Solutions for Quiz 12 - Financial Markets and Economic Fluctuations | ECON 423, Quizzes of Financial Market

Download Solutions for Quiz 12 - Financial Markets and Economic Fluctuations | ECON 423 and more Quizzes Financial Market in PDF only on Docsity! Econ 423: Questions from Previous Versions of Quiz 12 [Fall 2000-present] 1. The primary function of investment banks is: (a) the bundling of deposits into loans. (b) extending long-term credit to other financial institutions. (c) helping corporations raise funds. (d) providing credit to firms engaged in international trade. 2. Investment banks advertise upcoming securities offerings with block ads in the Wall Street Journal. Such an ad is called a: (a) tombstone. (b) marker. (c) prospectus. (d) registration statement. 3. Most investment banks are attached to: (a) large commercial banks. (b) large brokerage houses. (c) finance companies. (d) large nonfinancial corporations, such as automobile manufacturers. 4. When a group of investment banks agree that each group member will underwrite a portion of a new securities issue, the group is called a: (a) joint venture. (b) syndicate. (c) debt pack. (d) convoy. (e) cabal. 5. The concept of bundling and selling new public issues of junk bonds for companies that had not yet achieved investment-grade status, thereby reducing risk through diversification, was pioneered in 1977 by: (a) Michael Milken. (b)Warren Buffet. (c) Ivan Boesky. (d) Carl Icahn. (e) Roger Milliken. 6. Federal agricultural subsidies tend to be quickly: (a) spent because most farmers lack adequate budgeting skills. (b) capitalized into higher prices for farm land. (c) slashed whenever pressure mounts to cut federal tax rates. (d) absorbed by rising costs for agricultural labor. 7. The idea that innovation is a major source of economic profit is central to the ideas of: (a) Joseph A. Schumpeter. (b) Karl Marx. (c) Frank Knight. (d) Horatio Alger. (e) John Bates Clark. 8. The asset that would come closest to yielding a “risk-free” rate of return would be: (a) owner-occupied housing. (b) an inflation-adjusted 10-year US Treasury bond purchased within a few days of maturity. (c) an Aaa rated municipal bond. (d) stock in a well-managed hedge fund. (e) stock in a mutual fund that was perfectly diversified to eliminate specific risk. 9. An investment bank can reduce risk and security sales responsibilities when underwriting a new security, by: (a) providing a margin credit. (b) hedging the IPO by selling short in another market. (c) forming a syndicate. (d) taking a long position with the new security. (e) selling the securities on loan to customers in the firms commercial banking sector. 10. The average lifetime of a debt security’s stream of payments is called the security’s: (a) duration. (b) maturation. (c) seignorage. (d) longevity. (e) chronology. 11. The “house-money” effect is in play if financial investors: (a) sell a stock to cash in on a short-term profit after a stock rises in price. (b) acquire insider information that is likely to increase the value of a stock. (c) buy stock on margin by borrowing from a brokerage firm. (d) take greater risks after generating higher rates of return than expected. (e) ) receive inherited funds only after a longer wait than expected. 1 12. Financial investors tend to be most reluctant to sell stock if: (a) rumors begin circulating that the top manager has accepted a job with a different firm. (b) its current price is significantly less than the price at which they purchased it. (c) they acquire insider information that a firm is experiencing unexpectedly low revenues or unexpectedly high costs. (d) the stock is primarily traded in deep markets. (e) the current price of the stock reflects a significant recent increase. 13. The process by which investment bankers “package” new securities and convey them to the public and then deliver the proceeds (funds) to the issuing entity is known as: (a) underwriting. (b) subordinating. (c) securitization. (d) branding. (e) due diligence. 14. Analysts and brokers employed by investment banks have conflicting interests such that: (a) analysts make less money than brokers so analysts provide brokers with false information. (b) free rider problems force the company to pay analysts more than brokers, creating jealousy and discord. (c) free rider problems are exacerbated when brokers from various firms share privileged information. (d) analysts affect the outcome of brokers, causing brokers to encourage analysts to make the outcome favorable to them. (e) analysts doctor the books to show that research is more profitable to the firm than brokerage operations. 15. Although households or individual employees are ultimately the largest purchasers of capital market securities, they usually buy these securities through financial institutions such as: (a) mutual funds or pension funds. (b) over-the-counter markets. (c) venture capital firms. (d) commercial banks and thrifts. (e) money market. 16. Which of the following best explains differences between brokers and dealers? (a) Brokers are pure middlemen; dealers make markets by standing ready to buy and sell at given prices. (b) Dealers are pure middlemen; brokers make markets by standing ready to buy and sell at given prices. (c) Dealers link up buyers and sellers, but do not stand ready to buy and sell from their inventories of securities; brokers stand ready to buy and sell from their inventories of securities. (d) There is no difference between brokers and dealers. 17. An instruction to a securities agent to buy or sell the security at the current market price is called: (a) a limit order. (b) a market order. (c) a pit order. (d) an option order. 18. To take advantage of an expected decrease in the price of a common stock, an investor would use a: (a) market order. (b) limit order. (c) short sale. (d) margin credit. 19. Transactions costs tend to be reduced when an investment banker arranges the sale of a new securities issue through: (a) a private placement. (b) syndication. (c) the over-the-counter market. (d) public outcry. (e) securitization 20. Regulations designed to protect consumers in their dealings with finance companies include: (a) truth in lending legislation. (b) usury statutes. (c) bankruptcy statutes. (d) all of the above. 