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					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
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
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
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
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.

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
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.

23. Moral hazard on the part of a firm’s executives will be most problematic to buyers of the
    firm’s: (a) products. (b) preferred stock. (c) collateralized loans. (d) common stock.(e)
24. Venture capital firms are usually organized as: (a) open-ended mutual funds or nonprofit
    businesses. (b) close-ended mutual funds or limited partnerships. (c) sole proprietorships or
    corporations. (d) municipal REITs or as state agencies for local economic development.
25. Any financial investor able to use fully-owned assets with relatively low total value to
    control assets with significantly higher total value is said to be highly: (a) suspect. (b)
    leveraged. (c) mortgaged. (d) speculative. (e) arbitraged.
26. The portion of the registration statement that potential buyers legally must be given a before
    they can invest in a new security is called a: (a) prospectus. (b) proxy statement. (c) fiduciary
    warrant. (d) verification certificate. (e) collateral selection instrument.
27. Long term corporate bonds that were once investment grade but which have dropped to
    ratings to Baa or worse are called: (a) tombstones. (b) fallen angels. (c) suppositories. (d)
    dead puppies. (e) insecurities. (f) speculatories. (g) junk bonds.
28. Futures contracts are regularly traded on the: (a) Chicago Board of Trade (b) New York
    Stock Exchange. (c) Chicago Board of Options Exchange. (d) American Stock Exchange. (e)
    Philadelphia Board of Securities.
29. The price specified in an option contract at which the holder can buy or sell the underlying
    asset is called the exercise price or the: (a) premium. (b) call price. (c) strike price. (d) put
    price. (e) derivative price.
30. The process of transforming previously less liquid financial assets into more liquid capital
    market securities is known as: (a) commercialization. (b) sleigh riding. (c) securitization. (d)
    liquefying. (e) hedging. (f) portfolio exfoliation.
31. Principal-agent problems become a more significant threat to the interests of potential
    financial investors when: (a) the market price of a stock surges above the strike price of an
    option to buy the stock. (b) pension funds and insurance companies engage in private
    placements of new securities issues. (c) mergers and acquisitions are a major source of
    revenue for an investment banking firm. (d) the Federal Open Market Committee (FOMC)
    meets in secret to determine future directions for monetary policy. (e) researchers in an
    investment banking firm are influenced by deal-making in the investment banking division.
32. When the price of the underlying financial instrument is below the exercise price of a call
    option, the option is said to be: (a) out of the money. (b) a katzenjammer. (c) in the money.
    (d) notational principal. (e) dead on the money. (f) ripe for a put.
33. Options are contracts that give the purchasers the (a) option to buy or sell an underlying
    asset. (b) obligation to buy or sell an underlying asset. (c) right to hold an underlying asset.
    (d) right to switch payment streams.
34. A financial contract that obligates one party to exchange a set of payments it owns for
    another set of payments owned by another party is called a: (a) cross hedge. (b) cross call
    option. (c) cross put option. (d) swap. (e) cross-hedge.

35. Unlike forward financial transactions, spot transactions in financial instruments: (a) are
    immediately consummated. (b) exacerbate interest rate risk. (c) worsen default risk. (d)
    facilitate hedging to reduce exchange risk. (e) theoretically permit perfect option pricing to
    eliminate all risk, but not all uncertainty.
36. Promising the future delivery of an asset not currently possessed by the seller is known as:
    (a) speculative gambling. (b) selling long. (c) buying long. (d) buying short. (e) betting the
    house. (f) selling short.
37. Insurance companies’ attempts to minimize adverse selection and moral hazard explain
    which of the following insurance practices? (a) Collection of information and screening of
    potential policyholders. (b) Risk-based premiums. (c) Deductibles and coinsurance. (d)
    Cancellation of insurance. (e) All of the above.
38. Liabilities that are partially, but not fully, rate-sensitive include: (a) checkable deposits. (b)
    federal funds. (c) non-negotiable CDs. (d) fixed-rate mortgages. (e) money market deposit
39. An investment pool is formed: (a) to manipulate the market by spreading false rumors. (b) to
    lower brokerage fees by combining security purchases. (c) to share investment advice among
    member investors. (d) to take advantage of tax breaks introduced by the 1933 and 1934
    securities acts.
40. A list of financial derivatives would not appropriately include: (a) common stock. (b) futures.
    (c) options. (d) swaps. (e) forward contracts.
41. A contract that requires the investor to buy securities on a future date is called a: (a) short
    contract. (b) long contract. (c) hedge. (d) cross.
42. A short contract requires that the investor: (a) sell securities in the future. (b) buy securities
    in the future. (c) hedge in the future. (d) close out his position in the future.
43. Relative to futures contracts, forward contracts do not suffer from the problem of : (a) a lack
    of liquidity. (b) a lack of flexibility. (c) the difficulty of finding a counterparty. (d) default
44. If you sold a short contract on financial futures, you hope interest rates : (a) rise. (b) fall.(c)
    are stable. (d) fluctuate.
45. The elimination of riskless profit opportunities in the futures market is referred to as : (a)
    speculation. (b) hedging. (c) arbitrage. (d) open interest. (e) mark to market.
46. The agency responsible for regulation of the futures exchanges and trading in financial
    futures is the: (a) Commodity Futures Trading Commission. (b) Securities Exchange
    Commission. (c) Federal Board of Trade. (d) none of the above.
47. The futures markets have grown rapidly in recent years because: (a) interest rates are less
    volatile. (b) technology has lowered transaction costs. (c) financial managers are more risk
    averse. (d) shareholders are more risk averse.
48. Futures differ from forwards because they are: (a) used to hedge portfolios. (b) used to hedge
    individual securities. (c) used in both financial and foreign exchange markets. (d)
    standardized contracts.

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
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.

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.


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