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Unformatted text preview: II, and IV Answer: B Difficulty: Moderate
Rationale: III is not correct because the bank no longer owns the mortgage investments. A)
E) 34 Although derivatives can be used as speculative instruments, businesses most often use them to
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.
E) 35 A WEBS security
limits the diversification potential of investors who hold it.
may be traded only in the primary market.
is linked directly to the value of a composite index of futures contracts.
must be earned as a performance bonus within a corporation rather than purchased.
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. T hey 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 to
IV) Manipulation of financial data to misrepresent the actual condition of the firm.
Misleading and overly optimistic research reports produced by analysts.
Allocating IPOs to executives as a quid pro quo for personal favors.
E) II, III, and IV
I, II, and IV
II and IV
I, III, and IV
I, II, and III Answer: E Difficulty: Moderate
Rationale: I, II, and III are all mentioned as causes of recent scandals. A)
E) 37 A disadvantage of using stock options to compensate managers is that
it encourages mangers to undertake projects that will increase stock price.
it encourages managers to engage in empire building.
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.
all of the above.
none of the above. A)
E) 38 In 2005, ____________ was the most significant real asset of U. S. households in terms of total value.
mutual fund shares
bank loans Answer: C
Rationale: A is a desired characteristic. B is not necessarily a good or bad thing in and of itself. C creates an agency problem.
_x000C_ Answer: C Difficulty: Easy
Rationale: See T able 1.1. A)
E) 39 T he largest component of domestic net worth in 2005 was ____________.
non-residential real estate
residential real estate
equipment and software Answer: B Difficulty: Moderate
Rationale: See T able 1.2. A)
E) 40 A fixed-income security pays ____________.
a fixed level of income for the life of the owner
a fixed level of income for the life of the security
a variable level of income for owners on a fixed income
a fixed or variable income stream at the option of the owner
none of the above Answer: B Difficulty: Easy
Rationale: Only answer B is correct. A)
E) 41 Money market securities ____________.
are short term
pay a fixed income
are highly marketable
generally very low risk
all of the above Answer: E Difficulty: Easy
Rationale: All answers are correct.
E) 42 Financial assets permit all of the following except ____________.
allocation of risk
separation of ownership and control
elimination of risk
all of the above Answer: D Difficulty: Moderate
Rationale: Financial assets do not allow risk to be eliminated. However, they do permit allocation of risk, consumption timing, and separation of ownership and control....
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This document was uploaded on 02/06/2014.
- Spring '14