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.
Revenue bonds have a security structure where the bond issuer:
a. Pledges to the bondholders the revenues generated by the operating projects financed.
b. Secures the bonds by its unlimited taxing power.
c. Collateralizes the bonds with specific assets.
d. All of the above.
e. None of the above.
Private placement of securities involves:
a. Selling securities to the public.
b. Selling securities to a limited number of individual investors.
c. Placing securities with a limited number of institutional investors.
d. Selling securities that have a pool of assets as collateral.
e. None of the above.
Depository institutions seek to generate income by:
a. The difference between the return that they earn on assets and the cost of their funds.
b. Selling money for more than it costs to buy money.
c. The bid-ask spread.
d. a and b only.
f. None of the above.
An obligation guaranteed by another entity is called a:
a. Collateral trust bond.
b. Subordinated debenture bond.
c. Guaranteed bond.
d. Equipment trust certificate.
e. None of the above.
Central governments issue their securities through:
a. An ad hoc auction system.
b. A Dutch-style system.
c. The regular calendar auction.
d. The tap system.
e. All of the above.
When assessing the credit risk of a corporate issuer rating agencies look at:
a. Corporate governance risk.
b. Financial risk.
c. Business risk.
d. a and c only
e. All of the above.
Government-sponsored enterprises:
a. Are privately owned, publicly chartered entities.
b. Issue securities directly in the marketplace.
c. Issue debentures and mortgage-backed securities.
d. All of the above.
e. None of the above.
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.
The decision on how to divide funds across the major asset classes is referred to as:
a. Dynamic hedging.
b. Insuring the portfolio.
c. Asset allocation decision.
d. Program trading.
e. None of the above.
A common OTC option between two sectors of the market is an option on:
a. Interest rates.
b. The yield curve.
c. Fixed-income securities.
d. Pass-throughs.
e. None of the above.
Financial markets are not frictionless because of:
a. Commissions charged by brokers.
b. Bid-ask spreads charged by dealers.
c. Trading restrictions.
d. Costs of acquiring information about financial assets.
e. All of the above.
Which of the following economic factors have been identified to explain security
returns according to the APT?
a. Unanticipated changes in industrial production.
b. Unanticipated changes in inflation.
c. Unanticipated changes in interest rates.
d. Unanticipated changes in the shape of the yield curve.
e. All of the above.
Explain the relationship between a cap and a floor and an option.
Financial intermediaries transfer financial assets that are less desirable into other
financial assets, which are more widely preferred by the public. This transformation
involves which of the following economic functions?
a. Providing maturity intermediation.
b. Risk reduction via diversification.
c. Reducing the costs of contracting and information processing.
d. Providing a payments mechanism.
e. All of the above.
The financial reform, which occurred in England in 1986, is called:
a. The Big Board.
b. The Big Bang.
c. Decimal Monday.
d. The Black Monday.
e. None of the above.
Ginnie Mae ________.
A) issues securities that are not backed by FHA-insured multifamily housing loans.
B) does not create project loan pass-through securities.
C) purchase multifamily loans from approved lenders and either retain them in their
portfolio or use them for collateral for a security.
D) creates securities that can be backed by a single project loan on a completed project
or one or more project loans.
In constructing a portfolio of assets, investors seek to maximize the expected return
from their investment given some level of risk they are willing to accept. Portfolios that
satisfy this requirement are called:
a. Efficient portfolios.
b. Optimal portfolios.
c. Markowitz efficient portfolios.
d. a and c.
e. All of the above.
The value of a stock index option is equal to:
a. The index value multiplied by $100.
b. The index value multiplied by the number of shares purchased.
c. The index value multiplied by the contract multiple.
d. The share price divided by the index value.
e. None of the above.
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.
The fundamental difference between discount and coupon Treasury securities is:
a. The spread between the bid and ask prices is narrower than in other sectors of the
bond market.
b. The form of the payment stream that the holder receives.
c. The inflation premium.
d. The tax to be paid on the income received by the holder.
e. None of the above.
Most stock markets around the world use:
a. The specialist system.
b. Some version of competitive dealer system.
c. An electronically assisted market maker system.
d. b and c only.
e. All of the above.
One explanation for the rapid growth of the swap market is the opportunity for credit
arbitrage, which arises because of:
a. An inverted yield curve.
b. Differences between the quality spread for fixed-rate and floating-rate loans.
c. Market anomalies.
d. Yield differences between different maturity bonds.
e. None of the above.
Impact costs, timing costs, and opportunity costs are examples of:
a. Explicit costs.
b. Implicit costs.
c. Soft dollars.
d. Hard dollars.
e. None of the above.
What is beta and how can it be estimated?
The key distinction between life insurance and property and casualty insurance
companies lies in:
a. The difficulty of projecting whether or not a policyholder will be paid off.
b. The amount of the payoff.
c. Tax differences.
d. a and b only.
e. All of the above.
Describe the different forms of credit risk.
When the issuer of a security files a registration statement with the SEC, part I of the
registration is:
a. The prospectus.
b. Supplemental information.
c. A letter of comments.
d. A deficiency letter.
e. None of the above.
All of the following regarding Euro straights are true EXCEPT:
a. They make coupon payments semiannually.
b. They are referred to as “plain vanilla” bonds.
c. They are fixed-rate coupon bonds.
d. They are issued on an unsecured basis.
e. They are usually issued by high-quality entities.
An agreement whereby two parties agree to exchange periodic payments is called:
a. An option.
b. A futures contract.
c. A swap.
d. Cap and floor agreements.
e. None of the above.
The price of a Treasury security is forced to trade near its theoretical value based on
spot rates through the process of:
a. Coupon stripping.
b. Repurchasing.
c. Reconstituting.
d. a and c only.
e. None of the above.
A cap and a floor can be viewed simply as:
a. A package of forwards.
b. A package of options.
c. A package of futures.
d. A complex contract.
e. None of the above.