A covered or hedge strategy involves:
a. A position in an option.
b. Funds invested in a riskfree security.
c. A position in the underlying stock.
d. a and c only.
e. All of the above.
The two elements of a forward rate are:
a. The length of time for the rate.
b. The implicit rate.
c. When in the future the rate begins.
d. a and c only.
e. a and b only.
Covered interest arbitrage is the process that:
a. Ensures the same domestic return whether investing domestically or in a foreign
country.
b. Forces interest rate parity.
c. Increases currency risk.
d. a and b only.
e. All of the above.
In the United Kingdom, a pound-denominated bond issued by a Japanese corporation
and subsequently traded in the United Kingdom’s bond market:
a. Is part of the Japanese foreign bond market.
b. Is part of the United Kingdom’s foreign bond market.
c. Is nicknamed a ‘samurai bond.”
d. a and c only.
e. b and c only.
A strategy that seeks to enhance returns as a result of the mispricing of the futures
contract relative to the cash index is known as:
a. Program trading.
b. Index arbitrage.
c. Dynamic hedging.
d. Riskless investing.
e. None of the above.
The important aspects outlined in a bond indenture include the bond’s:
a. Maturity.
b. Security.
c. Provisions for retirement.
d. a and b only.
e. All of the above.
The basic motivation behind the creation of S&Ls was provision of funds for financing:
a. The purchase of a home.
b. The purchase of land.
c. The purchase of a car.
d. The purchase of government securities.
e. None of the above.
A major difference between options and futures is that:
a. Options provide a symmetric risk/reward relationship.
b. Futures provide a symmetric risk/reward relationship.
c. Options provide an asymmetric risk/reward relationship.
d. Futures provide an asymmetric risk/reward relationship.
e. b and c only.
The primary source of funds for credit unions is:
a. Issuance of debt securities.
b. Issuance of equity securities.
c. Deposits of their members.
d. None of the above.
e. All of the above.
A collateralized mortgage obligation (CMO):
a. Cannot eliminate prepayment risk.
b. Redistributes the cash flows of pools of mortgage pass-through securities to different
bond classes.
c. Distributes the various forms of prepayment risk among different classes of
bondholders.
d. b and c only.
e. All of the above.
A firm may seek to raise funds outside its domestic capital market for one or more of
the following reasons:
a. The amount of capital sought cannot be raised in its local market.
b. There is an opportunity to raise funds at a lower cost.
c. Funds denominated in another currency are sought.
d. The firm seeks to diversify funding costs.
e. All of the above.
The benefits of international stock diversification arise from international capital
markets that are less than perfectly correlated.
a. True.
b. False.
Brady bonds are growing in importance in the emerging bond market.
a. True.
b. False.
All of the following are true regarding covered bonds EXCEPT:
a. They are issued by banks.
b. The covered bonds market has become a major sector of the global bonds market.
c. Their use of public sector loans as collateral has been in decline.
d. The cover pool is static over the life of a covered bond.
e. The collateral for covered bonds is predominantly residential and commercial
mortgages.
A mortgage is a pledge of property to secure payment of a debt.
a. True.
b. False.
The theoretical futures price depends on which of the following factors?
a. Cash market price.
b. Financing cost.
c. Cash yield on underlying instrument.
d. a and c only.
e. All of the above.
Financial assets represent a residual claim in the case of:
a. Preferred stock.
b. Common stock.
c. Partnership share.
d. b and c only.
e. All of the above.
Large-denomination CDs are typically issued in denominations of $1 million or more.
a. True.
b. False.
Mortgage loans that are greater than the maximum permissible loan size are referred to
as nonconforming loans.
a. True.
b. False.
The shape of the yield curve also influences when the short will choose to deliver. Thus,
if the carry is negative, the short will:
a. Delay delivery until the last permissible settlement date.
b. Deliver on the first permissible settlement date.
c. Will not do anything.
d. Will wait until the shape of the yield curve has changed.
e. None of the above.
The theoretical option price can be calculated using:
a. The Black-Scholes option pricing model.
b. The binomial option pricing model.
c. Arbitrage arguments.
d. All of the above.
e. None of the above.
Municipal securities are issued for various purposes including:
a. Anticipation of the receipt of funds from taxes.
b. Financing long-term capital projects.
c. Financing long-term budget deficits that arise from current operations.
d. b and c only.
e. All of the above.
The rate that would prevail in the economy if price levels remain constant is referred to
as the:
a. Real rate.
b. Short-term interest rate.
c. Nominal rate.
d. Effective rate.
e. None of the above.
The capital market line represents:
a. A combination of a various risky assets.
b. A combination of a riskfree asset and the market portfolio.
c. A combination of riskless assets.
d. A combination common stock and corporate bonds.
e. None of the above.
In the Treasury market, the U.S. government does not issue zero-coupon bonds.
a. True.
b. False.
In an interest rate swap, the counterparties swap payments in the same currency based
on:
a. Information on market interest rate movements.
b. An interest rate.
c. An index.
d. Information on price movements in the market.
e. None of the above.
The goals of the Big Bang reforms for the Japanese financial markets were to develop
a:
a. Free market, which employs market principles.
b. Fair and transparent market.
c. Global market.
d. A market, which is less susceptible to domestic political pressures.
e. All of the above.
Capital market theory makes assumptions about:
a. Investor behavior.
b. Capital markets.
c. Historical returns.
d. a and b only.
e. All of the above.
When the yield declines as maturity increases, the yield curve is said to be:
a. Inverted.
b. Downward sloping.
c. Positive.
d. Negative.
e. a, b, and d only.
The CBT determines which Treasury issues are acceptable for delivery of a Treasury
bond futures contract as long as it meets the following criteria:
a. The issue must be long-term.
b. The issue must have at least 15 years to maturity from the date of delivery if not
callable.
c. The issue must be short-term.
d. The issue cannot be callable.
e. None of the above.
The option of when in the delivery month of a CBT Treasury bond futures contract to
deliver is referred to as:
a. Quality option.
b. Timing option.
c. Wild card option.
d. Swap option.
e. None of the above.
When financial institutions’ activities are restricted in the areas of lending, borrowing,
and funding, the regulation is referred to as:
a. Financial activity regulation.
b. Disclosure regulation.
c. Regulation of financial institutions.
d. Regulation of foreign participants.
e. None of the above.
The cash flow of a mortgage pass-through security depends on the cash flows of the
underlying mortgages.
a. True.
b. False.
Non-agency pass-throughs have been issued by conduits of:
a. Commercial banks.
b. Investment banking firms.
c. Entities not associated with either commercial banks or investment banking firms.
d. a and b only.
e. All of the above.