Principles of Finance

Please answer the following 25 Multiple Choice Questions. Please tell me in one or two sentences the economic rationale for picking a particular answer.

1. Subprime mortgages always require:

a. credit checks for potential borrowers
b. income verification
c. 30 year fixed rates
d. Federal Reserve approval
e. Balloon Payments
f. None of the Above

2. Which banking trend is credited with producing Economies of Scale and Economies of Scope ?

a. Globalization
b. Consolidation
c. Re-unification
d. Financial Disintermediation
e. Growth of Off-Shore Banking Centers
f. Creation of the European Union

3. Eurodollars include which of the following:

a. Deposits by Europeans in American banks
b. Dollar deposits in foreign banks or in U.S. branches of foreign banks
c. Dollars printed in Europe by the Bank of England
d. Dollars in Asian banks
e. Dollars in the Bank of China in New York
f. b,d and e

4. Options contracts are considered:

a. Unilateral contracts
b. Must be exercised by the buyer
c. Must be performed by the option's writer if exercised by the buyer
d. Obligatory for both buyer and seller
e. Both a and c
f. Exclusive right to sell agreements

5. Money Market Mutual Funds were created to:

a. Aid the small investor to obtain higher rates of interest
b. Side step Regulation Q
c. Pool the funds of many investors
d. Provide an alternative to savings passbook accounts
e. Catch the rising interest rates in the short-term money market
f. All of the Above

6. The "Credit Crunch" had the following macroeconomic effect:

a. Decline in mortgage approval rate
b. Lower velocity of money
c. Decline in the unemployment rate
d. Increase in residential real estate sales
e. Rise in the federal funds rate
f. Both a and b

7. The buyer of a call option:

a. Has the right, but not the obligation, to buy an asset at a pre-determined price during a specific period of time
b. Has the right to sell the option before the expiration date
c. Has the right to do nothing at all
d. May sue the options' writer for non-performance
e. May consult a financial advisor
f. All of the above

8. The process of Underwriting Securities refers to:

a. Investment bank activity in the IPO market
b. Open Pit Trading at the Chicago Mercantile Exchange
c. Writing a Prospectus for a Money Market Mutual Fund
d. Creating a Power Point Presentation for a shareholders' meeting
e. Obtaining financing for start-up companies
f. Hedge Fund investments

9. Junk Bonds :

a. Cannot be sold before maturity
b. Are considered insider trading instruments
c. Are often used for leveraged buyouts
d. Must be purchased directly from the company
e. Carry a D rating
f. Are never included in an investor's portfolio

10. Municipal Bonds:

a. Can be General Obligation or Revenue bonds
b. May be subject to default
c. Have tax advantages
d. May be sold prior to maturity
e. Are long-term debt instruments
f. All of the Above

11. Repos or Repurchase Agreements refer to:

a. The towing of your car for payment default
b. A sale of securities in the money market and their re-purchase at a higher price
c. A means by which banks can borrow short-term
d. Both b and c
e. Stock buy back agreements for top managers
f. Rent to Own real estate contracts

12. The term "fallen angels" refers to:

a. CEOs who lost their jobs during the Great Recession
b. Once prosperous companies who cannot repay their debts
c. Companies forced to answer charges from the SEC in court
d. Financiers such as Madoff and Milken who were jailed
e. Municipal Bond defaults
f. Unprofitable revenue bond projects

13. The Glass-Steagall Act prohibited:

a. States from printing their own money
b. Commercial banks from owning Investment banks
c. Banks from borrowing from the Federal Reserve
d. Banks from opening branches in foreign countries
e. The U.S. government from running a deficit
f. American citizens from investing abroad

14. The advantage of Zero coupon bonds is that they:

a. Are issued with a 0% coupon attached
b. Are purchased at a discounted price from their face value
c. Are issued only by municipalities and have tax advantages
d. Are perpetuities which create a never-ending income stream
e. Are insured by the FDIC
f. None of the Above

15. The decline of Regulation Q was prompted by:

a. The creation of Money Market Mutual Funds
b. The rise in premiums in the insurance industry
c. The ceiling for bank interest rates
d. The Savings and Loan Crisis
e. Both a and c
f. The growth of credit unions

16. An issuer would exercise the call provision of its corporate bond:

a. Only on the first of January in the year of maturity
b. When interest rates fall
c. When interest rates rise
d. When the bond matures
e. When new corporate bonds are issued
f. When the Board of Directors has its annual meeting

17. When would a municipality need to issue TANs and BANs ?

a. To bridge a short-term financial deficit
b. To wait for tax revenues to be received
c. To finance a long-term water tunnel project
d. To finance a three year highway expansion
e. Both a and b
f. None of the Above

18. The role of Arbitrageurs includes:

a. Yearly reports to the Security and Exchange Commission on the nature of
their activities
b. Buying and Selling both futures contracts and the underlying assets
c. Helping to establish equilibrium between the prices of the underlying assets
and the futures contracts
d. Facilitating interest rate swaps between competing banks
e. Both b and c
f. Co-ordinating information on the creditworthiness of business borrowers

19. Interest Rate Swaps:

a. Are a contract between counterparties
b. Contain a fixed rate payer and a floating rate payer
c. Are also called Jumbo CDs
d. Are exchanged for fixed rate mortgages
e. Both a and b
f. Are arranged through Letters of Credit

20. Whole Life Insurance policies :

a. Carry variable premiums which increase with age
b. Build up cash reserves which a policyholder can access
c. Are the same as term life policies
d. Are the creation of Actuaries
e. Are the same as an Annuity
f. Are required as a 401(k) investment

21. With an Open-end Mutual Fund, shareholders:

a. May purchase additional shares at any time directly from the fund
b. May not redeem their shares through the fund
c. May never purchase additional shares
d. Have the same advantages as with closed-end funds
e. Will incur redemption penalties
f. Will never pay a brokerage commission

22. 401(k) Retirement Plans:

a. Are an example of defined contribution plans
b. Are the same as Keogh plans
c. Allow the employee investment choices
d. Do not depend on asset performance
e. Both a and c
f. Require the approval of a certified financial advisor

23. Venture Capital Funds:

a. Provide seed money for start-up companies
b. Are actively traded on the major stock exchanges of the world
c. Are always registered with the SEC
d. Are funded by wealthy individuals
e. Both a and d
f. Are continuously monitored by the Federal Reserve

24. Private Placements are best employed as a source of:

a. Funds for small and mid-size companies
b. To Supplement the income of retirees
c. To Replace Social Security or Disability payments
d. To Create an environmental superfund reserve
e. Income in the Portfolios of small investors
f. To serve bankers' biggest customers

25. Restrictive Covenants in a loan contract:

a. Allow the borrower to use the money in any way he/she chooses
b. Allow the borrower to submit un-audited financial statements
c. May prohibit certain business activities for the borrower
d. Allow the co-mingling of funds among all company managers
e. May never be re-negotiated
f. May force a proxy vote at a shareholder meeting