Which of the below statements is FALSE?
A) For residential mortgage loans, “value” is either market value or appraised value.
B) For income-producing properties, the value of the property is based on the
fundamental principles of valuation: the value of an asset is the present value of its
expected cash flow.
C) In valuing commercial property, the cash flow is the future NOI and the discount rate
(reflecting the risks associated with the cash flow) is used to compute the present value
of the future NOI.
D) Investors are often confident about estimates of market value and the resulting LTVs
reported for properties.
Discuss the factors that influence the option price.
When an investment banking firm buys the securities from the issuer and accepts the
risk of selling the securities to investors at a lower price, the arrangement is referred to
as:
a. Underwriting.
b. Firm commitment.
c. Best-efforts underwriting.
d. Underwriting syndicate.
e. None of the above.
Until the 1960, Regulation Q had virtually no impact on the ability of banks to compete
with other financial institutions to obtain funds because:
a. Market interest rates stayed below the ceiling rate.
b. Market interest rates stayed above the ceiling rate.
c. Market interest rates and the ceiling rate stayed the same.
d. The ceiling rate stayed below the market interest rates.
e. None of the above.
When a U.S. corporation’s equities are traded in a foreign market, they are typically
issued in the form of:
a. A Global Depository Receipt.
b. An American Depository Receipt.
c. A Depository Receipt.
d. A foreign share.
e. None of the above.
Compare and contrast the SML, CML and market model.
Commercial mortgage loans are for mortgage loans for ________.
A) mortgage-producing properties.
B) income-manufacturing mortgages.
C) income-producing properties.
D) mortgage-manufacturing properties.
Explain the deficiencies of the traditional mortgage loan.
The market for lease financing is a segment of the larger market for:
a. Agency securities.
b. Equities.
c. Equipment financing.
d. Municipal securities.
e. None of the above.
How did the Treasury respond to the violation of the auction process by Salomon
Brothers?
Which of the following statements is incorrect?
a. Derivative instruments derive their value from the price of the underlying financial
instrument.
b. Derivative instruments give the holder the right, but not the obligations, to buy or sell
a financial assets.
c. Derivative instruments can be used for speculative purposes.
d. Derivative instruments can be used for accomplishing a specific financial objective.
e. None of the above.
When orders are batched or grouped together for simultaneous execution at the same
price, the marked is known as:
a. A call market.
b. A continuous market.
c. An auction market.
d. A clearinghouse.
e. None of the above.
Explain the reasons for why OTC interest rate options are used by market participants.
If the price of a call option in the market is higher than that derived from the
Black-Scholes option pricing model, an investor could:
a. Sell the call option and buy a certain number of shares in the underlying stock.
b. Buy the call option and buy a certain number of shares in the underlying stock.
c. Buy the call option and sell short a certain number of shares in the underlying stock.
d. Sell the call option and sell short a certain number of shares in the underlying stock
e. None of the above.
Commercial banks and investment banks customize for their clients interest rate
contracts that are useful for:
a. Index arbitrage.
b. Controlling risk.
c. Taking positions in markets.
d. b and c only.
e. None of the above.
A currency swap is:
a. Simply a package of currency forward contracts.
b. More transactionally efficient than futures or forwards.
c. More suitable for hedging long-dated foreign exchange exposure.
d. All of the above.
e. a and b only.
The initial margin requirement is set by:
a. The broker.
b. The NASD.
c. The Federal Reserve.
d. The Commodity Futures Trading Commission.
e. None of the above.
Explain the mark-to-market and margin requirements of a futures contract and use an
example.
When the seller agrees to pay the buyer if a designated reference falls below a
predetermined level, the agreement is called:
a. A swap.
b. A cap.
c. A floor.
d. The strike.
e. None of the above.
Which of the below statements is TRUE?
A) The debt-to-service coverage ratio (DSC ratio) is the ratio of a property’s net
operating income (NOI) multiplied by the debt service.
B) The higher the DSC ratio, the more likely it is that the borrower will be able to meet
debt servicing from the property’s cash flow.
C) The NOI is defined as the rental income plus cash operating expenses (adjusted for a
replacement reserve).
D) A ratio less than 1 for DSC means that the cash flow from the property is sufficient
to cover debt servicing.
The standard deviation of portfolio return is a measure of:
a. Systematic risk.
b. Unsystematic risk.
c. Total risk.
d. Statistical risk.
e. None of the above.
An investor who wants to speculate that interest rates will rise:
a. Can buy interest rate futures.
b. Can sell interest rate futures.
c. Can simultaneously buy and sell interest rate futures.
d. All of the above.
e. None of the above.
A long/call paper buying strategy involves:
a. Purchasing a call option.
b. Investing in a riskfree security.
c. Buying a put option.
d. a and b only.
e. None of the above.
If the shape of the yield curve is upward sloping and the cost of carry is positive, the
futures price will trade at a:
a. Discount to the cash price.
b. Premium to the cash price.
c. Be equal to the cash price.
d. Cannot be determined.
e. None of the above.
For common stock, an order of 100 shares is called:
a. A round lot.
b. An odd lot.
c. A block trade.
d. An open order.
e. None of the above.
The option price is a reflection of the option’s:
a. Premium.
b. Intrinsic value.
c. Time value.
d. b and c only.
e. None of the above.
Commercial mortgage-backed securities:
a. Are issued by private entities.
b. Do not have any implicit or explicit government guarantee.
c. Must be credit enhanced.
d. Are backed by a pool of commercial mortgage loans.
e. All of the above.
The buyer of a cap benefits if the designated reference:
a. Rises above the strike rate.
b. Falls below the strike rate.
c. Stays the same.
d. None of the above.
In the U.S., secondary trading of common stock occurs on:
a. Major national stock exchanges.
b. Regional stock exchanges.
c. The OTC market.
d. All of the above.
e. a and b only.
Why does risk occur in a repo transaction?
When a mortgage is included in a pool of mortgages that is used as collateral for a
mortgage pass-through security, the mortgage is said to be:
a. Securitized.
b. Collateralized.
c. Guaranteed.
d. Standardized.
e. Stripped.
Congress has specifically exempted municipal securities from:
a. The registration requirements of the Securities Act of 1933.
b. The periodic reporting requirements of the Securities Exchange Act of 1934.
c. Antifraud provisions applicable to municipal securities.
d. a and b only.
e. All of the above.
A most important property resulting from the existence of a perfect loan market is that:
a. It separates the current consumption decision from the current income position by
opening the possibility to save and dissave.
b. It frees the investment from the saving decision.
c. a and b only.
d. Borrowing and lending rates are equal.
e. All of the above.