C. a commodity futures contract
D. B and C
E. A and B
The values of B and C are derived from that of an underlying financial asset; the value of A is based on the value of the firm only.
Difficulty: Easy
15. _______ was the first to introduce mortgage pass-through securities.
A. Chase Manhattan
B. Citicorp
C. FNMA
D. GNMA
E. None of the above
GNMA introduced mortgage pass through securities in 1970.
Difficulty: Easy
16. A bond issue is broken up so that some investors will receive only interest payments while others will receive only principal payments, which is an example of ________.
A. bundling
B. credit enhancement
C. unbundling
D. financial engineering
E. C and D
Unbundling is one of many examples of financial engineering that offer more alternatives to the investor.
Difficulty: Easy
17. An example of a primitive security is __________.
A. a common share of General Motors
B. a call option on Mobil stock
C. a call option on a stock of a firm based in a Third World country
D. a U.S. government bond
E. A and D
A primitive security's return is based only upon the earning power of the issuing agency, such as stock in General Motors and the U.S. government.
Difficulty: Easy
18. The ____________ refers to the potential conflict between management and shareholders due to management's control of pecuniary rewards as well as the possibility of incompetent performance by managers.
A. agency problem
B. diversification problem
C. liquidity problem
D. solvency problem
E. regulatory problem
The agency problem describes potential conflict between management and shareholders. The other problems are those of firm management only.
Difficulty: Easy
19. _________ financial asset(s).
A. Buildings are
B. Land is a
C. Derivatives are
D. U.S. Agency bonds are
E. C and D
A and B are real assets.
Difficulty: Easy
20. The value of a derivative security _______.
A. depends on the value of the related primitive security
B. can only cause increased risk.
C. is unrelated to the value of the related primitive security
D. has been enhanced due the recent misuse and negative publicity regarding these instruments
E. is worthless today
Of the factors cited above, only A affects the value of the derivative and/or is a true statement.
Difficulty: Easy
21. Money market funds were a financial innovation partly inspired to circumvent _______.
A. Regulation B, which is still in existence
B. Regulation D
C. DIDMCA
D. Regulation M
E. Regulation Q, which is no longer in existence
Regulation Q limited the amount of interest that banks could pay to depositors; money market funds were not covered by Regulation Q and thus could pay a higher rate of interest. Although Regulation Q no longer exists, money market funds continue to be popular.
Difficulty: Easy
22. __________ are a way U.S. investor can invest in foreign companies.
A. ADRs
B. IRAs
C. SDRs
D. GNMAs
E. Krugerrands
Only ADRs represent an indirect investment in a foreign company.
Difficulty: Easy
23. _______ are examples of financial intermediaries.
A. Commercial banks
B. Insurance companies
C. Investment companies
D. Credit unions
E. All of the above
All are institutions that bring borrowers and lenders together.
Difficulty: Easy
24. Financial intermediaries exist because small investors cannot efficiently ________.
A. diversify their portfolios
B. gather all relevant information
C. assess credit risk of borrowers
D. advertise for needed investments
E. all of the above.
The individual investor cannot efficiently and effectively perform any of the tasks above without more time and knowledge than that available to most individual investors.
Difficulty: Easy