The capital asset pricing model states that the expected return of a security is equal to
the riskfree rate of return plus:
a. Beta.
b. A risk premium.
c. The market risk premium.
d. The market price of risk.
e. None of the above.
Interest rate futures can be used by market participants to:
a. Allocate funds between stock and bonds.
b. Provide portfolio insurance.
c. Enhance returns when futures are mispriced.
d. Hedge against adverse interest rate movements.
e. All of the above.
There is no single repo rate; rather rates vary from transaction to transaction depending
on:
a. Quality.
b. Term of the repo.
c. Delivery requirement
d. Availability of collateral.
e. All of the above.
The trade date is the date:
a. The counterparties commit to the swap.
b. The swap begins accruing interest.
c. The swap stops accruing interest.
d. The swap is delivered.
e. None of the above.
Which of the following are properties of financial assets?
a. Reversibility.
b. Moneyness.
c. Liquidity.
d. Marketability.
e. a, b and c only.
In an interest rate swap, the position of the floating-rate payer is equivalent to a:
a. Long position in a fixed-rate bond and a short position in a floating rate bond.
b. Long position in a floating-rate bond and a short position in a fixed-rate bond.
c. Long position in a fixed-rate bond and a long position in a floating rate bond.
d. Short position in a fixed rate bond and a long position in a floating rate bond.
e. None of the above.
When one party is exchanging a payment based on an interest rate and the other party
based on the return of some equity index, the swap agreement is called:
a. In interest rate swap.
b. An equity swap.
c. An interest rate-equity swap.
d. An index swap.
e. A currency swap.
Maturity intermediation has implications for financial markets in that:
a. Investors have more choices concerning the maturity of their investments.
b. Borrowers have more choices for the length of their debt obligations.
c. Investors will require that long-term borrowers pay a higher interest rate than on
short-term borrowing.
d. a and c only.
e. All of the above.
The writer of a call option is said to be in a:
a. Long call position.
b. Short call position.
c. Long put position.
d. Short put position.
e. None of the above.
The price of a futures contract is determined by:
a. Supply and demand conditions.
b. Open outcry of bids and offers in an auction market.
c. The pit trader.
d. Locals.
e. None of the above.
Secondary markets outside the U.S. are located in:
a. London.
b. Paris.
c. Frankfurt.
d. Osaka.
e. All of the above.
Discuss the basic characteristics of the exchanges in the U.K. and Germany.
The risk that a currency’s value may change adversely is called:
a. Volatility.
b. Currency fluctuation.
c. Currency risk.
d. Price risk.
e. None of the above.
The rate paid on Eurodollar CD futures is the:
a. Index price.
b. London Interbank Offered Rate (LIBOR).
c. T-bill rate.
d. Prime rate.
e. Money market rate.
The buyer of a floor benefits if the designated reference:
a. Stays the same.
b. Rises above the strike rate.
c. Falls below the strike rate.
d. None of the above.
More complex OTC options are called:
a. Bermuda options.
b. Atlantic options.
c. Exotic options.
d. Plain vanilla options.
e. All of the above.
Asset-backed securities are securities backed by:
a. Credit card receivables.
b. Auto loans.
c. Commercial mortgage loans.
d. Home equity loans.
e. a, b, and d only.
In response to the Great Depression and its effects on financial markets, the Federal
Reserve provided liquidity for thrifts by the creation of the:
a. Federal Home Loan Banks.
b. Federal Housing Administration.
c. Fannie Mae.
d. Ginnie Mae.
e. Freddie Mac.
An issue that has both a minimum and a maximum coupon rate is said to be:
a. Capped.
b. Floored.
c. Drop-locked.
d. Collared.
e. Restricted.
The money market is the market for:
a. Long-term bonds.
b. Common stock.
c. Short-term financial instruments.
d. Agency securities.
e. None of the above.
Explain sovereign debt ratings assigned by ratings agencies.
To settle a stock index option, the exchange-assigned option writer:
a. Delivers all the stocks that make up the index.
b. Pays cash to the option buyer.*
c. Takes an offsetting position.
d. Lets the option expire worthless.
e. None of the above.
The portfolio, which consists of all assets, is called:
a. The efficient portfolio.
b. The optimal portfolio.
c. The market portfolio.
d. The efficient frontier.
e. None of the above.
A rating of Ba3 means that a bond is:
a. Very high grade, very high quality.
b. Lower medium grade.
c. Substantial risk, in poor standing.
d. Predominantly speculative.
e. Low grade, speculative.
Asset-backed securities and corporate bonds differ in terms of:
a. Credit risk.
b. Operational risk.
c. Investment risk.
d. a and b only.
e. None of the above.
Currency futures do not provide a good vehicle for hedging:
a. Long-dated foreign exchange exposure.
b. Currency exposure in the British pound.
c. Short-term currency exposure.
d. Anticipated currency exposure.
e. None of the above.
The performance of a portfolio of receivables is measured by:
a. Delinquencies.
b. Gross portfolio yield.
c. Monthly payment rate.
d. b and c only.
e. All of the above.
Market risk is:
a. The risk that remains in a well-diversified portfolio.
b. Also called systematic risk.
c. Nondiversifiable.
d. The risk that affects all securities.
e. All of the above.
A party to a futures contract can liquidate the position by:
a. Taking an offsetting position in the same contract.
b. Waiting until the settlement date.
c. Walking away from the futures contract.
d. a and b only.
e. All of the above.
By mid 2007, the European government bond market:
a. Represented about 40% of the world’s outstanding government bonds.
b. Was second only to the U.S. Treasury market in terms of size.
c. Was about 50% larger than the Japanese government bond market.
d. a and b only.
e. a and c only.