformationaboutthestockortheissuingcompany.

3.Strongmarketefficiency:Noinvestorcanconsistentlyearnexcessreturnsbasedonanypublicorprivateinformation.Stockpricesreflectallinformation,bothpublicandprivate.

Thenumberofinvestorswhohavetradedwithinsiderknowledgeprovidesgraphicevidencethatthestrongformefficiencydoesnothold.

75.Definethedifferencesbetweenthecapitalmarketandthemoneymarket.Giveexamplesofthekindsofsecuritiesfoundineachcategory.

ANSWER: Moneymarketsecuritiesareshort-termandliquidwithmaturitiesunderoneyear.Thereisminimalriskinthemoneymarketandmoneymarketsecuritiesgenerallypayinterestthatisguaranteed.Typesofmoneymarketsecuritiesare:cashandcashequivalents,commercialpaper,treasurybills,governmentsecurities,andcertificatesofdeposit.

Capitalmarketsecuritiesarelong-termandilliquidwithmaturitiesgreaterthanoneyear.Thereissignificantriskinvolvedandcapitalmarketsecuritiesearnarateofreturnthatisnotguaranteed.Typesofcapitalmarketsecuritiesare:preferredstocks,commonstocksandbonds.

76.ListthetypesofdisclosureformsrequiredbytheSECandexplainwhatinformationiscontainedineachform.

ANSWER: ThevariousSECformslistedinthetextare:

1.10K.Thisisthefirm’sannualreporttotheSECrequiredfromfirmswithpubliclyheld

securities.

2.10-Q.Thisformcontainsquarterlyinformationwhichupdatesthe10-K.

3.14-AfilingorProxyStatement.Thisformissubmittedpriortoannualshareholdermeetingsdetailingmatterstobediscussedandvoteduponbythestockholders.

77.ListchangesthathaveoccurredwithinfinancialmarketsregulationasaresultofthepassageoftheSarbanes-OxleyActof2002.

ANSWER: Thesignificantchangesthathaveoccurredare:

1.Topmanagementisdirectlyresponsiblefortheaccuracyoftheirfirm’sfinancialstatements.Theymustpersonallycertifytotheaccuracyofthefinancialstatementsandinternalcontrolsystems.

2.Theactstrengthenstheindependenceandaccountabilityoftheauditcommitteeofthefirm’s

internalcontrolsystem.

3.TheactcreatesthePublicCompanyAccountingStandardsBoardtooverseetheauditingindustrytoimprovetheindependenceandcredibilityofauditorsandtheauditingfunction.

4.Theactrequiresthatauditorsnowcertifyafirm’sfinancialcontrolsystemandreportany

materialweaknesses.

5.Theactcreatesstructuralseparationbetweenfinancialanalystsandinvestmentbankersworkingforthesamefirm.

6.Theactinstitutesnewrulestoensureindependenceoffinancialanalysts.

78.Howdidthemortgagemarketprovidetheimpetusforthefinancialcrisisof2007-2010?

ANSWER: MortgagemarketsintheUSevolvedtotakeadvantageofeasymoneyflowinginfromaroundtheworld.

Mortgagesbecamesecuritized.Banks,inthepast,wereverycautiouswithregardtowhotheylenttoandensuredthatborrowershadsufficientincomeandcollateraltorepaytheirloanstothebank.

Beginningin1980,thischanged.Banksandmortgagebrokersandlenderswouldoriginatetheloansandthenresellthemtootherfinancialinstitutions.Theseinstitutionswouldbundlethemortgagesintoamortgage-backedsecurityorbondandsellthemtoinvestorsaroundtheworld.Thesebondswereperceivedtobeverysafe.Butintheearly2000’sthedemandexceededthesupplyandinvestmentbanksfoundawaytoexpandsupplybyreachingintomoreriskymortgages(knownassubprime).Aslongasrealestatepricesweregoingupandtheeconomyandemploymentlevelswerehigh,thesederivativesecuritiesenjoyedagreatdealofpopularityandthedefaultriskonthesebondswasverylow.Theincreaseinhomepriceswasunsustainableandintheendtheownersofthesederivativessufferedhugelosses.Therearosefearoflendingmoneybetweenbankswhicheventuallyledtoaliquiditycrisiswhichresultedinbanksandfinancialinstitutionsbeingliquidatedortakenoverbyastrongerfinancialinstitution.

79.Thedifferencebetweenputsandcallsis:

a.acallisanoptiontobuy

b.aputallowsthepurchaseofextrastock

c.acallcannotberesold

d.aputrequiresthattheowneroftheputmustsellonaspecificdate

ANSWER: a

80.Foreigncurrencyforwardandfutureoptionsarecontractsthatreflect:

a.an obligation

b.achoice

c.adeliverydateoftheproduct

d.aspecificrequirement

ANSWER: b

81.Foreigncurrencyforwardandfutureoptionsprovideameansforfirmstocontrol

a.foreigngovernmentintervention

b.foreignpoliticalproblems

c.foreignexchangerisk

d.theforeigntransportofthegoods

ANSWER: c

82.Aninvestordecidestosellhisstockbasedoninformationhereceivedaboutsomeinternalauditrevealingthatthecompanyhasseverefinancialproblems. Tradingonthisinformationiscalled:

a.privatetrading

b.insidertrading

c.optionstrading

d.informationtrading

ANSWER: b

83.financeseekstoidentifywhysomeinvestorsreactirrationallywhenconfrontedwithunexpectedupsanddownsinthemarket

a.Systematic

b.Weak-form

c.AssetEvaluation

d.Behavioral

ANSWER: d

84.AllofthefollowingareanomaliesthathaveimpactedthefinancialmarketinthepastEXCEPT:

a.therealestatemarket

b.thepurchaseandsubsequentsaleofinternetstock

c.therunupofgoldprices

d.investinginbluechipstock

ANSWER: d

85.Allofthefollowingcontributedtothefinancialcrisisof2007-2010EXCEPT:

a.theGulfWar

b.thesecuritizationofmortgageloans

c.verylowinterestrates

d.foreign investment in the bond market

ANSWER: a

86.All of the following have tax implications as it concerns financial management decisions EXCEPT:

a.Capitalstructure

b.Dividendpolicy

c.Inventorycontrol

d.Leasing

ANSWER: c

87.Financialintermediariesarecompensatedfortheirservicesby

a.theinterestratespread.

b.salary.

c.stockoptions

d.preferredstockcertificates

ANSWER: a

88.FinancialassetsareallofthefollowingEXCEPT:

a.money

b.debtsecurities

c.equitysecurities

d.inventory

ANSWER: d