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.
A form of insurance that has no cash value if the insured party does not die within the
set policy period is called:
a. Term insurance.
b. Whole life insurance.
c. Universal life insurance.
d. Variable life insurance.
e. Survivorship insurance.
Syndicated loans are distributed by:
a. Assignment.
b. Participation.
c. Underwriting.
d. a and b only.
e. All of the above.
Investment banking firms are engaged in which of the following activities?
a. Public offering and trading of securities.
b. Private placement of securities.
c. Securitization of assets.
d. Mergers and acquisitions.
e. All of the above.
Compare and contrast futures and forwards.
Discuss the primary reasons for financial innovation.
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.
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.
Since diversification reduces unsystematic risk, the relevant measure of risk for an
investor who holds a well-diversified portfolio is:
a. Market risk.
b. Company-specific risk.
c. Total risk.
d. Residual risk.
e. None of the above.
Market participants perceive Treasury securities to carry no default risk because:
a. They are short-term in nature.
b. They are backed by the full faith and credit of the U.S. government.
c. They can be bought and sold easily.
d. They are not affected by changes in interest rates.
e. None of the above.
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.
Loans made by offshore banks are referred to as:
a. Eurocurrency loans.
b. Euro medium-term notes.
c. Eurobonds.
d. Euroloans.
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.
An instrument, which gives the buyer the right to buy from or sell to the writer a
designated futures contract at a designated price at anytime during the life of the
instruments is called a:
a. Stock option.
b. Futures option.
c. Delayed option.
d. Timing option.
e. None of the above.
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.
Because they are created using the securitization process, covered bonds are often
compared to:
a. Residential mortgage-backed securities.
b. Commercial mortgage-backed securities.
c. Asset-backed securities.
d. a and b only.
e. All of the above.
The Garn-St. Germain Act of 1982 expanded the types of assets in which S&Ls could
invest. The acceptable list now includes:
a. Consumer loans.
b. Commercial loans.
c. Municipal securities.
d. a and c only.
e. All of the above.
One of the results of the financial innovations, which have occurred since the 1960, has
been the introduction of market-broadening instruments, which increase the liquidity of
markets and the availability of funds by:
a. Attracting new investors.
b. Offering new opportunities for borrowers.
c. Reallocating financial risk to those less adverse to them.
d. a anb b only.
e. All of the above.
Even securities issued by the U.S. government are risky assets, because:
a. The return will depend on the price of the U.S. government bond if it is held to
maturity.
b. The return is unknown if the bond is held for only one year.
c. Changes in interest rates will affect the price of the bond.
d. All of the above.
e. None of the above.
Swaps are beneficial because:
a. They are more transactionally efficient instruments.
b. They increase the liquidity in the swap market.
c. They offer longer maturities than forward and futures contracts.
d. All of the above.
e. None of the above.
Explain how the separate functions of insurance companies are now often provided by
different companies.
In graphically depicting the model for security returns usually referred to as the market
model, the slope of the line can be thought of as the:
a. Beta factor.
b. Error term.
c. Residual term.
d. Alpha factor.
e. None of the above.
The sale of a security with a commitment by the seller to buy the security back from the
purchaser at a specified price and a designated future date is referred to as:
a. A negotiable CD.
b. A repurchase agreement.
c. A reverse repo.
d. A commercial paper.
e. None 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 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.
A transaction in which an investor borrows to buy shares using the shares themselves as
collateral is called:
a. Short selling.
b. Buying on margin.
c. Going long.
d. Going short.
e. None of the above.
If the issuer of a bond has the choice to retire all or part of an issue prior to maturity, the
bondholder is exposed to:
a. Call risk.
b. Timing risk.
c. Refunding risk.
d. a and b only.
e. All of the above.
The Black-Scholes option pricing model:
a. Computes a fair option price.
b. Derives the price for a European call option.
c. Prices options written on a nondividend-paying stock.
d. b and c only.
e. All of the above.
Investment-grade bonds are bond issues that are assigned a rating:
a. In the top four rating categories.
b. Below the top four rating categories.
c. Of zero.
d. Junk.
e. None of the above.
Rule 144A will contribute to the growth of the private placement market by:
a. Improving the liquidity of securities issued.
b. Reducing the cost of raising funds.
c. Attracting new large institutional investors into the market.
d. a and b only.
e. All of the above.
Dollar duration of a bond measures the:
a. Dollar price change.
b. Percentage price change.
c. Average price change.
d. Change in yield.
e. None of the above.