Collateral trust bonds pledge real property or personal property to offer security beyond
that of the general credit standing of the issuer.
a. True.
b. False.
The basic economic function of futures markets is to provide an opportunity for market
participants:
a. To hedge against the risk of adverse price movements.
b. To hedge against the risk of adverse interest rate changes.
c. To hedge against the risk of adverse exchange rate changes.
d. b and c only.
e. All of the above.
While an annuity imposes an expense fee on the fund’s performance, mutual funds
impose a mortality and expense fee.
a. True.
b. False.
Common stock issued by Digital Equipment Corporation is traded in which of the
following markets?
a. Money market.
b. Debt market.
c. Derivatives market.
d. Capital market.
e. None of the above.
Dynamic hedging is an investment strategy, which:
a. Seeks to insure the value of a portfolio through the use of a synthetic put option.
b. Requires rebalancing.
c. Takes advantage of the mispricing of stock index futures.
d. a and b only.
e. All of the above.
The difference between the price paid to the issuer and the price at which the
investment bank reoffers the security to the public is called:
a. Bid-ask spread.
b. Gross spread.
c. Underwriter discount.
d. b and c only.
e. None of the above.
The greater the expected volatility of the price of the underlying asset, the less an
investor would be willing to pay for the option, and the more the option writer would
demand for it.
a. True.
b. False.
Convertible bonds issued by the British government are referred to as:
a. Bunds.
b. Gilts.
c. TIPS.
d. LEAPS.
e. None of the above.
The process of valuing financial assets does not include:
a. Estimating the cash flows.
b. Determining the length of time the asset is held.
c. Determining the appropriate discount rate.
d. Discounting the expected cash flows.
e. All of the above.
The foreign exchange market is a(n)
a. Interbank market.
b. Dealer market.
c. Over-the-counter market.
d. All of the above.
e. a and c only.
The part of the risk premium or spread attributable to credit risk is called the credit
spread.
a. True.
b. False.
The key distinction between a primary market and a secondary market is that:
a. In the secondary market the issuer receives funds from the buyer.
b. In the secondary market the issuer of the asset does not receive funds from the buyer.
c. In the secondary market the existing issue changes hands.
d. b and c only.
e. None of the above.
Traditional mortgages were financed mainly by depository institutions with very
short-term funds, even though a mortgage is a very long-term instrument. This
mismatch of maturities was solved with the:
a. Adjustable-rate mortgage.
b. Graduated-payment mortgage.
c. Balloon mortgage.
d. Reverse mortgage.
e. Growing equity mortgage.
An option that allows the option buyer to purchase a put option is called:
a. Caput.
b. Cacall.
c. Swaption.
d. Caption.
e. None of the above.
Investors can use the cash or futures market to alter their risk exposure, which requires
them to consider which of the following factors?
a. Liquidity.
b. Transactions costs.
c. Taxes.
d. Leveraging aspect of futures.
e. All of the above.
When two parties agree at a specified future date to exchange an amount of money
based on a reference interest rate and a notional principal amount, the agreement is
commonly referred to as:
a. Interest rate swap.
b. Forward rate agreement.
c. Swaption.
d. Caption.
e. None of the above.
The coupon rate on a floating-rate note may be:
a. LIBOR.
b. A stated margin.
c. The bid on LIBOR.
d. A spread over LIBID.
e. The arithmetic average of LIBOR and LIBID.
The interest rate that banks charge brokers for margin transactions is called:
a. The prime rate.
b. The call money rate.
c. The federal funds rate.
d. The discount rate.
e. None of the above.
A drop-lock bond is one that automatically changes the floating coupon rate into a fixed
coupon rate under certain circumstances.
a. True.
b. False.
In a firm commitment underwriting arrangement, the risk that the investment banking
firm accepts is:
a. That it sells the securities to investors at a lower price.
b. That the price it pays to purchase the securities from the issuer will be less than the
price it receives when it reoffers the securities to the public.
c. That it does not buy the entire issue from the issuer.
d. That it does not realize the gross spread.
e. None of the above.
A pension sponsor, who wishes to alter the composition of the pension funds between
stocks and bonds, can use:
a. Stock index options.
b. Interest rate options.
c. Treasury bonds.
d. a and b only.
e. All of the above.
To protect against a loss, investment banks engage in:
a. Speculative strategies.
b. Active portfolio management strategies.
c. Hedging strategies.
d. Passive portfolio management strategies.
e. None of the above.
The market where banks can borrow and lend reserves is called the:
a. Open market.
b. Federal funds market.
c. Discount window.
d. Money market.
e. None of the above.
Stock index options can be used to:
a. Protect a portfolio position against an adverse price movement.
b. Bet on the movement of stock prices.
c. Earn an abnormal return.
d. a and b only.
e. All of the above.
When the yield rises steadily as the maturity increases, the yield curve is said to be:
a. Positive.
b. Upward sloping.
c. Normal.
d. All of the above.
e. None of the above.
Regulation Q allowed the Fed to impose:
a. Geographical restrictions on branch banking.
b. Interest rate ceilings on deposit accounts.
c. Capital requirements for commercial banks.
d. Permissible activities for commercial banks.
e. None of the above.
The principal assets of savings banks are:
a. Mortgage-backed securities.
b. Residential mortgages.
c. Commercial mortgages.
d. Government securities.
e. All of the above.
The price at which the asset may be bought or sold is called the:
a. Option price.
b. Option premium
c. Exercise price.
d. Strike price.
e. c and d only.
A mortgage design that is created for senior homeowners who want to convert their
home equity into cash is the.
a. Convertible mortgage.
b. Reverse mortgage.
c. Traditional mortgage.
d. Growing-equity mortgage.
e. Subprime loans.
The value of a bond depends on:
a. The issuer.
b. The coupon rate.
c. The maturity of the bond.
d. Market interest rates.
e. b, c, and d only.