A transaction in which an investor borrows to buy additional securities using the
securities themselves as collateral is called:
a. Leveraged buyout.
b. Buying on margin.
c. Short selling.
d. All of the above.
e. None of the above.
In an interest rate cap or floor agreement, the predetermined level of the reference rate
that is used to determine when and how much the seller must compensate the buyer is
known as:
a. The strike rate.
b. Caption.
c. Flotion.
d. The swap rate.
e. None of the above.
Which of the following statements is false?
a. For a given yield and coupon rate, the longer the maturity, the greater the price
volatility.
b. Fore a given yield and maturity, price volatility is greater, the higher the coupon rate.
c. A bond’s price volatility is affected by its maturity and coupon rate.
d. There is an inverse relationship between the price and yield of a bond.
e. None of the above.
The Black-Scholes model is based on several restrictive assumptions, including:
a. Constant variance of the stock price.
b. Stock prices are continuous and smooth.
c. Zero taxes and transactions costs.
d. Equal borrowing and lending rates.
e. All of the above.*
Traders employ strategies to generate revenues from positions in one or more securities
including:
a. Speculation.
b. Riskless arbitrage.
c. Risk arbitrage.
d. Hedging.
e. a, b and c only.
What are the principal objectives of the risk-based capital requirements?
a. Greater consistency in evaluating the capital adequacy of major banks.
b. Capital adequacy standards that consider the risk profile of the bank.
c. Recognize liquidity factors and market price sensitivity to which a bank may be
exposed.
d. a and b only.
e. All of the above.
Computing a yield for a mortgage-backed security is difficulty because:
a. It requires a determination of the cash flow.
b. The cash flow is uncertain because of prepayments.
c. Assumptions about prepayments must be made.
d. All of the above.
e. None of the above.
Which of the following is true regarding the income of an insurance company?
a. The income from premiums paid is an unstable type of revenue.
b. The initial underwriting income is the return generated from the investment of the
insurance premiums.
c. An insurance company’s profit is the sum of its insurance premiums and investment
returns.
d. The investment returns from the investment of the insurance premiums
accumulate until the funds are paid out on the policy.
e. c and d only.
Differentiate between price risk and reinvestment risk.
When financial institutions’ activities are restricted in the areas of lending, borrowing,
and funding, the regulation is referred to as:
a. Financial activity regulation.
b. Disclosure regulation.
c. Regulation of financial institutions.
d. Regulation of foreign participants.
e. None of the above.
A futures contract is a firm legal agreement between a buyer and a seller in which:
a. The buyer agrees to take delivery of an asset at a specified price at the end of a
designated period of time.
b. The value of the futures contract is derived from the value of the underlying
instrument.
c. The seller agrees to make delivery of an asset at a specified price at the end of a
designated period of time.
d. a and c only.
e. All of the above.
A firm, which is acquired using mostly debt funds and taken private, is participating in
a(n):
a. Initial public offering.
b. Leveraged buyout.
c. Private placement.
d. Merchant banking.
e. None of the above.
Institutional investors employ index-related strategies in order to:
a. Control market risk exposure.
b. Construct an index fund.
c. Enhance returns through index arbitrage.
d. Implement an asset allocation decision.
e. All of the above.
Debt contracts with no periodic interest payments made to owners during the life of the
contract are called:
a. Fixed income bonds.
b. Straight coupon bonds.
c. Zero coupon bonds.
d. Perpetual bonds.
e. Discount bonds.
Trading costs can be decomposed into:
a. Explicit costs.
b. Implicit costs.
c. Soft dollars.
d. a and b only.*
e. All of the above.
Options markets have developed in many countries, including:
a. The United Kingdom.
b. Canada.
c. The Netherlands.
d. All of the above.
e. a and b only.
Interest rate swaps:
a. Can be replicated by a package of forward contracts.
b. Are more liquid than interest rate forward contracts.
c. Cost more than a package of interest rate forward contracts.
d. a and b only.
e. All of the above.
To purchase student loans in the secondary market and to securitize pools of student
loans, Congress created a government-sponsored enterprise commonly known as:
a. Fannie Mae.
b. Sallie Mae.
c. Freddie Mac.
d. Ginnie Mae.
e. None of the above.
The risk of a portfolio can be quantified by:
a. Specifying the probability associated with each possible future outcome.
b. The dispersion of the possible returns below the expected value.
c. The variance of the portfolio returns.
d. The standard deviation of portfolio returns.
e. All of the above.
Explain the difference between the term structure of interest rates and the yield curve.
Cash reserve funds are:
a. A form of reserve funds.
b. Typically used in conjunction with external credit enhancements.
c. A form of internal credit enhancement.
d. All of the above.
e. None of the above.
As the value of a futures contract is derived from the value of the underlying
instrument, they are commonly called:
a. Commodities.
b. Arbitrage instruments.
c. Derivative instruments.
d. Secondary instruments.
e. None of the above.
Monetary policy for member countries of the European Union is administered by the:
a. Bundesbank.
b. European Central Bank.
c. Federal Reserve.
d. Bank of England.
e. None of the above.
Forward exchange rates are determined by:
a. The spot exchange rate.
b. The interest rate in two countries.
c. The income growth rate.
d. a and b only.
e. All of the above.
Since the introduction of the euro on January 1, 1999, the single European currency
against the U.S. dollar has:
a. Strengthened.
b. Weakened.
c. Remained unchanged.
d. Cannot be determined.
e. None of the above.
Which one of the following are examples of financial assets?
U.S. Treasury bonds.
a. Foreign bonds.
b. Home mortgage loan.
c. Common stock.
d. All of the above
Stock index options can be used to:
a. Protect a portfolio position against an adverse price movement.
b. Bet on the movement of stock prices.
c. Earn an abnormal return.
d. a and b only.
e. All of the above.
“Any occ” disability insurance:
a. Insures against the inability of an employed person to earn an income in his own or
any occupation.
b. Is typically written for professionals.
c. Is typically written for blue-collar workers.
d. a and b only.
e. a and c only.
A wild card option is:
a. The choice of which acceptable Treasury issue to deliver.
b. The choice of when in the delivery month to deliver.
c. The choice to deliver after the closing price of the futures contract is determined.
d. The choice to deliver the cheapest issue.
e. None of the above.
The traditional type of mortgage is characterized by:
a. A fixed rate.
b. Level, nominal, payment.
c. Full amortization.
d. a and b only.
e. All of the above.
With ________, the borrower provides sufficient funds for the servicer to invest in a
portfolio of Treasury securities that replicates the cash flows that would exist in the
absence of prepayments.
A) defeasance
B) yield maintenance charges
C) prepayment lockout
D) prepayment penalty points
Preferred stock is classified as a senior instrument in that holders of these securities:
a. Have priority over debtholders in the case of liquidation.
b. Have priority over common stockholders in the case of bankruptcy.
c. Have first claim to the earnings and assets of the firm.
d. Have no risk.
e. None of the above.
Explain the economic functions provided by mutual funds.
Explain the differences and similarities between the portfolio theory and capital market
theory.