Module 4 Honors Quiz >> Financial Markets

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.

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?

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.