Ch1_Bodie

Student: ___________________________________________________________________________

1.

Net worth represents _____ of the Liabilities and Net Worth of nonfinancial U.S. businesses. A. B. C. D. About 55% Over 90% Under 10% About 30%

2.

Real assets in the economy include all but which one of the following? A. B. C. D. Land Buildings Knowledge Common stock

3.

Net worth represents _____ of the Liabilities and Net Worth of Commercial Banks. A. B. C. D. About 50% About 90% About 10% About 30%

4.

According to the Flow of Funds Accounts of the United States, the largest asset of U.S. households is ____. A. B. C. D. Mutual fund shares Real estate Pension reserves Corporate equity

5.

According to the Flow of Funds Accounts of the United States, the largest liability of U.S. households is ____. A. B. C. D. Mortgages Consumer credit Bank loans Gambling debts

6.

____ is not a derivative security. A. B. C. D. A share of common stock A call option A futures contract All of the above are derivative securities

7.

According to the Flow of Funds Accounts of the United States, the largest financial asset of U. S. households is _____. A. B. C. D. Mutual fund shares Corporate equity Pension reserves Personal trusts

8.

Active trading in markets and competition among securities analysts helps ensure that I. Security prices approach informational efficiency II. Riskier securities are priced to offer higher potential returns III. Investors are unlikely to be able to consistently find under- or over-valued securities A. B. C. D. I only I and II only II and III only I, II and III

9.

The material wealth of society is determined by the economy's __________, which is a function of the economy's __________. A. B. C. D. Investment bankers, financial assets Investment bankers, real assets Productive capacity, financial assets Productive capacity, real assets

10. Which of the following is not a money market security? A. B. C. D. U.S. Treasury bill Six month maturity certificate of deposit Common stock Bankers acceptance

11. __________ assets generate net income to the economy and __________ assets define allocation of income among investors. A. B. C. D. Financial, financial Financial, real Real, financial Real, real

12. Which of the following are financial assets? I. Debt securities II. Equity securities III. Derivative securities A. B. C. D. I only I and II only II and III only I, II and III

13. __________ are examples of financial intermediaries. A. B. C. D. Commercial banks Insurance companies Investment companies All of the answers are financial intermediaries

14. Asset allocation refers to the __________. A. B. C. D. Allocation of the investment portfolio across broad asset classes Analysis of the value of securities Choice of specific assets within each asset class None of the answers define asset allocation

15. Which one of the following best describes the purpose of derivatives markets? A. B. C. D. Transferring risk from one party to another Investing for a short time period to earn a small rate of return Investing for retirement Earning interest income

16. __________ was the first to introduce mortgage pass-through securities. A. B. C. D. Chase Manhattan Citicorp FNMA GNMA

17. Security selection refers to the ____ A. B. C. D. Allocation of the investment portfolio across broad asset classes Analysis of the value of securities Choice of specific securities within each asset class Top down method of investing

18. _____ is an example of an agency problem A. B. C. D. Managers engage in empire building Managers protect their jobs by avoiding risky projects Managers over consume luxuries such as corporate jets All of the answers provide examples of agency problems

19. _____ is a mechanism to mitigate potential agency problems A. B. C. D. Tying income of managers to success of the firm Directors defending top management Anti takeover strategies Straight voting method of electing the board of directors

20. __________ are real assets. A. B. C. D. Bonds Production equipment Stocks Commercial paper

21. __________ portfolio construction starts with selecting attractively priced securities. A. B. C. D. Bottom-up Top-down Upside-down Side-to-side

22. In a capitalist system capital resources are primarily allocated by _____________. A. B. C. D. Governments The SEC Financial markets Investment bankers

23. A __________ represents an ownership share in a corporation. A. B. C. D. Call option Common stock Fixed-income security Preferred stock

24. The value of a derivative security __________. A. B. C. D. Depends on the value of its related primitive security Affects the value of its related primitive security Is unrelated to the value of its related primitive security Can only be integrated by calculus professors

25. A bond issue is broken up so that some investors will receive interest payments while others will receive principal payments. This is an example of __________. A. B. C. D. Bundling Credit enhancement Securitization Unbundling

26. __________ portfolio management calls for holding diversified portfolios without spending effort or resources attempting to improve investment performance through security analysis. A. B. C. D. Active Idiotic Passive Market timing

27. Financial markets allow for all but which one of the following? A. B. C. D. Shift consumption through time from higher income periods to lower Price securities according to their riskiness Higher stock of real assets in the economy Allow most participants to routinely earn high returns with low risk

28. Financial intermediaries exist because small investors cannot efficiently __________. A. B. C. D. Diversify their portfolios Gather information Monitor their portfolios All of the answers provide reasons why

29. Methods to encourage managers to act in shareholders best interest include I. Threat of takeover II. Proxy fights for control of the Board of Directors III. Tying managers compensation to stock price performance A. B. C. D. I only I and II only II and III only I, II and III