21. The most notable exception to “the rule” that financial conglomerates tend to fail is: (a) General Electric Capital Services. (b) Sears. (c) Long Term Capital Management (d) Citigroup. (e) the Travelers group. (f) Xerox. (g) Visa. 22. Pension plan assets tend to be invested primarily in: (a) government securities. (b) corporate bonds. (c) certificates of deposit. (d) stock. 2 49. Instructions to securities agents to immediately sell a security if its price falls to or below a prespecified level are: (a) limit orders. (b) market orders. (c) long orders. (d) option orders. (e) short orders. 50. The earliest examples of finance companies date back to the beginning of the 1800s when retailers offered (a) installment credit to customers. (b) balloon loans to customers. (c) zero- interest loans to customers. (d) all of the above to customers. 51. Most automobile financing is provided by: (a) commercial banks. (b) thrifts. (c) finance companies owned by automobile companies. (d) finance companies owned by real estate brokers. 52. Consumer finance companies can be distinguished from commercial banks because consumer finance companies (a) often accept loans with much higher default risk than banks would. (b) are often wholly owned by a manufacturer that might be willing to offer favorable credit terms to sell products. (c) typically offer lower interest rates to its loan customers than do banks. (d) do all of the above. (e) do only (a) and (b) of the above. 53. Firms might sell accounts receivable to finance companies (a) to obtain quick cash. (b) to avoid the cost of funding a credit department. (c) because they don’t want to spoil their relationships with customers over bill collection hassles. (d) for all of the above reasons. 54. Finance companies are far less regulated than banks and thrifts because (a) its depositors are exclusively large institutional investors. (b) there are no regulations on subsidiaries of a bank holding company. (c) there are no depositors to protect. (d) there are few cases of finance companies failing. (e) the capital-to-total-assets ratio of finance companies is relatively strong compared to that of banks and thrifts. 55. Usury statutes (a) allow consumers to declare bankruptcy while still retaining ownership of many of their assets. (b) require finance companies to disclose the annual percentage rate charged on loans. (c) impose restrictions on finance companies’ ability to collect on delinquent loans. (d) set a ceiling on interest rates that can be charged on finance company loans. (e) only (a) and (b) of the above. 56. The financial intermediaries that typically have portfolios most heavily weighted towards illiquid assets would be: (a) property and casualty insurance companies. (b) life insurance companies. (c) money market mutual funds. (d) commercial banks. (e) credit unions. 57. In an effort to return to profitability, insurance companies have campaigned for limits on insurance payments, particularly for (a) medical malpractice. (b) earthquakes, floods, and other natural disasters. (c) automobile liability. (d) environmental hazards. 58. The Federal Deposit Insurance Corporation Improvement Act of 1991 (a) increased the FDIC’s ability to borrow from the Treasury to deal with failed banks. (b) increased the scope of deposit insurance in several ways. (c) eliminated governmentally-administered deposit insurance. (d) eliminated the upper limit on the amounts of deposits that would be insured. 5 59. Savings and loans lost a total of $10 billion in 1981-1982 due to a combination of rising interest rates in 1979-1982 and the (a) recession of 1981-1982 that reduced real estate prices enough to cause significant loan defaults. (b) tighter regulatory restrictions enacted by Congress in 1981 and 1982. (c) loss of market share to commercial banks that were allowed to compete directly with thrifts in the real estate market. (d) acceleration of inflation in 1981- 1982 that caused thrifts to lose additional funds to money market mutual funds. 60. That taxpayers were poorly served by thrift regulators in the 1980s is now quite clear. This poor performance cannot be explained by (a) regulators’ desire to escape blame for poor performance, leading to a perverse strategy of “regulatory gambling.” (b) regulators’ incentives to accede to pressures from politicians, who sought to keep regulators from imposing tough regulations on major campaign contributors. (c) Congress’s dogged determination to protect taxpayers from the unsound banking practices of managers at many of the nation’s savings and loans. (d) any of the above. 61. “Bureaucratic gambling” refers to the (a) the strategy of thrift managers that they would not be audited by thrift regulators in the 1980s due to relatively weak bureaucratic power of thrift regulators. (b) risk that thrift regulators took in publicizing the plight of the S&L industry in the early 1980s. (c) strategy adopted by thrift regulators of lowering capital requirements and pursuing regulatory forbearance in the 1980s in hopes that conditions in the S&L industry would improve. (d) none of the above. 62. The Federal Home Loan Bank Board and the FSLIC failed in their regulatory tasks and were abolished by the (a) Competitive Equality Banking Act of 1987. (b) Financial Institutions Reform, Recovery and Enforcement Act of 1989. (c) Office of Thrift Supervision. (c) Office of the Comptroller of the Currency. 63. From the 1940s through the early 1980s, the agency that regulated the nation’s savings and loan associations was the (a) Federal Home Loan Bank Board. (b) Office of Thrift Supervision. (c) Resolution Trust Corporation. (d) Comptroller of the Currency. 64. The building of GNMA-guaranteed mortgages into a saleable security (usually for large institutional investors) is an example of: (a) disintermediation. (b) futures bundling. (c) hedge optioning (d) quasi-intermediation. (e) securitization. 65. The driving force behind the securitization of mortgages and automobile loans has been the (a) rising regulatory constraints on substitute financial instruments. (b) desire of mortgage and auto lenders to exit this field of lending. (c) improvement in computer technology. (d) relaxation of regulatory restrictions on credit card operations. 6