The two measures that have been found to be key indicators of the potential credit
performance of a commercial mortgage loan are the debt-to-service coverage ratio and
the loan-to-value ratio.
CMBS are backed by either newly originated or seasoned commercial mortgage loans.
Put protection for commercial mortgage loans includes prepayment lockout,
defeasance, prepayment penalty points, and yield maintenance charges.
The least prevalent form of deal backed by commercial mortgage loans to multiple
borrowers is the conduit deal.
A commercial mortgage-backed security is a security backed by at least two
commercial mortgage loans, the loans being either newly originated or seasoned loans.
At the current time, hedge funds are not regulated by the SEC.
a. True.
b. False.
CMBS can be classified only by CMBS with loans from a single borrower.
In a CMBS transaction, the special servicer is responsible for overseeing the deal,
verifying that all servicing agreements are being maintained, and facilitating the timely
payment of interest and principal.
Residential mortgage loans are nonrecourse loans for the purchase of income-producing
properties, the major ones being apartment buildings, office buildings, industrial
properties, shopping centers, hotels, and health care facilities.
Balloon risk associated with a commercial mortgage loan is the risk that a borrower will
not be able to make the balloon payment because either the borrower cannot arrange for
refinancing at the balloon payment date or cannot sell the property to generate sufficient
funds to pay off the balloon balance.
Balloon risk is something that has to be dealt with in structuring an RMBS.
Fusion or hybrid deals are multiple borrower CMBS deals that combine loans that are
included in conduit deals with a large or “mega” loan.
CMBS can be issued by Ginnie Mae, Fannie Mae, Freddie Mac, and private entities.
Eurocommerical paper:
a. Is issued and placed outside the jurisdiction of the currency of the denomination.
b. Has considerably longer maturity than domestic commercial paper.
c. Is almost always dealer placed.
d. Has an active secondary market.
e. All of the above.
Price risk of a bond occurs when a bond must be sold prior to maturity at an uncertain
price because the:
a. Yield is determined by the Federal Reserve.
b. Future return or yield is unknown.
c. Future yield is expected to be less than the coupon rate.
d. b and c only.
e. None of the above.
An underwriting arrangement whereby an investment banking firm or group of firms
offers a potential issuer of debt securities a firm bid to purchase a specified amount of
the securities with a certain coupon rate and maturity is known as:
a. Firm commitment underwriting.
b. Bought deal.
c. Dutch auction.
d. Underwriting process.
e. None of the above.
In the United Kingdom, a pound-denominated bond issued by a Japanese corporation
and subsequently traded in the United Kingdom’s bond market:
a. Is part of the Japanese foreign bond market.
b. Is part of the United Kingdom’s foreign bond market.
c. Is nicknamed a “samurai bond.”
d. a and c only.
e. b and c only.
The risk that the issuer will be unable to sell new paper at maturity is called:
a. Default risk.
b. Credit risk.
c. Rollover risk.
d. A and b only.
e. None of the above.
Competitive bidding underwriting is mandated for certain securities of:
a. Regulated public utilities.
b. Industrials.
c. Municipal debt obligations.
d. a and c only.
e. All of the above.
Which of the following statements is false?
a. The auction for Treasury securities is conducted on a noncompetitive bidding basis.
b. Competitive bids must be submitted on a yield basis.
c. All U.S. Treasury auctions are single-price auctions.
d. B and c only.
e. None of the above.
The total risk of a portfolio consists of:
a. Diversifiable risk.
b. Nondiversifiable risk.
c. Statistical risk.
d. a and b only.
e. All of the above.
Financial futures can be classified as:
a. Stock index futures.
b. Interest rate futures.
c. Commodity futures.
d. Currency futures.
e. a, b and d.
The rate earned on federal government debt instruments is usually characterized as the:
a. Nominal rate.
b. Riskless rate.
c. Real rate of interest.
d. Gross rate.
e. None of the above.
