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.
Which of the following risks are associated with realizing the expected cash flows?
a. Default risk.
b. Purchasing power risk.
c. Foreign-exchange risk.
d. All of the above.
Because of the tax-exempt feature of municipal bonds, the yield on municipal securities
compared to Treasuries with the same maturity is:
a. Less.
b. Greater.
c. The same.
d. Unknown.
e. None of the above.
The highest yield accepted by the Treasury is referred to as the:
a. Tail.
b. Stop yield.
c. Average yield.
d. Income yield.
e. None of the above.
A growing-equity mortgage:
a. Does have negative amortization.
b. Has an adjustable-rate mortgage whose monthly mortgage payments increase over
time..
c. Has a fixed-rate mortgage whose monthly mortgage payments increase over time.
d. Effectively shortens the life of the mortgage.
e. c and d only.
The term structure of interest rates is the relationship between the yields on comparable
securities but different:
a. Spreads.
b. Maturities.
c. Credit ratings.
d. Provisions.
e. None of the above.
To protect the value of a stock held in a portfolio against the risk of a decline in the
market value, an investor would follow:
a. A covered call writing strategy.
b. A protective put buying strategy.
c. A butterfly spread.
d. A short call strategy.
e. None of the above.
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.
When an option has intrinsic value, it is said to be:
a. In the money.
b. Out-of-the money.
c. At-the-money.
d. Time dependent.
e. None of the above.
When the asset manager customizes the investment selection to the objectives of the
investor, this is referred to as:
a. A hedge fund.
b. A separately managed account.
c. A private fund.
d. An individual-traded fund.
e. None of the above.
Whenever investment bankers assist in offering the securities of government-owned
companies to private investors, this process is referred to as:
a. Initial public offering.
b. Privatization.
c. Underwriting.
d. Firm commitment.
e. None of the above.
A commitment letter is sent to the applicant:
a. When the lender guarantees the funds.
b. When the lender decides to lend the funds.
c. When the lender has found suitable property for purchase.
d. a and b only.
e. All of the above.
Which of the following statements is most correct?
a. The NYSE is called a membership organization.
b. NYSE’s owners are its seat holders.
c. NASDAQ is owned by the NASD.
d. NASDAQ is a for-profit organization.
e. All of the above.
A fund in which the asset manager retains some exposure to systematic risk is:
a. A market directional hedge fund.
b. A corporate restructuring hedge fund.
c. A convergence trading hedge fund.
d. A risk arbitrage hedge fund.
e. An opportunistic hedge fund.
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.
What is an option on a swap, and how can it be used?
When all bidders pay the highest winning yield bid in a competitive bidding
underwriting, this type of auction is referred to as:
a. Single price auction.
b. Dutch auction.
c. Multiple price auction.
d. a and b only.
e. None of the above.
Discuss the fundamental determinants of exchange rates.
Discuss the frictions that cause actual financial markets to differ from a perfect market.
State the assumptions, which underlie the capital market theory distinguishing between
assumptions about investor behavior and assumptions about capital markets.
Speculation in interest rate futures differs from speculating with interest rate options in
that interest rate options:
a. Limit downside risk.
b. Reduce the upside potential by the amount of the option price.
c. Offers unlimited gains.
d. a and b only.
e. None of the above.
Outside of the U.S. inflation-indexed bonds are known as:
a. TIPS.
b. HICPS.
c. Indexers.
d. Linkers.
e. None of the above.
Participants in financial markets use interest rate swaps to:
a. Alter the cash flow characteristics of their assets.
b. Capitalize on perceived capital market inefficiencies.
c. Change the risk by altering the cash flow characteristics of their liabilities.
d. a and b only.
e. All of the above.
Primary dealers for government securities include:
a. Domestic investment banking firms.
b. Foreign investment banking firms.
c. Foreign commercial banks.
d. Domestic commercial banks.
e. All of the above.
When the lessor uses only a portion of its own funds to purchase the equipment and
borrows the balance from a bank, the lease is referred to as a:
a. Tax-oriented lease.
b. Leveraged lease.
c. Direct lease.
d. Single-investor lease.
e. None of the above.
Compare and contrast mortgage-backed securities and commercial mortgage-backed
securities.
In a defined contribution plan, the plan sponsor is responsible for making:
a. Specified contributions into the plan on behalf of qualifying participants.
b. Specified payments to the employee after retirement.
c. Variable payments linked to an index such as the CPI.
d. Both a and b.
e. Both b and c.
The difference between the expected return in the market and the riskfree rate is called:
a. The market risk premium.
b. The market price of risk.
c. The risk premium.
d. The market sensitivity index.
e. a and b.
An option that allows the option buyer to purchase a put option is called:
a. Caput.
b. Cacall.
c. Swaption.
d. Caption.
e. None of the above.
To protect against a loss, investment banks engage in:
a. Speculative strategies.
b. Active portfolio management strategies.
c. Hedging strategies.
d. Passive portfolio management strategies.
e. None of the above.
Regarding the default risk associated with municipal bonds:
a. Over the past 30 years there have been relatively few defaults.
b. From 1940 to the present they have demonstrated very little default risk.
c. They historically had little default risk but it has increased dramatically in the past
three decades.
d. Their default risk is constantly fluctuating.
e. None of the above.
The bid-ask spread:
a. Is the difference between the price the market maker is willing to sell a financial asset
and the price the market maker is willing to buy a financial asset.
b. Reflects the amount of risk the market maker is assuming by making a market.
c. Is affected by the thickness of the market.
d. All of the above are correct.
e. None of the above.
Student loans that are not part of a government guarantee program are called:
a. Term loans.
b. Bank loans.
c. Alternative loans.
d. Subsidized loans.
e. None of the above.
A corporation can issue new common stock directly to existing stockholders through a:
a. Warrant.
b. Preemptive rights offering.
c. Initial public offering.
d. Leveraged buyout.
e. None of the above.
Buying stock index futures, will:
a. Increase a portfolio’s beta.
b. Decrease a portfolio’s beta.
c. Not affect a portfolio’s beta.
d. None of the above.