投资学英文第7版Test Bank答案 chap001.doc

Chapter 1 The Investment EnvironmentMultiple Choice Questions1.In 2005, _ was the most significant real asset of U. S. nonfinancial businesses in terms of total value. A)equipment and software B)inventory C)real estate D)trade credit E)marketable securities Answer: C Difficulty: Easy Rationale: See Table 1.4.2.In 2005, _ was the least significant real asset of U. S. nonfinancial businesses in terms of total value. A)equipment and software B)inventory C)real estate D)trade credit E)marketable securities Answer: B Difficulty: Easy Rationale: See Table 1.4.3.In 2005, _ was the least significant liability of U. S. nonfinancial businesses in terms of total value. A)bonds and mortgatges B)bank loans C)inventories D)trade debt E)marketable securities Answer: B Difficulty: Easy Rationale: See Table 1.4.4.In 2005, _ was the most significant financial asset of U. S. nonfinancial businesses in terms of total value. A)cash B)trade credit C)trade debt D)inventory E)marketable securities Answer: B Difficulty: Easy Rationale: See Table 1.4.5.The material wealth of a society is equal to the sum of _. A)all financial assets B)all real assets C)all financial and real assets D)all physical assets E)none of the above Answer: B Difficulty: Easy Rationale: Financial assets do not directly contribute the productive capacity of the economy.6._ of an investment bank. A)Citigroup is an example B)Merrill Lynch is an example C)Goldman is an exampleD)B and C are each examplesE)Each of the above is an example Answer: E Difficulty: Easy 7._ are financial assets. A)Bonds B)Machines C)Stocks D)A and C E)A, B and C Answer: D Difficulty: Easy Rationale: Machines are real assets; stocks and bonds are financial assets.8.An example of a derivative security is _. A)a common share of General Motors B)a call option on Mobil stock C)a commodity futures contract D)B and C E)A and B Answer: D Difficulty: Easy Rationale: 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.9._ was the first to introduce mortgage pass-through securities. A)Chase Manhattan B)Citicorp C)FNMA D)GNMA E)None of the above Answer: D Difficulty: Easy 10.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 Answer: E Difficulty: Easy Rationale: Unbundling is one of many examples of financial engineering that offer more alternatives to the investor.11.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 Answer: E Difficulty: Easy Rationale: 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.12.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 Answer: A Difficulty: Easy Rationale: The agency problem describes potential conflict between management and shareholders. The other problems are those of firm management only.13._ financial asset(s). A)Buildings are B)Land is a C)Derivatives are D)U. S. Agency bonds are E)C and D Answer: E Difficulty: Easy Rationale: A and B are real assets.14.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 Answer: A Difficulty: Easy Rationale: Of the factors cited above, only A affects the value of the derivative and/or is a true statement.15.In terms of total value, the most significant liability of U. S. nonfinancial businesses in 2005 was _. A)bank loans B)bonds and mortgages C)trade debt D)other loans E)marketable securities. Answer: B Difficulty: Easy Rationale: See Table 1.4.16.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 Answer: E Difficulty: Easy Rationale: 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. See page 18.17._ are a way U. S. investor can invest in foreign companies. A)ADRs B)IRAs C)SDRs D)GNMAs E)Krugerrands Answer: A Difficulty: Easy Rationale: Only ADRs represent an indirect investment in a foreign company.18._ are examples of financial intermediaries. A)Commercial banks B)Insurance companies C)Investment companies D)Credit unions E)All of the above Answer: E Difficulty: Easy Rationale: All are institutions that bring borrowers and lenders together.19.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. Answer: E Difficulty: Easy Rationale: 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.20.Firms that specialize in helping companies raise capital by selling securities are called _. A)commercial banks B)investment banks C)savings banks D)credit unions E)all of the above. Answer: B Difficulty: Easy Rationale: An important role of investment banks is to act as middlemen in helping firms place new issues in the market.21.Financial assets _. A)directly contribute to the country's productive capacity B)indirectly contribute to the country's productive capacity C)contribute to the country's productive capacity both directly and indirectly D)do not contribute to the country's productive capacity either directly or indirectly E)are of no value to anyone Answer: B Difficulty: Easy Rationale: Financial assets indirectly contribute to the country's productive capacity because these assets permit individuals to invest in