Q&A Hero

Q: A stock purchased at $40 at the beginning of the year paid $10 in dividends and was sold for a net price of $42 at the end of the year. The total annual return is a. 25% b. 100% c. 30% d. 40% e. 12%

Q: The household sector is the largest surplus sector and invests in the capital market a. directly by purchasing stocks and bonds. b. directly by issuing assets payable in the capital market. c. indirectly through mutual funds and pension funds d. both a and c

Q: Which of the following statements is not true? a. Electronically linking equity dealers and exchange markets is slowly leading toward a national market system. b. Electronically linking international markets has created 24-hour trading opportunities for some stocks. c. U. S. stock exchanges have extended (after hours) their normal trading hours in which shares are traded electronically, linking U. S. with the hours of international markets. d. All of the above statements are true.

Q: Which of the following isnot true about American Depository Receipts (ADRs)? a. ADRs are claims issued by U.S. financial intermediaries (FIs) against shares in foreign companies, with the shares held in custody by the FIs for investors. b. ADRs are issued in the U.S. and are denominated in U.S. dollars. All cash flows to the investor are in dollars. c. An ADR enhances a company's visibility, status and profile in the U.S. and internationally among investors. d. An ADR decreases the foreign firm's U.S. liquidity (and potentially total global issuer liquidity).

Q: A shareholder in a troubled corporation is not likely to lose his/her a. money invested in the stock. b. house. c. dividends declared. d. par value.

Q: Regulators provide a valuable function for the capital markets because they a. try to keep the market participants honest. b. try to prevent excessive speculation from destabilizing the market. c. make sure all pertinent information about publicly traded securities is disclosed. d. all of the above

Q: Security exchanges provide a valuable function in that they a. create interest in stocks. b. increase the marketability of securities. c. provide a legal way to gamble. d. supply money to deficit spending units. e. both a and d

Q: Which of the following terms is not associated with common stock? a. contractual b. residual c. ownership d. limited liability

Q: The term shareholder equity means a. a right to dividends. b. a contractual relationship with a corporation. c. an ownership claim. d. a prior claim on income and assets.

Q: The capital market is allocationally efficient if a. funds are channeled to their most productive use. b. market makers such as dealers and brokers are making reasonable, not excessive rates of return. c. only if informational and operational market efficiencies are high. d. both a and c.

Q: In a board of directors election for five directors and straight voting, a majority group of shareholders will elect a. four directors. b. five directors. c. four or five depending on how the cumulative voters vote. d. the same proportional share of directors as their ownership share.

Q: Investors with 30 per cent of the voting stock of a corporation, interested in a seat on the board of directors, had better have __________ voting privileges. a. straight b. cumulative c. proxy d. limited

Q: Which of the following is not associated with characteristics of common stock? a. residual claim on income and assets b. proxy c. cumulative dividends d. dual-class stock

Q: If the stock markets are semi-strong efficient, stock prices reflect all historic and current public information about a firm but prices do not reflect inside information.

Q: Preferred stockholders have a claim junior to common stock but senior to bondholders.

Q: A proxy is an absentee ballot that allows a representative to vote on behalf of the stockholder.

Q: Equity capital can be raised through the money market and the NYSE bond market.

Q: Systematic risk can be significantly reduced through diversification.

Q: Among financial institutions, mutual funds are the largest holders of corporate equity securities.

Q: Shelf registration permits a corporation to register several types of security issues and sell them at once.

Q: Convertible preferred stock can be exchanged into common stock at a predetermined ratio.

Q: A publicly traded company issuing additional shares of common stock does it through an IPO.

Q: The market rate of return on a $100 par value preferred stock, priced at $90, paying an $8.00 annual dividend, is 8 per cent.

Q: A stock which is expected to pay a $4 dividend next year, growing constantly at 6%, and is priced to yield a required return of 18% must be selling for $33.33.

Q: Preferred stockholders have the same voting rights as common shareholders.

Q: The underwriter's spread is inversely related to the size of the primary offering.

Q: A market with breadth has a large number of diverse investors.

Q: Diversification attempts to lower or eliminate the unsystematic risk of a portfolio of securities.

Q: At NYSE, limit orders are usually entered into the specialist's limit order book.

Q: A wide spread between the bid and ask quotes of a security dealer may represent weak operational market efficiency.

Q: The New York Stock Exchange is an example of a secondary market.

Q: Limited liability of stockholders protects them from losses on their stock portfolio.

Q: Stock with betas less than one tend to have more price variability than the market.

Q: Primary capital market securities provide marketability and possibilities for investors to alter the riskiness of their portfolios.

Q: The secondary market for capital market securities is important because it provides funds directly to deficit spending units.

Q: The NASDAQ is a stock exchange.

Q: The Dow Jones Industrial Average is a price-weighted index.

Q: In July 2006, Forrest purchased a town house at $325,000 and paid 25% down. The mortgage that he obtained is a 30-year fixed-rate with an annual percentage interest rate of 5.75%. In July 2011, due to the fall of interest rate, he decided to refinance and obtained a mortgage at a 5.1% annual interest rate for 25 years. After he refinanced, how many dollars of cash out-flow per month he could reduce from the new payment schedule?

