1) if you buy 100 shares of ibm stock in anticipation that earnings will increase by more
than anticipated, you are engaging in what is termed a risky arbitrage.
2) basis risk is the risk that the prices or value of the underlying spot and the derivatives
instrument used to hedge do not move predictably relative to one another.
3) the financing gap is defined as average core deposits minus average borrowed funds.
4) the largest secondary money market in the united states is the secondary market for
t-bills.
5) property and casualty insurers have a greater need for liquidity than life insurers.
6) the real interest rate is the increment to purchasing power that the lender earns in
order to induce him or her to forego current consumption.
7) a fixed-floating interest rate swap is called a plain vanilla swap.
8) vulture funds specialize in buying distressed loans.
9) funds that specialize in municipal bonds and certain types of real estate to minimize
tax liabilities are called hybrid funds.
10) repos and fed funds borrowed are examples of stored liquidity.
11) cash management accounts offered by a securities firm allow investors to write
checks on funds invested in money market securities.
12) hedge funds and reits often employ significant amounts of leverage, but standard
open-end mutual funds do not.
13) savings institutions must have at least 65% of their assets in mortgage related areas
in order to maintain their favorable tax status and obtain fhlb loans.
14) liability losses are more subject to social inflation than property losses.
15) you want to have $1,200,000 when you retire and you are in a defined contribution
plan. you can earn 9% per year on the money invested and you will retire in 25 years.
your employer also contributes to your plan. the employer will contribute 4% of what
you put into the plan each year. how much do you have to contribute per year to meet
your goal?
a.$18,435.43
b.$17,654.87
c.$16,879.32
d.$13,622.60
e.$15,999.44
16) figure 1-1
ibm creates and sells additional stock to the investment banker, morgan stanley. morgan
stanley then resells the issue to the u.s. public.
this transaction is an example of a(n)
a.primary market transaction
b.asset transformation by morgan stanley
c.money market transaction
d.foreign exchange transaction
e.forward transaction
17) for large interest rate increases, duration _____________ the fall in security prices,
and for large interest rate decreases, duration ______________ the rise in security
prices.
a.overpredicts; overpredicts
b.overpredicts; underpredicts
c.underpredicts; overpredicts
d.underpredicts; underpredicts
e.none of the above
18) you buy a car for $38,000. you agree to a 60-month loan with a monthly interest
rate of 0.55%. what is your required monthly payment?
a.$634.24
b.$745.29
c.$605.54
d.$764.07
e.none of the above
19) the relationship between maturity and yield to maturity is called the
__________________.
a.loan covenant
b.term structure
c.bond indenture
d.fisher effect
e.drp structure
20) in terms of volume of trading and market value of firms traded, the _____________
is the largest u.s. stock market. in terms of number of firms traded, the ___________ is
the largest in the united states.
a.nyse; nyse
b.nasdaq; nyse
c.nyse; amex
d.nyse; nasdaq
e.nasdaq; amex
21) you buy euros in new york from deutsche bank and simultaneously sell them in
london to barclays for a gain. this is an example of
a.position trading
b.program trading
c.risk arbitrage
d.pure arbitrage
e.hedging
22) if a bank relies solely on purchased liquidity, the bank will likely
a.maintain large amounts of liquid assets
b.fund its loan commitments with asset sales
c.be required to borrow money at short notice
d.be required to raise equity capital quickly
e.be forced to liquidate liabilities at fire sale prices
23) a u.s. bank has £120 million in loans to corporate customers and has £70 million in
deposits it owes to customers with the same maturity. the bank has also sold £20 million
pounds forward. the bank’s net exposure is
a.£210 million
b.£30 million
c.£70 million
d.£170 million
e.£190 million
24) loans past due 90 days or more and loans that are not accruing interest because of
problems of the borrower are called
a.loan losses
b.net charge-offs
c.provisional loans
d.noncurrent loans
e.contra loans
25) depository institutions include:
a.banks
b.thrifts
c.finance companies
d.all of the above
e.a and b only
26) convexity arises because
a.bonds pay interest semiannually
b.coupon changes are the opposite sign of interest rate changes
c.duration is an increasing function of maturity
d.present values are a nonlinear function of interest rates
e.duration increases at higher interest rates
27) which of the following is/are capital market instruments?
a.10-year corporate bonds
b.30-year mortgages
c.20-year treasury bonds
d.15-year u.s. government agency bonds
e.all of the above
28) bank a has an increase in deposits of $20 million dollars and all bank reserve
requirements are 10%. bank a loans out the full amount of the deposit increase that is
allowed. this amount winds up deposited in bank b. bank b lends out the full amount
possible as well and this amount winds up deposited in bank c. what is the total increase
in deposits resulting from these three banks?
a.$48.00 million
b.$54.20 million
c.$56.33 million
d.$57.10 million
e.$60.00 million
29) a bank is earning 6% on its $150 million in earning assets and is paying 4.75% on
its liabilities. the bank’s interest rate spread is __________.
a.6.00%
b.4.75%
c.1.25%
d.10.75%
e.1.26%
30) classify the following trading activities as either a position trade, a pure arbitrage
trade, or a risk arbitrage trade.
31) what is the difference between the expected real interest rate and the real rate of
interest actually earned?
32) figure 23-2
a u.s. bank has deposit liabilities denominated in euros that must be repaid in 2 years.
the deposits pay a fixed interest rate of 4%. the bank took the money raised and
converted it to dollars, whereupon it lent the dollars to a corporate customer who will
repay the bank over the next two years in dollars at a variable rate of interest equal to
libor +3%. the interest rate earned may change every six months.
other than credit risk, what are the risks to the bank?
design a swap that the bank could use to reduce their risks.
33) what did the sarbanes-oxley act do to try and prevent additional scandals at
corporations? what more needs to be done to prevent additional scandals among
investment bankers?
34) how does a futures or option clearinghouse assist traders?
35) discuss how secondary markets benefit funds issuers.
36) explain the payment pattern on a gnma pass-through and a new class b cmo when
interest rates fall. which has more predictable payments, and why would an investor
care?
37) what are home equity loans? what has happened to the average balance of home
equity loans in recent years? why do finance companies prefer home equity loans to
unsecured debt?