Arbitraging instruments enable investors and borrowers to take advantage of differences
in costs and returns between markets.
a. True.
b. False.
The consumer has several decisions to make regarding:
a. How much to invest.
b. How much to lend.
c. How much to consume now and later.
d. a and b only.
e. All of the above.
Financial assets, financial instruments, or securities are intangible assets.
a. True.
b. False.
A subordinated debenture bond has priority over senior corporate bonds.
a. True.
b. False.
A perfect market results when:
a. The number of buyers and seller is sufficiently large.
b. All buyers and sellers are price takers.
c. No transactions costs.
d. No taxes.
e. All of the above.
Insurance companies are really a composite of several companies, which include:
a. Manufacturer.
b. Investment company.
c. Distribution component.
d. All of the above.
e. None of the above.
Participants in financial markets use interest rate swaps to:
a. Compensate the asset/liability manager for risk-taking.
b. Alter the cash flow characteristics of their assets or liabilities.
c. Capitalize on perceived capital market imperfections.
d. b and c only.
e. All of the above.
A stop order that designates a price limit is a:
a. Stop order.
b. Limit order.
c. Stop-limit order.
d. Market-if-touched order.
e. None of the above.
Graphically, all the Markowitz efficient portfolios lie:
a. On the boundary of the set of feasible portfolios.
b. Below the efficient frontier.
c. Above the efficient frontier.
d. None of the above.
e. All of the above.
The yield to maturity measure is used as an index to compare the rate of return of
instruments having different cash flows and different maturities.
a. True.
b. False.
Fannie Mae, Ginnie Mae, and Freddie Mac helped to create a secondary market for
mortgages by:
a. Issuing conventional mortgage loans.
b. Purchasing conventional mortgage loans.
c. Issuing FHA- and VA-insured mortgage loans.
d. Providing mortgage insurance.
e. None of the above.
The prices of all option-free bonds move in the same direction of the change in yields.
a. True.
b. False.
The capital asset pricing model assumes that the expected return of a security is
determined by:
a. Multifactor risk.
b. The asset’s beta only.
c. Arbitrage risk.
d. Extra-market sources of risk.
e. None of the above.
The multifactor CAPM is attractive because:
a. It is simple to use.
b. It recognized nonmarket risks.
c. It is easier to implement.
d. All of the above.
e. None of the above.
The driving force in the development of a strong secondary market for residential
mortgage loans was a financial innovation, which involves:
a. The pooling of mortgages.
b. The issuance of securities collateralized by these mortgages.
c. Asset securitization.
d. A and b only.
e. All of the above.
Debt instruments created by using swaps are commonly referred as structured notes.
a. True.
b. False.
Which of the following statements is most correct?
a. The stock index options market was initially inefficient.
b. Arbitrage in the stock index options market is difficult.
c. Since 1983, stock index futures are fairly priced.
d. All of the above.
e. None of the above.
Transactions costs include commissions, fees, execution costs, and opportunity costs.
a. True.
b. False.
The seller of a futures contract will realize a profit if the futures price:
a. Increases.
b. Decreases.
c. Stays the same.
d. None of the above.
e. All of the above.
Deferred-interest bonds:
a. Sell at a deep discount.
b. Do not pay interest for an initial period.
c. Are sometimes referred to as zero-coupon bonds.
d. a and b only.
e. All of the above.
An appealing feature of the APT model is that:
a. It makes fewer assumptions about investor behavior and the market structure.
b. Is simple to use.
c. Is easier to implement.
d. Is more accurate in estimating the expected rate of return of an asset.
e. None of the above.
The basic principle underlying the bootstrapping technique is that the value of the
Treasury coupon security should be equal to the value of the package of zero-coupon
Treasury securities that duplicates the coupon bond’s cash flow.
a. True.
b. False.
A perfectly competitive market is characterized by:
a. Governmental regulation.
b. Efficiency.
c. Low-cost production.
d. b and c only.
e. All of the above.
A measure of price volatility that relates to coupon and maturity is:
a. Duration.
b. Convexity.
c. Yield spread.
d. Yield to maturity.
e. None of the above.
While U.S. government debt is not rated by any nationally recognized statistical rating
organization, the debt of other national governments is rated.
a. True.
b. False.
Using spot rates, the theoretical value of a bond is calculated:
a. As the present value of all expected future cash flows.
b. By discounting a cash flow for a given period by the corresponding spot rate for that
period.
c. By discounting all future cash flows at the riskfree rate.
d. By compounding all expected future cash flows.
e. None of the above.
By mid 2007, the European government bond market:
a. Represented about 40% of the world’s outstanding government bonds.
b. Was second only to the U.S. Treasury market in terms of size.
c. Was about 50% larger than the Japanese government bond market.
d. a and b only.
e. a and c only.
An option to purchase an option is referred to as a(n):
a. Exotic option.
b. Compound option.
c. Plain vanilla option.
d. Spread option.
e. None of the above.
The most common forms of external credit enhancements are:
a. A corporate guarantee.
b. A bank letter of credit.
c. Bond insurance.
d. a and b only.
e. All of the above.
If an investor has a six-month investment horizon, buying a 5-year, 10-year, or 20-year
bond will produce the same six-month return. This interpretation of the pure
expectations theory is referred to as the:
a. Return-to-maturity expectation.
b. Local expectations.
c. Broadest interpretation.
d. Liquidity theory.
e. None of the above.
In a completely integrated capital market:
a. There are no restrictions to prevent investors from investing in securities issued in
any capital market throughout the world.
b. The required return on securities of comparable risk will be the same in all capital
markets before adjusting for risk.
c. The required return on securities of comparable risk will be the same in all capital
markets after adjusting for taxes and foreign exchange rates.
d. a and c only.
e. All of the above.
Commercial mortgage-backed securities:
a. Are issued by private entities.
b. Do not have any implicit or explicit government guarantee.
c. Must be credit enhanced.
d. Are backed by a pool of commercial mortgage loans.
e. All of the above.
Investors use the options market to generate abnormal returns.
a. True.
b. False.
The performance of a portfolio of receivables is measured by:
a. Delinquencies.
b. Gross portfolio yield.
c. Monthly payment rate.
d. b and c only.
e. All of the above.