CH1

Question 1

What are real assets?

Answer 1

Assets used to produce goods and services.

Question 2

What are financial assets?

Answer 2

Claims on real assets or the income generated by them.

Question 3

What must financial assets equal?

Answer 3

Financial liabilities.

Question 4

What does the Domestic Net Worth equal?

Answer 4

Sum of real assets.

Question 5

What are fixed-income (debt) securities?

Answer 5

Pay a specified cash flow over a specific period.

Question 6

Define equity in the context of investments.

Answer 6

An ownership share in a corporation.

Question 7

What are derivative securities?

Answer 7

Securities providing payoffs that depend on the values of other assets.

Question 8

What is the informational role of financial markets?

Answer 8

Capital flow to companies with the best prospects.

Question 9

True or False: Market price equals fair value.

Answer 9

True. (However markets aren’t always efficient)

Question 10

What does consumption timing in investments refer to?

Answer 10

Using securities to store wealth and transfer consumption to the future.

Question 11

How do investors select their desired risk level?

Answer 11

By choosing between different types of investments, such as bonds vs. stocks.

Question 12

What are mitigating factors for agency problems?

Answer 12

Performance-based compensation, boards of directors, threat of takeovers.

Question 13

Why is trust important in corporate governance?

Answer 13

Lack of trust leads to additional costly laws and regulations.

Question 14

What is a significant consequence of governance and ethics failures?

Answer 14

They cost the economy and erode public support and confidence.

Question 15

Define security selection.

Answer 15

Choice of particular securities within an asset class.

Question 16

What is security analysis?

Answer 16

Analysis of the value of securities.

Question 17

What is the average loss for stock portfolios?

Answer 17

25%.

Question 18

What is passive management?

Answer 18

Buying and holding a diversified portfolio without attempting to identify mispriced securities.

Question 19

What is active management?

Answer 19

Identifying mispriced securities or forecasting broad market trends.

Question 20

Who are net borrowers?

Answer 20

Business firms that raise capital now to pay for investments.

Question 21

Who are net savers?

Answer 21

Households that purchase securities issued by firms.

Question 22

What role do financial intermediaries play?

Answer 22

They connect borrowers and lenders.

Question 23

What types of entities can be financial intermediaries?

Answer 23

• Commercial banks
• Investment companies
• Insurance companies
• Pension funds
• Hedge funds

Question 24

What do investment bankers specialize in?

Answer 24

Primary market transactions.

Question 25

What is the difference between the primary and secondary market?

Answer 25

Primary market involves newly issued securities, while secondary market involves preexisting securities traded among investors.

Question 26

What is venture capital?

Answer 26

Equity investment to finance new firms.

Question 27

What is private equity?

Answer 27

Investments in privately-held companies.

Question 28

What does securitization involve?

Answer 28

Bundling mortgage loans into large pools and creating mortgage-backed securities.

Question 29

Fill in the blank: The old way of mortgage finance was 'originate to _______'.

Answer 29

hold.

Question 30

Fill in the blank: The new way of mortgage finance is 'originate to _______'.

Answer 30

distribute.

Question 31

What is a characteristic of adjustable-rate mortgages?

Answer 31

They have rising loan-to-value ratios ## Footnote This characteristic can affect borrower payments and financial stability.

Question 32

What are CDOs?

Answer 32

Collateralized Debt Obligations that consolidate default risk of loans onto one class of investor and divide payment into tranches ## Footnote Ratings agencies were pressured to give high ratings to these financial products.

Question 33

What are some features of the Dodd-Frank Reform Act?

Answer 33

Stricter rules for bank capital, liquidity, risk management, mandated increased transparency, clarified regulatory system ## Footnote The Volcker Rule is a notable component of this act.

Question 34

What does the Volcker Rule entail?

Answer 34

It mandates restrictions on proprietary trading by banks ## Footnote This aims to reduce the risk of financial crises.

Question 35

Fill in the blank: The financial crisis of 2008-2009 was characterized by _______.

Answer 35

highly leveraged banks and systemic risk ## Footnote This led to significant instability in financial markets.