1) if you earn 0.5% a month in your bank account, this would be the same as earning a
6% annual interest rate with annual compounding.
2) both retail and wholesale cds are negotiable instruments despite their different
denominations.
3) a credit forward is a forward agreement that hedges against an increase in default risk
on a loan after the loan has been created by a lender.
4) hedge funds can short sell securities, whereas most mutual funds cannot.
5) ignoring default risk, if a bond’s expected return is greater than its required return,
then the bond’s market price must be greater than the present value of the bond’s cash
flows.
6) commercial paper is a short term obligation of the u.s. government issued to cover
government budget deficits and to refinance maturing government debt.
7) a long-term investor in a high marginal tax bracket will normally prefer a dollar of
capital gain to a dollar of dividend yield.
8) the five cs of credit are financial capacity, collateral, conditions, connections with the
bank, and capital.
9) a fairly priced bond with a coupon less than the expected return must sell at a
discount from par.
10) an example of a pure arbitrage strategy is to simultaneously buy and sell the same
security in two different markets at different prices.
11) the unbiased expectations hypothesis of the term structure posits that long-term
interest rates are unrelated to expected future short-term rates.
12) commercial paper, treasury bills, and banker’s acceptance rates are all quoted as
discount yields.
13) for securities firms, income from investment management is more stable than
income from underwriting or trading activities.
14) the required rate of return on a bond is
a.the interest rate that equates the current market price of the bond with the present
value of all future cash flows received
b.equivalent to the current yield for non par bonds
c.less than the err for discount bonds and greater than the err for premium bonds
d.inversely related to a bond’s risk and coupon
e.none of the above
15) a professional futures trader who buys and sells futures for his own account
throughout the day but typically closes out his positions at the end of the day is called a
a.floor broker
b.day trader
c.position trader
d.specialist
e.hedger
16) the bis recommends that depository institutions do which of the following to
realistically measure liquidity risk?
i. construct a maturity ladder of funding requirements over both the short and long run.
ii. conduct scenario analyses of the bank’s implied liquidity position under different
bank and economic conditions.
iii. always keep the loan to deposit ratio less than one.
a.i only
b.ii only
c.i and ii only
d.ii and iii only
e.i, ii, and iii
17) a pension plan has promised to pay out $25 million per year over the next 15 years
to its employees. actuaries estimate the rate of return on the fund’s assets will be 5.50%.
what amount of pension fund reserves (to the nearest dollar) are needed for the plan to
be fully funded?
a.$375,000,000
b.$310,945,678
c.$250,939,524
d.$202,345,555
e.$198,466,231
18) which of the following is/are money market instrument(s)?
a.negotiable cds
b.common stock
c.t-bonds
d.4-year maturity corporate bond
e.a, b, and c are money market instruments
19) the following formula is used to calculate the _____________ of a money market
investment.
a.ear
b.apr
c.single-payment yield
d.discount yield
e.bey
20) an employee contributes 9% of his salary to his 401(k) plan and the employer
matches with 40% of the first 6% of the employee’s salary. the employee earns $90,000
and is in a 28% tax bracket. if the employee earns 10% on the plan investments, what is
his one-year rate of return relative to the net amount of money he invested?
a.16.28%
b.51.25%
c.90.07%
d.93.52%
e.29.72%
21) a three-class sequential pay cmo has an initial principle balance of $50 million per
class. in the first month, interest payments of $5 million and principle payments of $2
million are received. in the second month, class a holders receive interest on _____
principle and class b holders receive interest on _____ principle.
a.$30 million; $30 million
b.$28 million; $28 million
c.$27 million; $27 million
d.$28 million; $30 million
e.$30 million; $28 million
22) the fdic is concerned about issuance of mortgage-backed bonds (mbbs) because
a.the fdic is concerned about investors’ prepayment risk
b.mbbs increase deposit insurance premiums
c.the process takes loans off the balance sheet and replaces them with liabilities
d.the process reduces the amount of assets available to back insured deposits
e.none of the above
23) the discount yield on a t-bill differs from the t-bill’s bond equivalent yield (bey)
because
i. the discount yield is the return per dollar of face value and the bey is a return per
dollar originally invested.
