Municipal bonds are traded in the:
a. Over-the-counter market.
b. Private market.
c. Third market.
d. Dutch auction market.
e. None of the above.
As a general rule, bonds are callable at:
a. Maturity only.
b. A premium above par.
c. The coupon rate.
d. The yield-to-maturity.
e. None of the above.
Assumptions about capital markets include:
a. Perfectly competitive capital markets.
b. The absence of frictions.
c. Investors can borrow and lend at some riskfree rate.
d. All of the above.
e. a and b only.
Discuss the factors that affect the yield spread between a non-Treasury security and a
Treasury security with the same maturity.
The investment return can be measured in terms of:
a. An arithmetic average rate of return.
b. A time-weighted rate of return.
c. A dollar-weighted rate of return.
d. All of the above.
e. None of the above.
When an investment banker puts together a selling group, the gross spread is divided
among:
a. The lead underwriter.
b. Members of the underwriting syndicate.
c. Members of the selling group.
d. B and c only.
e. All of the above.
The initial motivation for the interest rate swap market was borrower exploitation of
what was perceived to be:
a. Index arbitrage opportunities.
b. Credit arbitrage opportunities.
c. Currency arbitrage opportunities.
d. Risky arbitrage opportunities.
e. None of the above.
A perfect market results when:
a. The number of buyers and seller is sufficiently large.
b. All buyers and sellers are price takers.
c. No transactions costs.
d. No taxes.
e. All of the above.
Which of the following transactions is an example of direct investment?
a. An investment company buys a portfolio of stocks and bonds.
b. An individual makes a deposit at a commercial bank.
c. Owning an equity claim against an investment company.
d. a and b only.
e. All of the above.
For commercial mortgage loans, call protection can take the following forms:
________.
A) prepayment lockout and defeasance.
B) prepayment lockout and prepayment penalty points.
C) defeasance and yield maintenance charges.
D) All of these
Which of the following is false?
a. Warrants are attached to a bond or preferred stock.
b. Warrants may be detached from the host security that they were attached to.
c. Warrants can be traded separately on major national exchanges.
d. Warrants have a value.
e. None of the above.
The longer the time to expiration, the:
a. Greater the option price.
b. Lower the option price.
c. Lower the option’s time value.
d. b and c only.
e. None of the above.
Member banks can borrow from the Fed in order to:
a. Meet short-term liquidity needs.
b. Increase their earnings.
c. Meet required reserves.
d. a and c only.
e. All of the above.
According to Fisher’s Law, the nominal gross rate is equal to:
a. The product of the gross real rate and one plus the inflation rate.
b. The sum of the gross real rate and the inflation rate.
c. The difference between the real gross rate and the inflation rate.
d. a and b only.
e. None of the above.
An investor receives a margin call from the broker when:
a. The investor’s margin account falls below the initial margin but is still above the
maintenance margin..
b. The investor’s margin account falls below the minimum maintenance margin.
c. The investor’s margin account reaches zero.
d. b and c.
e. All of the above.
The price discovery process is an economic function, which refers to:
a. Financial markets that reduce the search and information costs.
b. Financial markets that signal how funds in the economy should be allocated among
financial assets.
c. Financial markets that provide a mechanisms for an investor to sell a financial asset.
d. Financial markets that offer liquidity.
e. None of the above.
When two parties agree at a specified future date to exchange an amount of money
based on a reference interest rate and a notional principal amount, the agreement is
commonly referred to as:
a. Interest rate swap.
b. Forward rate agreement.
c. Swaption.
d. Caption.
e. None of the above.
An odd lot is defined as:
a. 100 shares of stock.
b. Less than a round lot.
c. A block trade.
d. Less than 100 shares of stock.
e. b and d only.
The graphical depiction of the relationship between the yield on bonds of the same
credit quality but different maturities is known as:
a. The yield curve.
b. The term to maturity.
c. The term structure of interest rates.
d. The yield spread.
e. None of the above.
According to the liquidity theory of the term structure, the forward rate should reflect
both interest rate expectations and:a.a. A liquidity premium.
a. A liquidity premium.
b. A risk premium.
c. A maturity premium.
d. A marketability premium.
e. None of the above.
Fannie Mae, Ginnie Mae, and Freddie Mac helped to create a secondary market for
mortgages by:
a. Issuing conventional mortgage loans.
b. Purchasing conventional mortgage loans.
c. Issuing FHA- and VA-insured mortgage loans.
d. Providing mortgage insurance.
e. None of the above.
If the market price of a bond is less than the par value, then the coupon rate is:
a. Less than the par yield.
b. Greater than the required yield to maturity.
c. Equal to the market interest rate.
d. Below the riskless rate.
e. None of the above.
The criticism of futures contracts that their introduction will increase the price volatility
of the underlying asset in the cash market is referred to as:
a. Asset volatility hypothesis.
b. Speculation.
c. Destabilization hypothesis.
d. Hedging.
e. None of the above.
“Market failure” is cited by economists as a reason for:
a. Increased globalization.
b. Regulation.
c. Competition.
d. Competitive markets.
e. None of the above.
In general, the municipal yield curve is:
a. Inverted.
b. Upward sloping.
c. Downward sloping.
d. Flat.
e. None of the above.
Which of the following allows for paying off bonds prior to maturity?
a. Conversion feature.
b. Sinking fund.
c. Call provision.
d. Retirement feature.
e. All of the above.
The bondholder is given the right to sell the issue back to the issuer at the par value on
designated dates in a:
a. Convertible bond.
b. Exchangeable bond.
c. Putable bond.
d. Warrant.
e. None of the above.
If the Treasury rates does not change, but the yield spread between Treasury and
non-Treasury securities changes, the price of a non-Treasury security will:
a. Increase.
b. Decrease.
c. Change.
d. Remain unchanged.
e. None of the above.
When a futures contract is used to hedge a position where either the portfolio or the
individual financial instrument is not identical to the instrument underlying the futures,
it is called a:
a. Cross-hedge.
b. Long hedge.
c. Short hedge.
d. Perfect hedge.
e. None of the above.
A swap can be thought of as a:
a. Package of forward contracts.
b. Package of futures contracts.
c. Package of options.
d. a and c only.
e. None of the above.
Describe the properties of financial assets that determine or influence their
attractiveness to different classes of investors.
Key Issues:
a. Moneyness.
b. Divisibility and denomination.
c. Reversibility.
d. Term to maturity.
e. Liquidity.
f. Convertibility.
g. Currency.
h. Cash flow and return predictability.
i. Complexity.
j. Tax status.
Which of the following statements is most correct?
a. The largest single-day decline in the history of the U.S. stock market occurred in
October 1987.
b. Rule 80A and 80B are examples of price limits.
c. The S&P 500 is the most comprehensive stock index.
d. a and b only.
e. All of the above.