Lesson #10 Quiz :Financial Markets (Financial Markets) answer 2025

Question 1

Which of the following is FALSE of Direct Participation Programs (DPPs)?

❌ They may skip corporate profits tax.
❌ A major example of a DPP is a real estate partnership.
❌ They are for accredited investors only.
✅ They must operate for at least some minimum amount of time.

Explanation:
DPPs (like real estate partnerships) often pass income directly to investors and may avoid corporate tax. There is no mandatory minimum operating time, making that statement false.

Question 2

If Sabine is “under water”, what does this mean?

✅ The value of her home is less than the value of her mortgage.
❌ She does not have enough money to make payments on her home.
❌ She has abandoned her house.
❌ She must declare bankruptcy.

Explanation:
“Underwater” means negative equity—the mortgage balance exceeds the home’s market value.

Question 3

Why does the 30-year mortgage rate closely match the 10-year Treasury bond YTM?

❌ Similar psychological causes influence both.
✅ Banks intentionally track the 10-year Treasury bond YTM.
❌ Rates are set by the same organization.
❌ People finance homes with Treasury bonds.

Explanation:
Mortgage lenders price long-term mortgages off the 10-year Treasury yield, which reflects long-term interest rate expectations.

Question 4

Who pays for private mortgage insurance (PMI)?

❌ Fannie Mae and Freddie Mac
❌ The U.S. government
❌ Banks
✅ The homeowner

Explanation:
PMI protects the lender, but the homeowner pays the premium, typically when the down payment is below 20%.

Question 5

Before the 2007 recession, why were banks giving mortgages to people who could not afford them?

❌ Many people faked documents (“liar loans”).
❌ Banks had no way to verify ability to pay.
❌ CMOs wanted mortgages likely to default.
✅ Banks resold mortgages to CMOs and were not incentivized to ensure low default risk.

Explanation:
Because banks sold mortgages onward, they did not retain the risk, weakening underwriting standards.

Question 6

Select TWO key causes of the housing bubble (2007):

❌ Corruption within the government
✅ Over-optimistic mortgage lending
✅ Fraudulent mortgage lending
❌ Hyper-inflation

Explanation:
Loose lending standards and fraud significantly inflated housing demand and prices.

Question 7

During the housing bubble, which fluctuated with the home price index?

❌ % who thought real estate was a bad investment
✅ % who thought real estate was a good long-term investment
❌ % who regretted buying
❌ % who were evicted

Explanation:
As prices rose, optimism increased—more buyers believed real estate was a good long-term investment.

Question 8

What in 2005 indicated the housing market might be a bubble?

✅ Media discussing a home-buying mania.
❌ Media discussing declining home purchases.
❌ Expected 10-year appreciation below mortgage rate.
❌ Time magazine prediction.

Explanation:
Widespread media discussion of a buying frenzy is a classic bubble warning sign.

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