Before the financial crisis, mortgage-backed securities were considered to be very safe investments. Later, the underlying risks associated with these securities were fully realized, and they were found to be much riskier than initially thought. What impact does this new information have on the demand for these assets? A. Quantity demand did not change B. Quantity demand declined C. Quantity demand increased

Before the financial crisis, mortgage-backed securities were considered to be very safe investments. Later, the underlying risks associated with these securities were fully realized, and they were found to be much riskier than initially thought. What impact does this new information have on the demand for these assets? A. Quantity demand did not change B. Quantity demand declined C. Quantity demand increased

Cornerstones of Financial Accounting

4th Edition

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

ChapterA2: Investments

Section: Chapter Questions

Problem 3MCQ

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Question 2: State whether the following statements are true or false. 6. Hedging is an investment to reduce the risk of adverse price movements in an asset. ( ) 7. The limitation of CAPM is beta does not remain stable over time. ( ) 8. Interest on debts is an expense deducted before tax, which contributes to reducing the cost of deb. ( ) 9. When investors become more risk-averse will lead the required rate of return to increase. ( ) 10. Ahmed has a bond with a par value of OMR (1000). he sold it at OMR (1100), which means a market interest rate is equal to the coupon rate of the bond. ( )
Which of the following statements is correct? A. Investors appreciate illiquid assets in their portfolios as they can easily sell them off to cover margin calls. B. Liquid assets can quickly be converted into cash without changing prices too much. O C. Corporate bonds are among the most liquid financial assets as they trade at a very high frequency. D. Liquid assets tend to be cheaper as investors are not willing to pay for their liquidity benefits.
When market rates of interest rise after a fixed-rate security is purchased, the value of the now-below-market, fixed-interest payments declines, so the market value of the investment falls. How would that drop in fair value be reflected in the investment account for a security classified as HTM? Would your answer change if the drop in fair value was due to worsened financial conditions at the investee?
Financial advisors generally recommend that their clients allocate more to higher risk–return asset classes (like equities) if their investment horizons are long. Is this advice consistent with the basic M-V model? Does adding a shortfall constraint to the M-V model make a difference? If so, how? If not, why not? Assuming investment opportunities change over time, what type of asset return behavior would justify this advice within the M-V framework?
financial risk management fill in the blacks with correct answer. Interest rate risk is the potential for investment (....loss/gain..........). that result from a change in the interest rates. If interest rate (rise/fall)..., for instance, the value of the bond or fixed-income instrument will decline.
Which of the following is TRUE about liquidity? a. All assets should be put in liquid asset so that it is easy to use when necessary b. In most of the cases, the more liquid asset provides the lower return c. Investors should not care about liquidity in order to have a balanced portfolio investment d. Liquidity requirement does not have any impact on the return.
In a study on the time behavior of a financial assets it was found that people continued to trade even when the price of the asset equalled its fundamental value. In the same study it was also found that there was increased trading in the asset at a time when the the price of the asset was trending consistently in one direction. What could be the possibly explanation using behavioral finance?
Present value of an amount lesser than its value that is to be received (paid) in the future because of what reason? a.Deflation causes investors to lose purchasing power when their pesos are invested for greater than one year. b.Investors have the opportunity to earn positive rates of return, so any amount invested today should grow to a larger amount in the future. c.Investments generally are not as good as those who sell them suggest, so investors usually are not willing to pay full face value for such investments, thus the price is discounted. d.Because investors are taxed on the income received from investments they never will buy an investment for the amount expected to be received in the future. e.None of the choices is a correct answer.
The efficient markets hypothesis True or False: The efficient markets hypothesis holds only if all investors are rational. False True Almost all financial theory and decision models assume that the financial markets are efficient. The informational efficiency of financial markets determines the ability of investors to “beat” the market and earn excess (or abnormal) returns on their investments. If the markets are efficient, they will react rapidly as new relevant information becomes available. Financial theorists have identified three levels of informational efficiency that reflect what information is incorporated in stock prices. Identify the form of capital market efficiency under the efficient market hypothesis described in the following statement: Current market prices reflect all information contained in past price movements. This statement is consistent with: Strong form efficiency Semistrong form efficiency Weak form efficiency…
Why is the present value of an amount lesser than its value that is to be received (paid) in the future? a.Deflation causes investors to lose purchasing power when their pesos are invested for greater than one year. b.Investors have the opportunity to earn positive rates of return, so any amount invested today should grow to a larger amount in the future. c.Investments generally are not as good as those who sell them suggest, so investors usually are not willing to pay full face value for such investments, thus the price is discounted. d.Because investors are taxed on the income received from investments they never will buy an investment for the amount expected to be received in the future. e.None of the choices is a correct answer.
Applying the capital asset pricing model requires that one find appropriate inputs for the risk-free rate, the market rate of return (and market risk premium), and beta. Why is beta, in particular, difficult to pin down? a. People don't have ready access to financial data and won't have any source for this information in the near future. b. The major internet sources of financial data are notoriously unreliable. c. Hackers have been known to manipulate financial data for their own purposes. d. People must rely on historical performance information, and they have to assume that historical relationships continue into the future.
Explain these three 1. PURCHASING POWER RISK - is perhaps, more difficult to recognize than the other types of risk. It is easy to observe the decline in the price of a stock or bond, but it is often more difficult to recognize that the purchasing power of the return you have earned on investment has declined (risen) as a result of inflation (deflation). 2. INTEREST RATE RISK - Because money has time value, fluctuations in interest rates will cause the value of an investment to fluctuate also. Although interest rate risk is most commonly associated with bond price movements, rising interest rates cause bond prices to decline and declining interest rates cause bond prices to rise. 3. BUSINESS RISK - refers to the uncertainty about the rate of a return caused by the nature of the business. The most frequently discussed causes of business risk are uncertainty about the firm's sales and operating expenses.