One of the three major differences in the structures of a CMBS transaction and a
nonagency RMBS transaction include: ________.
A) Residential mortgages impose prepayment penalties or restrictions on prepayments.
B) The role of the buyers when the structure is being created is different.
C) With residential mortgages, the loan can be transferred by the servicer to the special
servicer when the borrower is in default, imminent default, or in violation of covenants.
D) All of these
What is SEC Rule 144A and its potential impact on the private placement market?
When an option grants the buyer the right to purchase the designated instrument from
the writer, it is referred to as a:
a. Call option.
b. Put option.
c. Long forwards.
d. Long futures.
e. None of the above.
Which of the following statements is false?
a. Index-related trading has increase stock price volatility.
b. The stock index options market has become the price discovery market.
c. Evidence suggests that index-related trading was responsible for Black Monday.
d. b and c only.
e. None of the above.
In constructing Markowitz efficient portfolios it is assumed that:
a. An investor’s decision is affected by the expected return and risk.
b. Investors are risk averse.
c. Investors seek to achieve the highest expected return for a given level of risk.
d. a and b only.
e. All of the above.
In the typical pass-through structure of auto loan-backed deals, there is a:
a. Senior tranche.
b. Subordinated tranche.
c. Accrual tranche.
d. a and b only.
e. All of the above.
Regarding the taxation of life insurance:
a. The inside buildup of cash value life insurance policies is not taxed as income or
capital gains.
b. The beneficiary of the death benefit of life insurance policy is not subject to an
income tax.
c. The death benefit of the policy is never subject to estate tax.
d. a and b only.
e. All of the above.
From the issuing government’s perspective:
a. The ad hoc auction system introduces less market volatility than a regular
calendar auction.
b. The ad hoc auction system offers less flexibility in raising funds than a regular
calendar auction.
c. The ad hoc auction system provides greater stability in scheduling.
d. a and b only.
e. All of the above.
Leasing is a form of:
a. Bank borrowing.
b. Syndication.
c. Tax avoidance.
d. Participation.
e. None of the above.
Explain how financial intermediaries provide at least one of four economic functions.
The market where banks can borrow and lend reserves is called the:
a. Open market.
b. Federal funds market.
c. Discount window.
d. Money market.
e. None of the above.
Prepayment risk, which is associated with the risk of prepayments, consists of:
a. Default risk.
b. Contraction risk.
c. Extension risk.
d. b and c only.
e. All of the above.
The pension crisis being faced by corporate defined benefit plans is due to:
a. Poor management.
b. The accounting permitted by accountants with the aid rules of actuaries.
c. Declining contributions from plan participants.
d. a and b only.
e. All of the above.
Corporate governance issues include:
a. Traditional ratio analysis.
b. Policies for financial disclosure.
c. The uncertainty of operating cash flows.
d. Net assets and working capital.
e. All of the above.
Manufactured housing-backed securities, which are backed by loans for manufactured
homes, are issued by:
a. Fannie Mae.
b. Ginnie Mae.
c. Private entities.
d. b and c only.
e. All of the above.
To control portfolio risk, institutional investors us:
a. Naked option strategies.
b. Covered call writing.
c. Protective put buying.
d. All of the above.
e. None of the above.
A warrant, which gives the holder the right but not the obligation to buy a designated
number of shares at a specified price before a set date, is equivalent to:
a. A call option.
b. A put option.
c. A straddle.
d. A spread.
e. None of the above.
Convertible bonds issued by the British government are referred to as:
a. Bunds.
b. Gilts.
c. TIPS.
d. LEAPS.
e. None of the above.
According to the reinsurance transaction, the “reinsurer” is:
a. The insurer transferring the risk.
b. The insurer accepting the risk.
c. The insurer that wrote the policy.
d. The policy holder whose policy is transferred.
e. None of the above.
Loan structures in which no repayment of the principal is made until the maturity date
are referred to as:
a. Balloon payment loans.
b. Term loans.
c. Bullet loans.
d. Performing loans.
e. None of the above.
The relationship between the call option price, the put option price, and the price of the
underlying asset is knows as:
a. Risk/return relationship.
b. Put-call parity relationship.
c. Binomial relationship.
d. Arbitrage relationship.
e. None of the above.
The effect of the prepayment right is that the cash flows from a mortgage is not known
with certainty. This uncertainty is called:
a. Cash flow risk.
b. Prepayment risk.
c. Marketability risk.
d. Price risk.
e. Credit risk.
The security issued by Freddie Mac is called a:
a. Participation certificate.
b. Mortgage-backed security.
c. Non-agency mortgage pass-through security.
d. Stripped mortgage-backed security.
e. None of the above.
Explain the difference between naked strategies and covered (hedge) strategies.
The relationship between yield and maturity is referred to as:
a. Yield curve.
b. Term structure of interest rates.
c. Term to maturity.
d. Yield spread.
e. None of the above.
The market-clearing interest rate is found:
a. At the intersection of the saving and investment function.
b. At the intersection of supply and demand.
c. At the point where borrowing and saving take place.
d. At the point where the transformation curve has a slope equal to R.
e. None of the above.
Derivative instruments that are used to control interest rate risk include:
a. Interest rate futures.
b. Interest rate options.
c. Interest rate forwards.
d. a and b only.
e. All of the above.
The federal funds rate:
a. Is determined by the supply and demand for federal funds.
b. Is the rate at which all money market interest rates are anchored.
c. Is often a target of the Fed’s monetary policy.
d. Is higher than the repo rate because federal funds are borrowed on an unsecured
basis.
e. All of the above.
The family of funds concept represents the strategy of the mutual fund industry to offer
investors a choice of numerous funds with different investment objectives in the same
fund family. Thus, investors may move their assets among:
a. Money market funds.
b. Global stock and bond funds.
c. Broadly diversified stock funds.
d. Stock funds devoted to particular sectors.
e. All of the above.
Corporations receive what federal tax exemption on qualified dividends of
preferred stock?
a. 0%.
b. 30%.
c. 50%.
d. 70%.
e. None of the above.
Which of the following are types of investment companies?
a. Open-end funds.
b. Closed-end funds.
c. Unit trusts.
d. a and b only.
e. All of the above.
Describe the risks associated with investing in mortgages.
A mortgage loan that meets an agency’s underwriting standards is referred to as a:
a. Conforming mortgage.
b. Nonconforming mortgage.
c. Conventional mortgage.
d. Nonconventional mortgage.
e. None of the above.