The term “hedge fund” was first used to describe:
a. The private investment fund of Alfred Winslow Jones.
b. The Quantum Group of Funds managed by George Soros.
c. The offshore investment corporation of the United Kingdom’s Financial Services
Authority.
d. The public fund overseen by the Board of Governors of the Federal Reserve
e. None of the above.
Institutional investors look for the mispricing of stock index futures to create arbitrage
profits and thereby enhance portfolio returns. This strategy is referred to as:
a. Dynamic hedging.
b. Index arbitrage.
c. Riskless arbitrage.
d. Program trading.
e. None of the above.
On the expiration date, an option’s time premium:
a. Exceeds its intrinsic value.
b. Equals zero.
c. Is positive.
d. Is negative.
e. None of the above.
Capital market theory assumes that:
a. Investors have homogeneous expectations.
b. Investors make decisions over a multiple-period investment horizon.
c. Investors are risk averse.
d. a and c only.
e. All of the above.
Discuss the reasons for why the stock market in the U.S. has undergone significant
structural changes.
A future interest rate calculated from either the spot rates or the yield curve is called:
a. An implicit forward rate.
b. A forward rate.
c. A theoretical future rate.
d. a and b only.
e. All of the above.
Distinguish between the role and function of financial assets and financial markets.
To construct an efficient portfolio of risky assets, it is assumed that investors are:
a. Risk lovers.
b. Risk neutral.
c. Risk averse.
d. Riskless.
e. None of the above.
When a trader positions the capital of the investment banking firm to take advantage of
a specific anticipated movement of prices or a spread between two prices, this strategy
is referred to as:
a. Riskless arbitrage.
b. Risk arbitrage.
c. Speculation.
d. Hedging.
e. None of the above.
The Pension Funding Equity Act:
a. Set funding standards for the minimum contributions that a plan sponsor must make
to the pension plan to satisfy the actuarially projected benefit payments.
b. Established fiduciary standards for pension fund trustees, managers, or advisors.
c. Gave corporate sponsors of DB plans some relief from burdensome pension
contributions.
d. a and b only.
e. All of the above.
Coupon stripping is the process of:
a. Separating each coupon payment as well as the principal.
b. Selling securities against each coupon payment and the principal.
c. Creating a series of zero-coupon bonds.
d. Discounting each coupon payment as well as the principal.
e. a, b, and c only.
In the U.S., options are traded on the:
a. Philadelphia Stock Exchange.
b. CBOE.
c. American Stock Exchange.
d. NYSE.
e. All of the above.
The factors that affect the yield spread between a non-Treasury security and a
comparable Treasury security are:
a. The type of issuer.
b. The issuer’s perceived creditworthiness.
c. The maturity of the instrument.
d. The expected liquidity of the issue.
e. All of the above.
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.
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.
Some underwriting firms have found the bought deal to be attractive because it:
a. Offers timing flexibility.
b. Reduces the risk of capital loss.
c. Requires greater amounts of funds.
d. a and b only.
e. All of the above.
The shape of the yield curve can be explained by:
a. The expectations theory.
b. The liquidity theory.
c. The preferred habitat theory.
d. The market segmentation theory.
e. All of the above.
Corporate bond issuers use the proceeds from a bond sale for:
a. Working capital.
b. Expansion of facilities.
c. Refinancing of outstanding debt.
d. Financing takeovers.
e. All of the above.
Which of the following statements is most correct?
a. The price of a bond will approach its par value as it moves toward its maturity.
b. Over time, the price of a discount bond will rise if interest rate do not change.
c. The price of a bond will rise if the perceived credit quality of the issuer deteriorates.
d. a and b 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 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.
Securities traded in the external market are distinguished by:
a. Being accessible only to foreign investors.
b. Being offered simultaneously to investors in a number of countries.
c. Being issued outside the jurisdiction of any single country.
d. Being traded in Europe only.
e. b and c only.
In a bankers’ acceptance:
a. The bank accepts the ultimate responsibility to repay the loan to its holder.
b. The bank has no responsibility to the parties involved.
c. The importer and the exporter share equally in the responsibility to repay the loan to
the bank.
d. The government guarantees the repayment of the loan to its holder.
e. None of the above.
Options offer:
a. Substantial upside return potential.
b. Substantial downside risk protection.
c. Unlimited gains and losses.
d. a and b only.
e. All of the above.
Investors who place their funds in an investment company, which in turn invests the
funds received in the stock of a large number of companies benefit from:
a. Diversification.
b. Reduced risk.
c. Lower cost.
d. All of the above.
e. a and b only.
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.
The discount rate is the interest rate charged to:
a. Borrow excess reserves.
b. Borrow funds at the discount window.
c. Borrow funds from commercial banks.
d. a and b only.
e. None of the above.
The benchmark interest rate used throughout the U.S. economy is the interest rate on:
a. Agency securities.
b. Treasury securities.
c. Federal funds.
d. Repurchase agreements.
e. None of the above.
With stock index options, the hedger:
a. Has downside risk protection.
b. Locks in a price.
c. Retains the upside potential, which is reduced by the option.
d. a and c only.
e. All of the above.
The date the a swap begins accruing interest is called:
a. Trade date.
b. Effective date.
c. Maturity date.
d. Settlement date.
e. None of the above.
A security’s return can be decomposed into the following two parts:
a. Systematic return.
b. Unsystematic return.
c. Historical return.
d. a and b only.
e. b and c only.