firms and governments. This in turn allows firms and governments to increase productive capacity.22.The sale of a mortgage portfolio by setting up mortgage pass-through securities is an example of _. A)credit enhancement B)securitization C)unbundling D)derivatives E)none of the above Answer: B Difficulty: Easy Rationale: The financial asset is secured by the mortgages backing the instrument.23.Corporate shareholders are best protected from incompetent management decisions by A)the ability to engage in proxy fights. B)management's control of pecuniary rewards. C)the ability to call shareholder meetings. D)the threat of takeover by other firms. E)one-share / one-vote election rules. Answer: D Difficulty: Moderate Rationale: Proxy fights are expensive and seldom successful, and management may often control the board or own significant shares. It is the threat of takeover of underperforming firms that has the strongest ability to keep management on their toes.24.The national net worth of the U. S. in 2005 was _. A)$15.411 trillion B)$26.431 trillion C)$42.669 trillion D)$55.651 trillion E)$70.983 trillion Answer: C Difficulty: Moderate Rationale: See Table 1.2.25.In 2005, _ of the assets of U. S. households were financial assets as opposed to tangible assets. A)20.4% B)34.2% C)60.7% D)71.7% E)82.5% Answer: C Difficulty: Moderate Rationale: See Table 1.1.26.Investment bankers perform the following role(s) _. A)market new stock and bond issues for firms B)provide advice to the firms as to market conditions, price, etc C)design securities with desirable properties D)all of the above E)none of the above Answer: D Difficulty: Easy Rationale: Investment bankers perform all of the roles described above for their clients.27.Theoretically, takeovers should result in _. A)improved management B)increased stock price C)increased benefits to existing management of taken over firm D)A and B E)A, B, and C Answer: D Difficulty: Easy Rationale: Theoretically, when firms are taken over, better managers come in and thus increase the price of the stock; existing management often must either leave the firm, be demoted, or suffer a loss of existing benefits.28.Important trends changing the contemporary investment environment are A)globalization. B)securitization. C)information and computer networks. D)financial engineering. E)all of the above Answer: E Difficulty: Easy Rationale: All of these are examples of important trends in the contemporary investment environment.29.The means by which individuals hold their claims on real assets in a well-developed economy are A)investment assets. B)depository assets. C)derivative assets D)financial assets. E)exchange-driven assets Answer: D Difficulty: Easy Rationale: Financial assets allocate the wealth of the economy. Book example: it is easier for an individual to own shares of an auto company than to own an auto company directly.30.Which of the following financial assets makes up the greatest proportion of the financial assets held by U.S. households? A)pension reserves B)life insurance reserves C)mutual fund shares D)debt securities E)personal trusts Answer: A Difficulty: Moderate Rationale: See Table 1.1.31.Which of the following are mechanisms that have evolved to mitigate potential agency problems?I) compensation in the form of the firm's stock optionsII) hiring bickering family members as corporate spiesIII) underperforming management teams being forced out by boards of directorsIV) security analysts monitoring the firm closelyV) 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 Answer: C Difficulty: Moderate Rationale: All but the second option have been used to try to limit agency problems.32.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. Answer: B Difficulty: Easy Rationale: See Table 1.3.33.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 Answer: B Difficulty: Moderate Rationale: III is not correct because the bank no longer owns the mortgage investments.34.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. Answer: D Difficulty: Easy Rationale: 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.35.A WEBS security 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. Answer: E Difficulty: Moderate Rationale: WEBS (World Equity Benchmark Shares) allow investors to trade portfolios of foreign stocks in a selected country. They can be traded by investors in secondary markets (Amex) and allow U.S. investors to diversify their portfolios of foreign stocks.36.During the period between 2000 and 2002, a large number of scandals were uncovered. Most of these scandals were related toI) 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 Answer: E Difficulty: Moderate Rationale: I, II, and III are all mentioned as causes of recent scandals.37.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. Answer: C Rationale: A is a desired characteristic. B is not necessarily a good or bad thing in and of itself. C creates an