ii. a 360-day year is used on the discount yield and the bey uses 365 days.
iii. the discount yield is calculated without compounding, the bey is calculated with
compounding.
a.i only
b.ii only
c.i and ii only
d.ii and iii only
e.i, ii, and iii
24) a bank with long-term fixed-rate assets funded with short-term rate-sensitive
liabilities could do which of the following to limit their interest rate risk?
i. buy a cap.
ii. buy an interest rate swap.
iii. buy a floor.
iv. sell an interest rate swap.
a.i and ii only
b.iii only
c.i and iv only
d.ii and iii only
e.iii and iv only
25) weaknesses of the duration gap immunization model include all but which of the
following?
a.continuously matching the duration of assets and liabilities can be time-consuming
and costly
b.duration-based predictions are always incorrect due to convexity
c.duration measurement and management are more complex than the repricing model
d.duration-based immunization strategies require continuous rebalancing of asset and
liability durations
e.duration measures only how cash flows change, not the present value of those changes
26) you would want to purchase a security if p ____________ pv or err ____________
rrr.
a.; £
b.;
c.£;
d.£; £
27) you have taken a stock option position and if the stock’s price increases you could
lose a fixed small amount of money, but if the stock’s price decreases your gain
increases. you must have ________________________________.
a.bought a call option
b.bought a put option
c.written a call option
d.written a put option
e.purchased a straddle
28) rank order the net charge-off rates from high to low for the following loan types:
i. c&i loans.
ii. credit card loans.
iii. real estate loans.
a.i, ii, iii
b.i, iii, ii
c.ii, i, iii
d.ii, iii, i
e.iii, i, ii
29) an investor has a 38% ordinary income tax rate and a 20% long-term capital gains
tax rate. the investor holds stock in a firm that could pay its usual $1 per share dividend
or reinvest the cash in the firm. the stock price is currently $30 per share. if the firm
does not pay the dividend, the share price will rise. if it pays the dividend, the share
price will stay the same. by how much must the share price rise if the dividend is not
paid in order to make the investor indifferent between receiving the dividend or not?
a.$1.00
b.$0.59
c.$0.78
d.$0.97
e.$0.50
30) you purchased a five-year annual payment 6% coupon bond for $1,000 and you
planned on holding it to maturity. however right after you bought the bond it was called
at $1,043.29 when all interest rates fell to 5% and remained there for the full five years.
you reinvested the money for the full five years. what was your annual compound rate
of return off your original investment?
a.6.00%
b.5.89%
c.5.75%
d.5.23%
e.5.00%
31) mortgage fees paid by the homeowner at, or prior to, closing upon the purchase of a
house typically include all but which one of the following?
a.application fee
b.title search fee
c.title insurance fee
d.appraisal fee
e.prepayment penalty
32) estimates of the cost of the september 11, 2001 terrorist attacks on the world trade
center indicate that the cost to insurance companies was as high as
a.$20 billion
b.$30 billion
c.$40 billion
d.$50 billion
e.$60 billion
33) a bank has book value of assets equal to $800 million and market value of assets
equal to $1,100 million. the bank has book value of liabilities of $700 million and
market value of liabilities equal to $850 million. the bank’s market-to-book ratio is
a.2.5
b.2.0
c.1.5
d.1.0
e.0.67
34) in terms of direct costs, are futures or options likely to be a more expensive form of
hedging? why? in terms of opportunity costs, which is more expensive? why?
35) why did the fed switch from increasing rates prior to 2007 to reducing interest rates
in 2007 and 2008?
36) what does an asset transformer do? why is asset transformation a risky activity?
37) explain how liquidity risk can lead to insolvency risk.
38)
what are the major types of firms in the investment banking industry? briefly describe
each.
39) what are the major advantages a bank gains by expanding into international bank
services? what are three disadvantages of international expansion?
40) who are the major suppliers and demanders of funds in the united states and what is
their typical position?
41) what determines the success or failure of an exchange-traded derivative contract?
why were currency and interest rate futures introduced in the early and late 1970s,
respectively?