A. pension reserves
B. life insurance reserves
C. mutual fund shares
D. debt securities
E. personal trusts
See Table 1.1.
Difficulty: Moderate
36. Which of the following are mechanisms that have evolved to mitigate potential agency problems?
I) compensation in the form of the firm's stock options
II) hiring bickering family members as corporate spies
III) underperforming management teams being forced out by boards of directors
IV) security analysts monitoring the firm closely
V) takeover threats
A. II and V
B. I, III, and IV
C. I, III, IV, and V
D. III, IV, and V
E. I, III, and V
All but the second option have been used to try to limit agency problems.
Difficulty: Moderate
37. Commercial banks differ from other businesses in that both their assets and their liabilities are mostly
A. illiquid.
B. financial.
C. real.
D. owned by the government.
E. regulated.
See Table 1.3.
Difficulty: Easy
38. Which of the following is true about GNMA pass-throughs?
I) They aggregate individual home mortgages into heterogeneous pools.
II) The purchaser of a GNMA receives monthly interest and principal payments received from payments made on the pool.
III) The banks that originated the mortgages maintain ownership of them.
IV) The banks that originated the mortgages continue to service them.
A. II, III, and IV
B. I, II, and IV
C. II and IV
D. I, III, and IV
E. I, II, III, and IV
III is not correct because the bank no longer owns the mortgage investments.
Difficulty: Moderate
39. Although derivatives can be used as speculative instruments, businesses most often use them to
A. attract customers.
B. appease stockholders.
C. offset debt.
D. hedge.
E. enhance their balance sheets.
Firms may use forward contracts and futures to protect against currency fluctuations or changes in commodity prices. Interest-rate options help companies control financing costs.
Difficulty: Easy
40. An ETF
A. limits the diversification potential of investors who hold it.
B. may be traded only in the primary market.
C. is linked directly to the value of a composite index of futures contracts.
D. must be earned as a performance bonus within a corporation rather than purchased.
E. tracks the performance of an index of share returns for a particular country or industry sector.
ETFs allow investors to trade portfolios in the secondary markets.
Difficulty: Moderate
41. A country ETF
A. invests in real estate in the country.
B. invests in small country businesses.
C. is linked directly to the value of a composite index of commodity futures contracts.
D. is not very popular and is only used by speculators.
E. tracks the performance of an index of share returns for a particular country.
Country ETFs allow investors to trade portfolios that mimic foreign indices in the secondary markets.
Difficulty: Moderate
42. During the period between 2000 and 2002, a large number of scandals were uncovered. Most of these scandals were related to
I) Manipulation of financial data to misrepresent the actual condition of the firm.
II) Misleading and overly optimistic research reports produced by analysts.
III) Allocating IPOs to executives as a quid pro quo for personal favors.
IV) Greenmail.
A. II, III, and IV
B. I, II, and IV
C. II and IV
D. I, III, and IV
E. I, II, and III
I, II, and III are all mentioned as causes of recent scandals.
Difficulty: Moderate
43. A disadvantage of using stock options to compensate managers is that
A. it encourages mangers to undertake projects that will increase stock price.
B. it encourages managers to engage in empire building.
C. it can create an incentive for mangers to manipulate information to prop up a stock price temporarily, giving them a chance to cash out before the price returns to a level reflective of the firms true prospects.
D. all of the above.
E. none of the above.
A is a desired characteristic. B is not necessarily a good or bad thing in and of itself. C creates an agency problem.