REE4204 FINAL EXAM QUESTIONS WITH
VERIFIED ANSWERS
False - ✔✔The maturity mismatch problem faced by many financial
institutions resulted from holding liabilities with much longer lives than their
assets.
False - ✔✔It is impossible for the cash flow on a project to be positive if
the taxable income is negative.
False - ✔✔Removing the rate ceilings on deposits in thrifts in the early 1980s
eliminated the maturity mismatch problem that these institutions had
previously suffered.
false - ✔✔Under the semi-strong form of market efficiency an investor
could earn excess returns using private or inside information.
True - ✔✔Disintermediation is the process of funds flowing out of
financial institutions.
True - ✔✔Favorable financial leverage occurs when the cost of debt is less
than the return on the investment.
False - ✔✔Agents never have incentives to pursue behavior which
is detrimental to their principals.
,False - ✔✔When a residential mortgage is created the mortgagee acquires
a call option which allows the debt to be retired at any time prior to maturity.
True - ✔✔The instrument called hypotheca allowed the lender to
take possession of the property only in the event of default.
True - ✔✔Mortgage bankers came into prominence with the
westward expansion following the Civil War.
True - ✔✔The interest rate risk inherent in a fixed-rate mortgage is the
decrease in value of the mortgage with an increase in market interest rates.
False - ✔✔A bi-weekly amortization mortgage payment is the
monthly payment divided by two.
False - ✔✔Mortgage payments are structured as an ordinary annuity,
meaning that payments fall at the beginning of each period.
True - ✔✔Everything else held constant, an interest-only payment will be
less than a fully amortizing payment.
False - ✔✔The present value of an annuity increases as the discount
rate increases.
, False - ✔✔A prepayment penalty increases the cost of borrowing since
the amount of the penalty is deducted from the borrower's initial proceeds.
8% - ✔✔Under the expectations theory, observed rates on current one-year
and two-year bonds of 4% and 6%, respectively, indicate that the one-year
bond rate one year from now will be between 4% and 6%.
True - ✔✔Under the expectations theory, an upwards sloping yield
curve means that investors expect market rates to rise in the future.
False - ✔✔The market segmentation theory by its nature dictates that
short term rates must always be less than long term rates.
True - ✔✔Default risk is the risk that a bond issuer will be unable to repay
the principal and interest on the debt.
True - ✔✔The yield observed on a riskless bond in a non-
inflationary environment would be the real rate of interest.
True - ✔✔A primary market transaction always involves the original issuer
of the security.
False - ✔✔The term "toxic mortgage debt" in the 2000s referred to
mortgages on properties
contaminated by hazardous waste.
VERIFIED ANSWERS
False - ✔✔The maturity mismatch problem faced by many financial
institutions resulted from holding liabilities with much longer lives than their
assets.
False - ✔✔It is impossible for the cash flow on a project to be positive if
the taxable income is negative.
False - ✔✔Removing the rate ceilings on deposits in thrifts in the early 1980s
eliminated the maturity mismatch problem that these institutions had
previously suffered.
false - ✔✔Under the semi-strong form of market efficiency an investor
could earn excess returns using private or inside information.
True - ✔✔Disintermediation is the process of funds flowing out of
financial institutions.
True - ✔✔Favorable financial leverage occurs when the cost of debt is less
than the return on the investment.
False - ✔✔Agents never have incentives to pursue behavior which
is detrimental to their principals.
,False - ✔✔When a residential mortgage is created the mortgagee acquires
a call option which allows the debt to be retired at any time prior to maturity.
True - ✔✔The instrument called hypotheca allowed the lender to
take possession of the property only in the event of default.
True - ✔✔Mortgage bankers came into prominence with the
westward expansion following the Civil War.
True - ✔✔The interest rate risk inherent in a fixed-rate mortgage is the
decrease in value of the mortgage with an increase in market interest rates.
False - ✔✔A bi-weekly amortization mortgage payment is the
monthly payment divided by two.
False - ✔✔Mortgage payments are structured as an ordinary annuity,
meaning that payments fall at the beginning of each period.
True - ✔✔Everything else held constant, an interest-only payment will be
less than a fully amortizing payment.
False - ✔✔The present value of an annuity increases as the discount
rate increases.
, False - ✔✔A prepayment penalty increases the cost of borrowing since
the amount of the penalty is deducted from the borrower's initial proceeds.
8% - ✔✔Under the expectations theory, observed rates on current one-year
and two-year bonds of 4% and 6%, respectively, indicate that the one-year
bond rate one year from now will be between 4% and 6%.
True - ✔✔Under the expectations theory, an upwards sloping yield
curve means that investors expect market rates to rise in the future.
False - ✔✔The market segmentation theory by its nature dictates that
short term rates must always be less than long term rates.
True - ✔✔Default risk is the risk that a bond issuer will be unable to repay
the principal and interest on the debt.
True - ✔✔The yield observed on a riskless bond in a non-
inflationary environment would be the real rate of interest.
True - ✔✔A primary market transaction always involves the original issuer
of the security.
False - ✔✔The term "toxic mortgage debt" in the 2000s referred to
mortgages on properties
contaminated by hazardous waste.