Q: Mortgages are now originated, funded, serviced, and insured by different parties. What developments are associated with this unbundling of loan cash flows in recent years?

Q: List three ways in which a change in the rate of an adjustable-rate mortgage can affect the borrower's mortgage.

Q: Why do mortgage-backed securities guaranteed by Federal government agencies often have yields above U.S. Treasury bond rates?

Q: Explain the ways in which the federal government fostered the development of the secondary mortgage markets.

Q: Commercial banks and mortgage pools recently overtook thrift institutions as major investors in mortgages. List and discuss several factors responsible for this change.

Q: Which one of the following entities is an government agency overseeing housing mortgage services? a. a GNMA b. b FNMA c. c FHLMC d. d FHFA

Q: Formosan Freedom Co. purchased an office at newly built World Trade Center at $2,812,500. The Company obtained a 30 year fixed rate mortgage at a 7.2% annual rate and pay 20% down. After five years, the Company has excess cash and decides to pay off the remaining balance. Due to several QEs in the past years, the Company can obtain a mortgage of annual interest rates at 7%. How much must the Company pay to retire the mortgage (to the nearest dollar)? a. a $2,225,330 b. b $2,122,426 c. c $2,015,678 d. d $1,999,998

Q: You purchase a house at $331,250 and pay 20% down. The 15-year mortgage is fixed- rate 6.25% annually. In addition to the principle and interest paid, you must pay 0.1% of the house purchasing price per month into an escrow account for insurance and taxes. What is the total monthly payment (to the nearest dollar)? a. a $2,272 b. b $2,603 c. c $2,557 d. d $2,707

Q: You purchase a house at $255,000 and pay 20% down. You obtain a 30-year fixed rate mortgage in which the annual interest rate is 5.85%. What is your monthly payment? a. $1,215.27 b. $1,203.48 c. $1,194.45 d. $1,367.22

Q: Which of the following statements about FHA and VA mortgages is false? a. They are insured by the government. b. They charge for their insurance. c. They have low down payments. d. The borrower is protected in case of default.

Q: Which of the following statements about balloon payment mortgages is not true? a. It is a traditional loan where interest is paid until the time when the principal is due. b. Terms can be 3, 5 or 7 years. c. Loan is amortized over 15 or 30 year period so that monthly payments are no different than an FRM of equal maturity. d. Rate is variable over the contract term. e. All of the above statements are true.

Q: Which of the following istrue aboutreverse annuity mortgages (RAMs)? a. RAMs allow homeowners to borrow against the equity on their homes at low rates. b. Typically obtained by older people whose home loans have been paid off, but can use income of the real estate investment they own. c. Typical term is no more than 20 years and could be for borrower's lifetime as an annuity. d. Homeowners' equity declines by amount borrowed. e. All of the above are true.

Q: Which of the following isnot true aboutconstruction-to-permanent mortgages? a. Bridge financing is provided by lender over the time frame required by the borrower to purchase land and construct the house. b. Both interest and principal payments are made until construction is completed. c. Loan is financed in increments as construction payments have to be made. d. On completion of the construction, loan balance is rolled over into the type of mortgage contract desired by borrower.

Q: Which of the following isnot true about interest-only mortgages? a. Low payments in initial years (10 to 15 years) " only includes interest on borrowed amount. b. Low payments in initial years (10 to 15 years) " only includes principal repayment on borrowed amount. c. After initial period, payments increase such that entire loan amount is amortized by the end of 30 years. d. None of the above is true.

Q: Mortgage rates, relative to other capital market rates, a. tend to vary with other rates. b. tend to be higher than Treasury bond rates. c. are becoming more uniform across the country. d. all of the above.

Q: Mortgage bankers are most likely to be involved in the _______ of a mortgage contract. a. origination b. funding c. servicing d. insuring

Q: Mortgage bankers usually donot a. permanently fund mortgages b. originate mortgages c. service mortgages d. collect monthly payments from borrowers

Q: Which of the following is associated with determining the creditworthiness of a mortgage borrower? a. income stability b. job stability c. prior credit history d. all of the above

Q: Which of the following is associated with a loosening of mortgage credit standards? a. Increased down payments. b. Increased loan/value ratios. c. Decreased in maximum total debt to income ratios d. Increased required use of mortgage insurance e. All of the above

Q: Which of the following is not associated with tightened mortgage credit standards? a. More time on the current job required. b. An increase in the required loan/value ratio. c. A decrease in the maximum total debt payments per month per amount of monthly income. d. Decreased maximums in the payment/income ratio of borrowers.

Q: Unlike noncallable corporate bonds, mortgages have _______ risk. a. default b. interest rate c. prepayment d. both a and c

Q: A prepayment option on a mortgage is similar to a _______ option on a bond. a. put b. call c. conversion d. default

Q: Mortgages with government or private mortgage insurance a. are likely to sell at lower prices and lower rates than comparable conventional mortgages. b. are less likely to default that conventional mortgages. c. offer the investor less default risk than conventional mortgages. d. will be written under the credit standards of the originator, and not the standards of the agency or insurance company.

