An FI manager purchases a zero-coupon bond that has two years to maturity. The
manager paid $76.95 per $100 for the bond. The current yield on a one-year bond of
equal risk is 12 percent, and the one-year rate in one year is expected to be either 16.65
percent or 15.35 percent. Either rate is equally probable.
What is the yield to maturity for the two-year bond if held to maturity? A. 27.99
percent.
B. 13.54 percent.
C. 29.95 percent.
D. 14.00 percent.
E. 11.53 percent.
Answer:
Politically motivated limitations on payments of foreign currency may expose an FI to
A. sovereign country risk.
B. interest rate risk.
C. credit risk.
D. foreign exchange risk.
E. off-balance-sheet risk.
Answer:
A $1,000 six-year Eurobond has an 8 percent coupon, is selling at par, and contracts to
make annual payments of interest. The duration of this bond is 4.99 years. What will be
the new price using the duration model if interest rates increase to 8.5 percent? A.
$23.10.
B. $976.90.
C. $977.23.
D. $1,023.10.
E. -$23.10.
Answer:
Suppose that debt-equity ratio (D/E) and the sales-asset ratio (S/A) were two factors
influencing the past default behavior of borrowers. Based on past default (repayment)
experience, the linear probability model is estimated as: PDi = 0.5(D/Ei) + 0.1(S/Ai). If
a prospective borrower has a debt-equity ratio of 0.4 and sales-asset ratio of 1.8, the
expected probability of default is A. 0.02.
B. 0.35.
C. 0.38.
D. 0.62.
E. 0.98.
Answer:
Which term defines the risk related to the uncertainty of an FI’s earnings on its trading
portfolio caused by changes, and particularly extreme changes in market conditions? A.
Interest rate risk.
B. Credit risk.
C. Sovereign risk.
D. Market risk.
E. Default risk.
Answer:
An investment company has purchased $100 million of 10 percent annual coupon,
6-year Eurobonds. The bonds have a duration of 4.79 years at the current market yields
of 10 percent. The company wishes to hedge these bonds with Treasury-bond options
that have a delta of 0.7. The duration of the underlying asset is 8.82, and the market
value of the underlying asset is $98,000 per $100,000 face value. Finally, the volatility
of the interest rates on the underlying bond of the options and the Eurobond is 0.84.
Given this information, what type of T-bond option, and how many options should be
purchased, to hedge this investment? A. 792 put options.
B. 792 call options.
C. 942 put options.
D. 942 call options.
E. 554 put options.
Answer:
If Bank 1 is acquired by Bank 3, what is the impact on the market’s HHI? A. An
increase in the HHI of 1600.
B. An increase in the HHI of 624.
C. An increase in the HHI of 1563.
D. A decrease in the HHI of 222.
E. A decrease in the HHI of 360.
Answer:
Match the following pieces of legislation with the function achieved by each regulation
as stated in question
A. Securities Act of 1933
B. Securities Exchange Act of 1934
C. Investment Advisers Act
D. Investment Company Act
E. Insider Trading and Securities Fraud Enforcement Act of 1988
F. Market Reform Act of 1990
G. National Securities Markets Improvement Act of 1996
Allows the SEC to introduce circuit breakers to halt trading on exchanges.
Answer:
A credit forward is a forward agreement that A. hedges against a decrease in default
risk on a loan after the loan rate is determined and the loan issued.
B. hedges against an increase in default risk on a loan before the loan rate is
determined and the loan issued.
C. hedges against an increase in default risk on a loan after the loan rate is determined
and the loan issued.
D. hedges against a decrease in default risk on a loan before the loan rate is determined
and the loan issued.
E. hedges against an increase in default risk on a loan after the loan rate is determined
and before the loan is issued.
Answer:
Which of the following is NOT a segment in the secondary market for sovereign debt?
A. Restructured loans.
B. Brady bonds.
C. Sovereign bonds.
D. Performing loans.
E. Nonperforming loans.
Answer:
The gap ratio expresses the reprice gap for a given time period as a percentage of A.
equity.
B. total liabilities.
C. current liabilities.
D. total assets.
E. current assets.
Answer:
Should the bank invest in this project if the discount rate is 18 percent? A. Yes, because
the net present value of the project is $2,473,948.
B. No, because the net present value of the project is -$2,473,948.
C. Yes, because the net present value of the project is $24.8 million.
D. No, because the net present value of the project is -$24.8 million.
E. Yes, because the net present value of the project is $1,342,688.
Answer:
A regression of sectoral loan losses against total loans losses, both measured as a
percentage of total loans, of a bank results in the following beta coefficients for the real
estate (RE) and commercial (CL) loan variables: βRE = 1.2, βCL = 1.6. The intercept for
both regressions is zero.
The results indicate that for the bank A. the real estate loan losses were systematically
lower than the total loan losses.
B. the real estate loan losses were systematically higher than the total loan losses.
C. the commercial loan losses are systematically higher than the total loan losses.
D. Answers A and C.
E. Answers B and C.
Answer:
Concern about bank solvency has been used to justify product segmentation on the
grounds of A. safety and soundness issues.
B. economy of scale and scope issues.
C. conflict of interest issues.
D. deposit insurance issues.
E. regulatory oversight issues.
Answer: