Question 1

An adjustable-rate mortgage (ARM)has an interest rate that is usually adjusted annually to reflect changes in Treasury bill rates (or other benchmark);ARMs typically have variable interest rates for one to five years with a provision to switch to a fixed-rate over the remaining life of the ARM.

Accepted Answer

This statement accurately describes the features of an adjustable-rate mortgage.

Question 2

An adjustable-rate mortgage (ARM)has an interest rate that is usually adjusted every five years to reflect changes in Treasury bill rates (or other benchmark);ARMs typically have variable interest rates over the 30 year life of the loan.

Accepted Answer

The answer of An adjustable-rate mortgage (ARM)has an interest rate...

Question 3

A credit rating indicates the expected likelihood that a borrower will miss interest or principal payments and possibly default on the debt obligation in the form of a loan,mortgage,or bond.

Accepted Answer

A credit rating is a measure of creditworthiness based on an assessment of the borrower's ability to repay debt. It is designed to gauge the risk of default by considering factors such as financial history, income, and collateral. The higher the credit rating, the lower the risk of default and the more attractive the borrower is to lenders.

Question 4

Securitization is the process of pooling and packaging mortgage loans into debt securities.

Accepted Answer

Securitization involves bundling mortgage loans together and creating mortgage-backed securities (MBS) that can then be traded as debt securities on the secondary market.

Question 5

The principle of finance that " higher returns are expected for taking on less risk " implies that rational investors would choose only safe investment because they generally do not feel that a higher return enough to justify taking greater risk.

Accepted Answer

The principle of finance actually implies that investors would be willing to take on more risk in order to achieve higher returns, but they would still demand compensation (in the form of higher returns) for the additional risk they are taking on. So, rational investors would not necessarily choose only safe investments, but they would carefully assess the risks and potential returns of different investments before making a decision.

Question 6

The principle of finance that "financial markets are inefficient in pricing securities" implies that the prices of securities reflect all information available to the public and that when new information becomes available,prices quickly change to reflect that information.

Accepted Answer

The principle of finance that "financial markets are inefficient in pricing securities" suggests that there may be opportunities for investors to identify mispriced securities and earn abnormal returns. This principle implies that prices of securities may not always reflect all available information, and that it may take time for prices to adjust to new information.

Question 7

A credit score is a number that indicates the creditworthiness or likelihood that a borrower will make loan payments when due

Accepted Answer

This is the correct definition of a credit score. It is a numerical representation of a borrower's creditworthiness and predicts their ability to make loan payments on time.

Question 8

The principle of finance that "reputation sometimes matters" implies that businesses do not necessarily require the trust and confidence of their customers,employees,and owners,as well as the community and society within which they operate,to be successful.

Accepted Answer

The principle of finance that "reputation sometimes matters" actually suggests that businesses do require the trust and confidence of their customers, employees, owners, and the community and society within which they operate to be successful. A good reputation can enhance a company's brand and attract more customers, while a bad reputation can lead to loss of business and damage the company's bottom line. Therefore, businesses should prioritize building and maintaining a positive reputation.

Question 9

The principle of finance that "management objectives may differ from owner objectives" implies that owner returns may suffer as a result of manager objectives.

Accepted Answer

This principle recognizes that managers may prioritize their own interests over those of the owners, potentially leading to lower returns for the owners.

Question 10

The principle of finance that "financial markets are efficient in pricing securities" implies that the prices of securities reflect all information available to the public and that when new information becomes available,prices quickly change to reflect that information.

Accepted Answer

This principle is known as "efficient market hypothesis" and is widely accepted in finance theory. It suggests that it is not possible to consistently outperform the market by using publicly available information as it is already reflected in security prices. However, the degree of efficiency of financial markets can vary depending on the level of information transparency and market participant behavior.

Question 11

While the financial press chooses to highlight examples of unethical behavior,most individuals exhibit sound ethical behavior in their personal and business dealings and practices.

Accepted Answer

While there are certainly instances of unethical behavior in the business world, the majority of individuals conduct themselves ethically in their personal and professional lives. It is important to avoid painting all individuals with the same brush based on the actions of a few.

Question 12

A mortgage-back security is an investment created by using a mortgage as collateral for a loan.

Accepted Answer

A mortgage-backed security is an investment that is created by pooling together a group of mortgages and selling shares of this pool to investors, not by using a mortgage as collateral for a loan.

Question 13

The principle of finance that "reputation matters" implies that for institutions or businesses to be successful,they must have the trust and confidence of their customers,employees,and owners,as well as the community and society within which they operate.

Accepted Answer

The statement is true. The reputation of an institution or business is important in gaining the trust and confidence of stakeholders, including customers, employees, owners, and the wider community. A good reputation can lead to increased profitability and sustainability in the long run.

Question 14

The principle of finance that "management objectives may differ from owner objectives" implies that owner returns may be enhanced as a result of manager objectives that differ from their own.

Accepted Answer

This principle suggests that owners and managers may have different objectives, such as managers seeking to increase their own salaries or job security while owners prioritize maximizing profits. If managers' actions result in higher profits or other benefits for the company, owners may indirectly benefit as well, even if their own objectives were not aligned with those of the managers.

Question 15

A mortgage-back security is an investment created by using a house as collateral for a loan.

Accepted Answer

A mortgage-backed security is an investment created by pooling together a group of mortgages and selling shares of the income generated from those mortgages to investors. It is not created by using a single house as collateral for a loan.

Question 16

A mortgage-back security is a debt security created by pooling together a group of mortgage loans whose periodic payments belong to the holders of the security.

Accepted Answer

A mortgage-backed security is created by pooling together a group of mortgage loans and then selling bonds that are backed by the payments received from those loans. These bonds are then sold to investors who receive periodic payments based on the cash flows generated by the mortgage loans.

Question 17

During the past couple of decades,generally high fixed-rate mortgage loan interest rates and the desire to extend housing ownership to more individuals in the U.S. ,the use of adjustable-rate mortgages grew in usage.

Accepted Answer

The statement accurately describes the trend in the usage of adjustable-rate mortgages in the U.S. during the past couple of decades.

Question 18

During the past couple of decades,generally low fixed-rate mortgage loan interest rates and the desire to extend housing ownership to more individuals in the U.S. ,the use of adjustable-rate mortgages fell.

Accepted Answer

This statement is incorrect. The use of adjustable-rate mortgages actually increased during the past couple of decades, alongside the use of fixed-rate mortgages.

Question 19

Securitization is the process of securing a mortgage through the purchase of insurance.

Accepted Answer

Securitization is the process of pooling together a group of mortgages and selling them as a securities investment to investors. It does not involve the purchase of insurance.

Question 20

Credit ratings are prepared by government organizations on individuals,financial institutions,business firms,and government entities.

Accepted Answer

The answer of Credit ratings are prepared by government organizations...

Quiz 1: The Financial Environment