30. Firms that specialize in helping companies raise capital by selling securities to the public are called __________. A. B. C. D. Pension funds Investment banks Savings banks REITs

31. In securities markets, there should be a risk-return trade-off with higher-risk assets having__________ expected returns than lower-risk assets. A. B. C. D. Higher Lower The same Cant tell from the information given

32. __________ are an indirect way U.S. investors can invest in foreign companies. A. B. C. D. ADRs IRAs SDRs CPCs

33. Security selection refers to __________. A. B. C. D. Choosing specific securities within each asset-class Deciding how much to invest in each asset-class Deciding how much to invest in the market portfolio versus the riskless asset Deciding how much to hedge

34. An example of a derivative security is __________. A. B. C. D. A common share of General Motors A call option on Intel stock A Ford bond A U.S. Treasury bond

35. __________ portfolio construction starts with asset allocation. A. B. C. D. Bottom-up Top-down Upside-down Side-to-side

36. Which one of the following firms falsely claimed to have a $4.8 billion bank account at Bank of American and vastly understated its debts, eventually resulting in the firms bankruptcy? A. B. C. D. WorldCom Enron Parmalat Global Crossing

37. Debt securities promise __________. I. a fixed stream of income II. a stream of income that is determined according to a specific formula III. a share in the profits of the issuing entity A. B. C. D. I only I or II only I and III only II or III only

38. The Sarbanes-Oxley Act tightened corporate governance rules by requiring all but which one of the following? A. B. C. D. Required corporations to have more independent directors Required the CFO to personally vouch for the corporations financial statements Required that firms could no longer employ investment bankers to sell securities to the public The creation of a new board to oversee the auditing of public companies

39. The success of common stock investments depends on the success of __________. A. B. C. D. Derivative securities Fixed income securities The firm and its real assets Government methods of allocating capital

40. The rate of return on the stock market in its best year, 1933, was __________ while in. Its worst year, 1931, the rate of return was __________ A. B. C. D. 43%, -54% 43%, -43% 54%, -54% 54%, -43%

41. The average rate of return on common stocks of large firms since 1926 was __________. A. B. C. D. 8% 9% 12% 13%

42. An example of a real asset is __________. I. a college education II. customer goodwill III. a patent A. B. C. D. I only II only I and III only I, II and III

43. The 2002 law designed to improve corporate governance is titled the A. B. C. D. Pension Reform Act ERISA Financial Services Modernization Act Sarbanes-Oxley Act

44. Which of the following is not a financial intermediary? A. B. C. D. A mutual fund An insurance company A real estate brokerage firm A savings and loan company

45. The combined liabilities of American households represent approximately __________ percent of combined assets. A. B. C. D. 11% 18% 24% 32%

46. In 2006 real assets represent approximately __________ percent of the total asset holdings of American households. A. B. C. D. 40% 42% 48% 55%

47. In 2006 financial assets represent approximately___________ percent of total asset holdings of American households. A. B. C. D. 37% 45% 58% 60%

48. Liabilities equal approximately _____ of total assets for nonfinancial U.S. businesses. A. B. C. D. 10% 25% 45% 75%

49. Which of the following is not an example of a financial intermediary? A. B. C. D. Salomon Smith Barney Allstate Insurance First Interstate Bank General Motors

50. Real assets represent about ____ of total assets for financial institutions. A. B. C. D. 1% 15% 25% 40%

51. Money Market securities are characterized by _________. I. maturity less than one year II. safety of the principle investment III. low rates of return A. B. C. D. I only I and II only I and III only I, II and III

52. After much investigation an investor finds that Intel stock is currently under priced. This is an example of A. B. C. D. Asset allocation Security analysis Top down portfolio management Passive management

53. After considering current market conditions an investor decides to place 60% of their funds in equities and the rest in bonds. This is an example of A. B. C. D. Asset allocation Security analysis Top down portfolio management Passive management

54. Suppose an investor is considering one of two investments which are identical in all respects except for risk. If the investor anticipates a fair return for the risk of the security they invest in they can expect to A. B. C. D. Earn no more than the Treasury bill rate on either security Pay less for the security that has higher risk Pay less for the security that has lower risk Earn more if interest rates are lower

55. The efficient markets hypothesis suggests that ________ A. Active portfolio management strategies are the most appropriate investment strategies B. Passive portfolio management strategies are the most appropriate investment strategies C. Either active or passive strategies may be appropriate, depending on the expected direction of the market D. A bottom up approach is the most appropriate investment strategy 56. In a perfectly efficient market the best investment strategy is probably a/an A. B. C. D. Active strategy Passive strategy Asset allocation Market timing

57. An important trend that has changed the contemporary investment market is __________. A. B. C. D. Financial engineering Globalization Securitization All three of the other answers

58. Unbundling refers to the creation of new securities by __________. A. B. C. D. Selling individual cash flows of a security or loan Repackaging individual cash flows of a security or loan into a new payment pattern Taking an illiquid asset and converting it into a marketable security Selling financial services overseas as well as in the U.S.

