Test 2

Question 1

A type of absentee ballot that allows a rep to vote on behalf of the stockholder is called a proxy

Answer 1

True

Question 2

The way stockholders control a large firm is by electing a board of directors.

Answer 2

True

Question 3

Stock splits change the divisor in a price weighted index but do not result in any net change in the divisor of a value weighted index.

Answer 3

True

Question 4

A long term investor in a high marginal tax bracket will normally prefer a dollar of capital gain to a dollar of dividend yield.

Answer 4

True

Question 5

At year end a firm has assets of $100 and debts due of $120. In this situation the stockholders must pay an additional $20 out of their own pocket.

Answer 5

False

Question 6

A subprime mortgage is a mortgage made to borrower who has poor credit.

Answer 6

True

Question 7

GNMA offers timing and principle insurance to investors in mortgages.

Answer 7

False

Question 8

The largest category of mortgages by dollar volume is commercial mortgages.

Answer 8

False

Question 9

Adjustable-rate mortgages can increase default risk.

Answer 9

True

Question 10

Forward contracts are marked to market daily.

Answer 10

False

Question 11

American options can only be exercised at maturity.

Answer 11

False

Question 12

Currency swaps can be used to hedge currency risk

Answer 12

True

Question 13

Mortgage payments are ___ on a 15 year fixed rate mortgage than on a 30 year fixed rate Mortgage, and ___ is paid on a 15 year mortgage than on a 30 year mortgage, ceteris paribus.

a. Lower; less interest
b. Lower; less principal
c. Higher; less interest
d. Higher; more principal
e. Higher; more interest

Answer 13

C) Higher; less interest

Question 14

14) The schedule showing how monthly mortgage payments are split into principle and interest is a (an):
a. Securitization schedule
b. Balloon payment schedule
c. Graduated payment schedule
d. Amortization schedule
e. Growing equity schedule

Answer 14

D) Amortization Schedule

Question 15

15) Which one of the following types or mortgages is likely to become more popular as the average age of the U.S. population increases?
a. GEM
b. GPM
c. SAM
d. PLA
e. RAM

Answer 15

E) RAM

Question 16

16) A MBB differs from a CMO or a pass-through in that
a. The MBB does not result in the removal of mortgages from the balance sheet.
b. A MBB holder has no prepayment risk.
c. Cash flows on a MBB are not directly passed through from mortgages.
d. All of the above.
e. a) and b) above.

Answer 16

D) All of the above

Question 17

17) The largest single holders of common stock (in dollar terms) are ultimately
a. Pension funds
b. Households
c. Mutual funds
d. Brokers and dealers
e. Life insurance firms

Answer 17

B) Households

Question 18

18) With _________ voting, all directors up for election are voted on by the shareholders at the same time in one general election.
a. Straight
b. Participating
c. Nonparticipating
d. Proxy
e. Cumulative

Answer 18

E) Cumulative

Question 19

19) If all preferred dividend payments that have been missed must be paid before any common stock dividend can be paid the preferred stock is called _____ preferred stock.
a. Cumulative
b. Participating
c. Nonparticipating
d. Voting
e. Dual class

Answer 19

A) Cumulative

Question 20

20) The preemptive right is designed to
a. Allow management to diffuse stock ownership any voting power
b. Allow managers to preempt a stock offering if they do not like the terms of the deal
c. Allow existing shareholders the right to sell their existing shares before the new offer
d. Allow existing shareholders to buy shares of the new offering if they desire
e. None of the above

Answer 20

D) Allow existing shareholders to buy shares of the new offering if they desire

Question 21

21) The NASDAQ automatic order execution system for individual traders placing buy or sell orders of 1000 or fewer shares is called the
a. ECN Network
b. SOE System
c. NASDAQ/AMEX Joint Program
d. Instinet Network
e. E*Trade Online Program

Answer 21

B) SOE system

Question 22

22) In terms of volume of trading and market value of firms traded the ________ is the largest U.S. stock market. In terms of number of firms traded the ___________ is the largest in the U.S.
a. NYSE ; NYSE
b. NASDAQ ; NYSE
c. NYSE ; AMEX
d. NYSE ; NASDAQ
e. NASDAQ ; AMEX

Answer 22

D) NYSE;NASDAQ

Question 23

23) In a ___________ offering the firm preregisters with SEC any securities it wishes to sell over the next two years.
a. Rights
b. Full underwritten
c. General cash
d. Shelf
e. Best efforts

Answer 23

D) Shelf

Question 24

24) The NYSE specialists are charged with
a. trading for their own account
b. ensuring public limit orders are executed
c. facilitating processing public market orders
d. all of the above
e. none of the above

Answer 24

D) All of the above

Question 25

25) The stamp on a prospectus accompanying a new issue that indicates the issue has not yet been approved for sale by the SEC is called the a. green hornet b. seal of approval c. red herring d. eagle stamp e. Reg FD

Answer 25

C) Red Herring

Question 26

26) An negotiated OTC agreement to exchange currencies at a fixed date in the future but at an exchange rate specified today is a a. Currency swap agreement b. Forward foreign exchange transaction c. Currency futures contract d. Currency options contract e. Spot foreign exchange transaction

Answer 26

B) Foreward foreign exchange transaction

Question 27

27) You have taken a stock option position and if the stock’s price increases you could lose a fixed small amount of money, but if the stock’s price decreases your gain increases. You must have ________________________________. a. Bought a call option b. Bought a put option c. Written a call option d. Written a put option e. Purchased a straddle

Answer 27

B) Bought a put option

Question 28

28) An interest rate collar is a. Writing a floor and writing a cap b. Buying a cap and writing a floor c. An option on a futures contract d. Buying a cap and buying a floor e. None of the above

Answer 28

B) Buying a cap and writing a floor

Question 29

29) Measured by the amount outstanding, the largest type of derivative market in the world is the a. Futures market b. Forward market c. Swap market d. Options market e. Credit forward market

Answer 29

C) Swap Market

Question 30

30) An interest rate floor is designed to protect an institution from a. Falling interest rates b. Falling bond prices c. Increased credit risk on loans d. Swap counterparty credit risk e. a) and b) above

Answer 30

A) Falling interest rates

Question 31

In terms of their default risk, sub-prime mortgages are risky. So why did investors think that they were safe?

Answer 31

In home markets, houses are collateral which is a pretty safe risk to take because if they default then then bank can take the house back meaning the recovery rate was 100%.

Question 32

Seasoned Equity Offerings (SEO's) often underperform the market. Why might this be the case?

Answer 32

Security is overvalued. Managers see the company as overvalued and they issue stock to make a bunch of cash so they can invest in something else.

Question 33

Provide at least 3 reasons that firms go public.

Answer 33

1. easier access to capital 2. Allows brand awareness 3. allows venture capitalists to sell out 4. Shareholder monitoring benefits 5. Not held liable by a bank if it goes bad

Question 34

Why are equity market indexes useful?

Answer 34

1. They can tell you how well the market did into a given day 2. Allow investors to compare valuation level between 1 period and another 3. Create passive portfolios

Question 35

What are some of the evidences for market efficiency? What is some of the evidence against?

Answer 35

``` For: -Really hard to make abnormal returns - technical analysis doesn't work - include random walks Against: - Internet bubble - small firm effect - January effect - Halloween effect - Behavioral Finance ```

Question 36

Broadly Speaking, why do investors use derivatives

Answer 36

1) to speculate -- speculate what will happen | 2) to hedge -- insure against losses

Question 37

What are interest rate swaps and how do they work?

Answer 37

agreement between two parties where one agrees to pay a fixed interest rate and the other pays a floating rate