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Module 4 Honors Quiz >> Financial Markets

Module 4 Honors Quiz >> Financial Markets

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1. Why must we consider psychological factors when speaking about housing prices?

  • Applying certain psychological factors can increase a portfolio’s risk.
  • Psychologists have developed mathematical formulas to accurately forecast housing prices.
  • Without psychological factors, a larger percentage of real estate prices would be determined by construction costs.
  • People behave in very predictable ways, so it is possible to make a lot of money by investing in real estate.

2. Select TWO important actions of the Federal Housing Administration.

  • Require loans to be at least 15 years.
  • Impose a sharp tax on real estate.
  • Insure lenders against losses
  • Guarantee employment for home-owners.

3. Which of the following definitions are correct? (check all that apply)

  • Fixed rate mortgages are mortgages where the interest rate does not change over time.
  • An adjustable rate mortgage (ARM) does not have a fixed interest rate, but increases gradually over time.
  • Shared Appreciation Mortgages (SAMs) require you to pay some percentage of the appreciation of your house.
  • Price Level Adjusted Mortgage (PLAMs) are adjusted to inflation.

4. Which of the following started happening to CDOs in 2007?

  • Defaults started to affect the highest tranche
  • CDOs replaced CMOs for mortgages.
  • CDOs had to be bailed out by the government
  • AAA tranches were re-rated to be of similar risk to the lowest tranche.

5. Why are banks incentivized to offer Qualifying Residential Mortgages (QRMs)?

  • Banks are usually in the business of initiating but not keeping mortgages, but QRMs are high enough quality that banks would want to keep them.
  • QRMs are mortgages that are unlikely to default, so by offering them, banks can ensure that they will not lose large amounts of money from defaults.
  • The government forces banks to offer them if they want to offer any kind of mortgage.
  • Banks are usually in the business of initiating but not keeping mortgages, so offering QRMs allows them to sell them all to a CMO.

6. Which of the following is NOT in practice a problem with regulation?

  • Regulation can cause a monopoly if only one company can keep up with the expenses of complying with the regulations.
  • A lot of money is lost on paperwork for complying with regulations.
  • It may be possible to bribe corrupt regulators.
  • Companies may be disincentivized to grow beyond a certain size to avoid extra regulations.

7. Which of the following correctly describes a type of hedge fund? (check all that apply)

  • 3c1 hedge funds can take no more than 99 investors, each of whom must have an income of at least $200,000 or investable assets of at least $1,000,000.
  • 3c3 hedge funds can take up to 999 investors, each of whom must be an individual with a net worth of at least $10,000,000 or an organization with a net worth of at least $100,000,000.
  • 3c7 hedge funds can take up to 500 investors, each of whom must be an individual with a net worth of at least $5,000,000 or an organization with a net worth of at least $25,000,000.
  • 3c8 hedge funds can take no more than 50 investors, each of whom must have an income of at least $200,000 or investable assets of at least $5,000,000.

8. Which is NOT true about Generally Accepted Accounting Principles (GAAP)?

  • They are used for EDGAR.
  • It invented the concept of Earnings Before Interest, Taxes, Depreciation, and Amortization (EBIT)
  • They are defined by the Financial Accounting Standards Board (FASB)
  • It maintains official definitions of “net income” and “operating income”,

9. What is rating shopping?

  • Banks only ask low-integrity rating services to rate mortgages.
  • Banks tell rating services the rating they wanted before it was rated.
  • Banks ask several mortgage rating services what their rating will be on a mortgage, and then pick the best rating.
  • Banks stop caring about the rating anymore as long as they can find someone to buy it.

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