59. You discover a treasure chest of $5 billion in cash. A. B. C. D. This is a real asset This makes you wealthier This makes society wealthier This is a real liability

60. Individuals may find it more advantageous to purchase claims from a financial intermediary rather than directly purchasing claims in capital markets because I. intermediaries are better diversified than most individuals II. intermediaries can exploit economies of scale in investing that individual investors cannot III. intermediated investments usually offer higher rates of return than direct capital market claims A. B. C. D. I only I and II only II and III only I, II and III

61. Surf City Software Company develops new surf forecasting software. It sells the software to Microsoft in exchange for 1000 shares of Microsoft common stock. Surf City Software has exchanged a _____ asset for a _____ asset in this transaction. A. B. C. D. Real, real Financial, financial Real, financial Financial, real

62. Stone Harbor Products takes out a bank loan. It receives $100,000 and signs a promissory note to pay back the loan over 5 years. A. B. C. D. A new financial asset was created in this transaction A financial asset was traded for a real asset in this transaction A financial asset was destroyed in this transaction A real asset was created in this transaction

63. Which of the following firms was not engaged in a major accounting scandal between 2000 and 2005? A. B. C. D. AT&T Parmalat Tyco WorldCom

64. Accounting scandals can often be attributed to a particular concept in the study of finance known as the A. B. C. D. Agency problem Risk / Return trade off Investment horizon Accounting cycles

65. An intermediary that pools and manage funds for many investors is called a/an A. B. C. D. Investment company Savings and loan Investment banker ADR

66. Financial institutions that specialize in assisting corporations in primary market transactions are called A. B. C. D. Mutual funds Investment bankers Pension funds Globalization specialists

67. WEBS allow investors to A. B. C. D. Invest in U.S. mortgage backed securities Invest in an individual foreign stock Invest in a portfolio of foreign stocks Avoid any exposure to foreign exchange risk

68. The commonly used phrase to describe the separation between investment bankers and stock analysts in the same firm is often called the A. B. C. D. Auditor independence Chinese wall Full disclosure process Independent process

69. The inability of shareholders to influence the decisions of managers, despite overwhelming shareholder support, is a breakdown in what process or mechanism? A. B. C. D. Auditing Public finance Corporate governance Public reporting

70. According to data reported during the Hewlett-Packard / Compaq proxy fight, approximately what percentage of public firms face proxy fights? A. B. C. D. 1% 10% 20% 50%

71. According to data reported during the analysts scandals, approximately what percentage of firms were assigned sell recommendations by Wall Street stock analysts? A. B. C. D. 2% 10% 20% 50%

72. A major cause of the analysts scandals on Wall Street was the heavy emphasis placed on __________________________ by investment bankers. A. B. C. D. Long term reputations Public opinion Short term profits Stock prices

73. In 2006 the greatest dollar amount of securitization occurred for which type loan? A. B. C. D. Home mortgages Credit card debt Automobile loans Equipment leasing

74. The process of securitizing poor quality bank loans made to developing nations resulted in the creation of ______________. A. B. C. D. Pass-throughs Brady bonds WEBS FHLMC participation certificates

75. _______________ allow participants to post buy and sell quotes and directly trade securities among investors without using an intermediary such as a securities dealer. A. B. C. D. ECNs ADRs Online brokers Full service brokers

76. U.S. Treasury bonds pay interest every six months and repay the principle at maturity. The U.S. Treasury routinely sells individual interest payments on these bonds to investors. This is an example of ____________. A. B. C. D. Unbundling Bundling Securitization Security selection

77. An investment advisor has decided to purchase gold, real estate, stocks, and bonds in equal amounts. This decision reflects which part of the investment process? A. B. C. D. Asset allocation Investment analysis Portfolio analysis Security selection

Ch1_Bodie Key
1. A 2. D 3. C 4. B 5. A 6. A 7. C 8. D 9. D 10. C 11. C 12. D 13. D 14. A 15. A 16. D 17. C 18. D 19. A 20. B 21. A 22. C 23. B 24. A 25. D 26. C 27. D 28. D 29. D 30. B 31. A 32. A

33. A 34. B 35. B 36. C 37. B 38. C 39. C 40. D 41. C 42. D 43. D 44. C 45. B 46. A 47. D 48. C 49. D 50. A 51. D 52. B 53. A 54. B 55. B 56. B 57. D 58. A 59. B 60. B 61. C 62. A 63. A 64. A 65. A 66. B 67. C

68. B 69. C 70. A 71. A 72. C 73. A 74. B 75. A 76. A 77. A

Ch1_Bodie Summary
Category Bodie - Chapter 01 Difficulty: Easy Difficulty: Hard Difficulty: Medium Difficulty: Moderate # of Questions 77 33 9 34 1