Q: As interest rates rise, the value of PO strips _______ and the value of IO strips _______. a. decreases; increases b. increases; decreases c. does not change; decreases d. decreases; decreases e. increases; increases

Q: An investor in a first-level CMO tranche with claims on a pool of mortgages is likely to a. have a much higher risk position than lower level tranches. b. have more certain returns and less default-risk exposure. c. wait until all tranches are paid before receiving a return. d. have lower risk but a much more varied return than lower level tranches.

Q: Which of the following statements is true? a. All fixed-rate mortgages have interest rate caps. b. All adjustable-rate-mortgages have interest rate caps. c. An interest rate cap on a mortgage reduces the lender's interest rate risk exposure. d. Usually, an annual interest rate cap on a mortgage is 5%, and a lifetime cap is 1- 2%. e. Both a and b are true.

Q: Interest rate caps on mortgage loans a. limit the size of the increase in the loan rate in any year. b. limit the size of the increase in the loan rate over the life of the loan. c. are required on all ARMs. d. both a and b e. all of the above

Q: Whichof the followingis not an advantage of investing in mortgage-backed bonds (MBBs) compared to investing in direct mortgages? a. MBBs are issued in standard denominations. b. MBBs are issued by individuals with limited credit experience. c. MBBs are usually insured and highly collateralized. d. MBBs have cash flow returns similar to corporate bonds.

Q: The original purpose of the Federal Home Loan Mortgage Corporation (Freddie Mac) was to a. make home loans to low income individuals. b. purchase the conventional mortgages from thrift institutions. c. purchase the insured conventional mortgages from financial institutions. d. purchase the government insured mortgages from thrift institutions.

Q: An ARM has a 5/1 cap (i.e., the rate cannot increase more than 1 percent per year and 5 percent over the life of the mortgage). What will the mortgage rate be after three years if the initial rate is 5%, and interest rates increase by 2% in each of the first three years of the contract? a. 6% b. 7% c. 8% d. 9% e. 10%

Q: The Tax Reform Act of 1986 increased the popularity of home equity lines of credit because a. tax deductibility of interest for homeowners was reduced. b. interest incurred under home equity lines was made tax deductible, but interest on other household financing was not. c. banks and savings and loans were given tax incentives to make home equity lines of credit. d. the law reduced the rates charged on home equity loans.

Q: Hybrid ARMs would be preferred by borrowers a. seeking a rate lower than comparable fixed rates. b. who may be selling their home soon. c. seeking a fixed payment for a few years. d. all of the above.

Q: Hybrid ARMs protect both lender and borrower from interest rate risk because a. the mortgage payment stays fixed for a time before it begins to vary with interest rates. b. hybrid ARMs guarantee the lender a fixed return and borrowers a fixed payment for the life of the contract. c. rates and house payments will vary quite frequently. d. these mortgages are insured by the FHA.

Q: Mortgage-backed securities often have payment patterns that are "doubly convex," which means a. the contract is very complex. b. that significant changes in the level of interest rates, up and down, produces losses for the investor. c. that conventional mortgages have double the default risk than other types of mortgages. d. that investors are exposed to both interest rate risk and default risk.

Q: Amortizing a mortgage loan means that a. a long-term is converted to a short-term loan. b. the equity in the house declines as the loan is paid down. c. the loan is repaid in equal, consecutive payments. d. interest is paid first entirely, and then the principal

Q: Like other capital market segments, mortgage markets a. bring together borrowers and suppliers of long-term funds. b. are always secured by the pledge of real property. c. are characterized by small, risky borrowers. d. issued in standard denominations. e. all of the above

Q: Which of the following statements about REMIC securities is false? a. REMIC securities provide tax-free income to investors. b. REMIC securities provide level cash flows similar to CMOs. c. REMIC securities may be backed by pass-through securities issued by FHLMC or FNMA. d. The Tax Reform Act of 1986 encouraged the use of REMICs.

Q: What is most likely to happen to an ARM in a decreasing rate environment? a. The borrower's payments will increase. b. The maturity of the loan will be extended. c. The principal of the loan will increase. d. The borrower's payments will decrease.

Q: Which of the following is not used to adjust ARM rates? a. Treasury security rates b. Dow Jones Mortgage Rate Index c. S&L cost of funds index d. current fixed-rate mortgage index e. LIBOR

Q: A savings and loan writing ARMs and expecting mortgage interest rates to decrease in the future would want a. an interest rate "cap" on their loans. b. a second mortgage on the home. c. to lengthen the "adjusting" time period. d. no limits on the variability of the rates.

Q: If you put 30 percent down on a home costing $150,000 with a 25-year, 9% loan,what is the remaining balance on the mortgage after five years? a. $ 81,450 b. $100,666 c. $ 79,097 d. $84,000 e. $ 97,936

Q: What will be the amount of interest paid in the first month if you put 30 percent down on a home costing $150,000 with a 25-year, 9% loan? a. $881.16 b. $702.32 c. $787.50 d. $726.31 e. $583.33