Describe the mechanics of trading futures options.
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b. Funds are immediately withdrawn from the purchaser’s account at the time the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c. Funds are withdrawn periodically (usually once a month) for transactions made by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.
The assets traded in the money market include:
a. Commercial paper.
b. Bankers acceptances.
c. Treasury bills.
d. Corporate bonds.
e. a, b, and c only.
A CMO is structured with various bond classes referred to as:
a. Serial bonds.
b. Tranches.
c. Class.
d. Series.
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.
All of the following fall under the category of convergence trading hedge funds
EXCEPT:
a. Fixed income arbitrage hedge funds.
b. Equity market neutral hedge funds.
c. Global macro hedge funds.
d. Convertible bond arbitrage hedge funds.
e. Relative value hedge funds.
In generating spread income, depository institutions face several risks. They include:
a. Credit risk.
b. Regulatory risk.
c. Interest rate risk.
d. a and b only.
e. All of the above.
The spot exchange rate market is:
a. A cash market.
b. Market for immediate settlement.
c. Market for settlement of a foreign exchange transaction within two business days.
d. All of the above.
e. a and b only.
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.
An investment strategy that seeks to insure the value of a portfolio using a synthetic put
option strategy is called:
a. Riskless investing.
b. Dynamic hedging.
c. Program trading.
d. Riskless arbitrage.
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.
When an investor takes a position in the market by buying a futures contract, the
investor is said to be in a:
a. Long position.
b. Short position.
c. Short futures.
d. Hedge position.
e. None of the above.
Which of the following statements about duration is most correct?
a. Duration for a coupon bond is greater than its maturity.
b. For a zero-coupon bond, the duration is equal to its maturity.
c. For bonds with the same maturity and selling at the same yield, the lower the coupon
rate, the greater a bond’s duration and volatility.
d. For bonds with the same coupon rate and selling at the same yield, the longer the
maturity, the larger the duration and price sensitivity.
e. b, c, and d only.
In Germany, the shares of smaller growth companies are traded:
a. In the official market.
b. In the regulated market.
c. In the Neuer Market.
d. a and b only.
e. None of the above.
Which type of bond allows the warrant owner to buy additional bonds from the issuer at
the same price and yield as the host bond?
a. Equity warrant.
b. Debt warrant.
c. Currency warrant.
d. Depreciation warrant.
e. All of the above.
In contrast to individual investors, financial intermediaries will be willing to make
longer term loans, and at a lower cost to borrowers, because:
a. They are counting on successive deposits providing the funds until maturity.
b. Individual investors are more apt to make long-term loans.
c. All risk is eliminated.
d. None of the above.
e. All of the above.
An investor who lends funds to a corporation by purchasing its debt obligation is
exposed to:
a. Credit risk.
b. Default risk.
c. Downgrade risk.
d. a and b only.
e. All of the above.
An agreement between two parties whereby one party, for an upfront premium, agrees
to compensate the other if a designated interest rate, called the reference rate, is
different from a predetermined level is known as a(n):
a. Forward rate agreement.
b. Interest rate swap.
c. Interest rate agreement.
d. Swaption.
e. None 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.
Governments-sponsored enterprises, which issue agency securities include:
a. Freddie Mac.
b. Fannie Mae.
c. Federal Home Loan Banks.
d. Federal Farm Credit System.
e. All of the above.
Investors in mutual funds incur:
a. Fund sales charges.
b. Annual operating expenses.
c. Interest.
d. a and b only.
e. All of the above.
Which of the below statements is TRUE?
A) One type of RMBS is those backed by large properties such as regional malls or
office buildings.
B) Conveyance deals are created by investment banking firms that establish a conduit
arrangement with mortgage bankers.
C) CMBS deals (that are called fusion deals or hybrid deals) are multiple borrower
CMBS deals that combine loans that are included in conduit deals with a large or
“mega” loan.
D) All of these
Options on interest rate caps are called:
a. Swaptions.
b. Captions.
c. Flotions.
d. Collars.
e. None of the above.
Discuss the motivation for issuing asset-backed securities.
Hedging with options by taking a position in the underlying stock allows the investor to
lock in:
a. The riskless arbitrage profit.
b. The abnormal return.
c. The riskfree rate.
d. Price risk.
e. None of the above.
General obligations bonds are secured by:
a. The issuer’s general taxing power.
b. A pledge of special fees/operating revenue from the service provided.
c. FDIC insurance.
d. a and b only.
e. All of the above.
A stock insurance company:
a. Is similar in structure to a corporation.
b. Issues shares that are traded publicly
c. Answers to only one constituency because its policyholders and its owners are
the same.
d. a and b only
e. a and c only.
A large endowment of the current commodity relative to the future will make people:
a. More eager to lend.
b. Raise the supply curve for loans.
c. Reduce R.
d. All of the above.
e. a and b only.
A ________ is a contractual agreement that prohibits any prepayments during a
specified period of time, called the lockout period.
A) defeasance
B) yield maintenance charges
C) prepayment lockout
D) prepayment penalty points
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.
The preliminary prospectus, which may be distributed to the public during the waiting
period for the registration of the security to become effective, is referred to as:
a. Red warning.
b. Red herring.
c. Initial prospectus.
d. Interim offering.
e. None of the above.