A security’s return can be decomposed into the following two parts:
a. Systematic return.
b. Unsystematic return.
c. Historical return.
d. a and b only.
e. b and c only.
Liquidity-generating innovations:
a. Increase the liquidity of the market.
b. Allow borrowers to draw upon new sources of funds.
c. Allow market participants to circumvent capital constraints imposed by regulations.
d. a and b only.
e. All of the above.
With a debit card,
a. A bill is sent to the debit cardholder periodically requesting payment for transactions
that have been made in the past.
b. Funds are immediately withdrawn from the purchaser’s account at the time the
transaction takes place.
c. Funds are withdrawn periodically (usually once a month) for transactions made by
the cardholder during the previous month.
d. All of the above.
e. None of the above.
Banks are highly leveraged financial institutions, which means that most of their funds
come from:
a. Deposits.
b. Borrowing from the Federal Reserve through the discount window.
c. Capital gains from the sale of securities.
d. a and b only.
e. All of the above.
Prepayment risk makes pass-throughs unattractive for certain financial institutions to
hold from an asset/liability perspective.
a. True.
b. False.
Long-dated forward contracts have relatively large bid-ask spreads.
a. True.
b. False.
The mortgage originator has several choices as to the mortgages acquired including:
a. Holding the mortgages in a portfolio.
b. Selling the mortgages to investors.
c. Using the mortgages as collateral for the issuance of a security.
d. a and b only.
e. All of the above.
With ________, the borrower provides sufficient funds for the servicer to invest in a
portfolio of Treasury securities that replicates the cash flows that would exist in the
absence of prepayments.
A) defeasance
B) yield maintenance charges
C) prepayment lockout
D) prepayment penalty points
Any firm can deal in government securities.
a. True.
b. False.
The optimum rate of investment for a firm is found at the point where:
a. The marginal productivity of capital equals the market gross rate.
b. The supply of capital equals the demand for capital.
c. Total investment equals total savings.
d. The firm’s indifference curve is just tangent to the market line.
e. None of the above.
Which of the following are types of investment companies?
a. Open-end funds.
b. Closed-end funds.
c. Unit trusts.
d. a and b only.
e. All of the above.
Option strategies that do not involve an offsetting or risk-reducing position in either
another option or the underlying common stock is called:
a. Naked strategies.
b. Covered strategies.
c. Hedge strategies.
d. Active strategies.
e. Passive strategies.
When an option grants the buyer the right to purchase the designated instrument from
the writer, it is referred to as a:
a. Call option.
b. Put option.
c. Long forwards.
d. Long futures.
e. None of the above.
Which of the following statements is most correct?
a. A forward contract, just like a futures contract, is an agreement for the future delivery
of something at a specified price at the end of a designated period of time.
b. A forward contact, just like a futures contract, is traded on an exchange floor.
c. A forward contract differs from a futures contract in that is it usually
nonstandardized.
d. a and c only.
e. All of the above.
Since the introduction of the euro on January 1, 1999, the single European currency
against the U.S. dollar has:
a. Strengthened.
b. Weakened.
c. Remained unchanged.
d. Cannot be determined.
e. None of the above.
Municipal bonds are generally traded and quoted in terms of the:
a. Basis price.
b. Yield-to-maturity.
c. Yield-to-call.
d. b and c only.
e. All of the above.
The key distinction between life insurance and property and casualty insurance
companies lies in:
a. The difficulty of projecting whether or not a policyholder will be paid off.
b. The amount of the payoff.
c. Tax differences.
d. a and b only.
e. All of the above.
When the value of the assets of a defined benefit plan is exceeded by the value of its
liabilities, the plan is said to:
a. Have a surplus.
b. Have a deficit.
c. Be overfunded.
d. a and c only.
e. None of the above.
Dealer-created derivative instruments protect investment banking firms against:
a. Capital loss.
b. Adverse price movements.
c. Increases in interest rates.
d. All of the above.
e. None of the above.
Which of the following statements is false?
a. The auction for Treasury securities is conducted on a noncompetitive bidding basis.
b. Competitive bids must be submitted on a yield basis.
c. All U.S. Treasury auctions are single-price auctions.
d. B and c only.
e. None of the above.
Buying stock index futures, will:
a. Increase a portfolio’s beta.
b. Decrease a portfolio’s beta.
c. Not affect a portfolio’s beta.
d. None of the above.
Computing a yield for a mortgage-backed security is difficulty because:
a. It requires a determination of the cash flow.
b. The cash flow is uncertain because of prepayments.
c. Assumptions about prepayments must be made.
d. All of the above.
e. None of the above.
The CAPM has strong theoretical and empirical support.
a. True.
b. False.
Any company that publicly offers a security in the U.S. becomes a reporting company
and, as such, is subject to:
a. The Securities Act of 1933.
b. The Securities Exchange Act of 1934.
c. The SEC.
d. The NASD.
e. None of the above.
The yields on CDs are a function of:
a. The credit rating of the issuing bank.
b. The maturity of the CD.
c. The supply and demand for CDs.
d. The back-up line of credit.
e. a, b, and c only.
In all rating systems the term high grade means:
a. High probability of future payments.
b. High credit risk.
c. Low credit risk.
d. a and b only.
e. a and c only.
The convexity measure of a security refers to:
a. Price volatility that relates maturity and coupon.
b. The approximate change in price that is not explained by duration.*
c. The shape of the price/yield relationship.
d. The approximate percentage price change of a bond for a 100 basis point change in
interest rates.
e. None of the above.
Trading differences exist between retail investors and institutional investors based on:
a. Size of trade.
b. Commission.
c. Method of order execution.
d. All of the above.
e. a and b only.
Primary dealers for government securities include:
a. Domestic investment banking firms.
b. Foreign investment banking firms.
c. Foreign commercial banks.
d. Domestic commercial banks.
e. All of the above.
A future interest rate calculated from either the spot rates or the yield curve is called:
a. An implicit forward rate.
b. A forward rate.
c. A theoretical future rate.
d. a and b only.
e. All of the above.
A tax risk associated with municipal bonds is that a tax-exempt issue may be eventually
declared by the IRS to be taxable.
a. True.
b. False.