The risks that cause uncertainty about the return over some investment horizon are:
a. The uncertainty about the price of a bond at the end of the investment horizon.
b. The uncertainty about the rate at which the proceeds from a bond that matures prior
to the maturity date can be reinvested until the maturity date.
c. The uncertainty about the movement of equity prices relative to debt instruments.
d. a and b only.
e. All of the above.
The important aspects outlined in a bond indenture include the bond’s:
a. Maturity.
b. Security.
c. Provisions for retirement.
d. a and b only.
e. All of the above.
That creditors are less informed about the true economic operating conditions of the
firm
than is management is espoused in:
a. The absolute priority rule.
b. The incentive hypothesis.
c. The recontracting process hypothesis.
d. The stockholders’ influence on reorganization plan hypothesis.
e. The strategic bargaining process hypothesis.
For entities that borrow funds using securities as collateral, the most common financial
instrument is:
a. Certificates of deposits.
b. Federal funds borrowing.
c. Repurchase agreements.
d. Bankers acceptance.
e. None of the above.
Which of the following is not a factor in the integration of financial markets throughout
the world?
a. Increased institutionalization of financial markets.
b. Advances in telecommunications and computer technologies.
c. Deregulation or liberalization of major financial markets.
d. Expanded role of the World Bank.
e. None of the above.
The transformation curve or production function:
a. Rises from the left to the right.
b. Assumes that the more is invested, the more will be the resulting future output.
c. Assumes decreasing returns to scale.
d. Has a slope, which measures the marginal productivity of capital.
e. All of the above.
Which of the following are considered plan sponsors?
a. Private business entities for their employees.
b. Unions on behalf of their members.
c. Individuals for themselves.
d. a and c only.
e. All of the above.
Usually, state and local governments require a competitive sale to be announced in a
recognized financial publication, such as:
a. Barron’s.
b. The Bond Buyer.
c. Institutional Investor.
d. Financial Analyst Journal.
e. None of the above.
For a pool of credit card receivables, the cash flow consists of:
a. Collected finance charges.
b. Fees.
c. Principal.
d. a and b only.
e. All of the above.
A fixed-rate deposit represents what type of liability to a financial institution?
a. Type I liability.
b. Type II liability.
c. Type III liability.
d. Type IV liability.
e. None of the above.
When the return to be realized in the future is known with certainty today, the asset is
said to be:
a. Risky.
b. Riskfree.
c. Neutral.
d. b and c only.
e. None of the above.
Studies of common stock returns have shown that total portfolio risk declines:
a. As the number of security holdings increases.
b. Security returns are less than perfectly correlated.
c. As diversification increases.
d. All of the above.
e. None of the above.
The reference rate on a syndicated loan is typically:
a. The Treasury bill rate.
b. LIBOR.
c. The federal funds rate.
d. The discount rate.
e. None of the above.
Explain how interest rate futures can be used to hedge against adverse interest rate
movements.
Treasury securities are free of:
a. Price risk.
b. Default risk.
c. Reinvestment risk.
d. Yield variations.
e. None of the above.
Non-agency mortgage pass-through securities are supported by credit enhancements
such as:
a. Corporate guarantees.
b. Pool insurance from a mortgage insurance company.
c. A bank letter of credit.
d. Senior/subordinated interests.
e. All of the above.
Margin calls must be satisfied:
a. In cash.
b. With additional stocks as collateral.
c. With an extension of the credit limit.
d. With commodities.
e. None of the above.
Explain the advantages and disadvantages of a callable bond.
Explain the yield relationship between municipal securities and taxable bonds.
Intermediaries involved in interest rate swaps performed the function of a:
a. Broker.
b. Principal.
c. Dealer.
d. a and b only.
e. None of the above.
The use of an interest rate swap to change the cash flow nature of liabilities is known
as:
a. Asset swap.
b. Liability swap.
c. Amortizing swap.
d. Bullet swap.
e. None of the above.
Describe some main features of a commercial loan.
How can swaps be used to create securities?
What is a yield maintenance charge?
What are the major differences between currency forwards, futures, and options?
CMBS can be classified by the type of loan pool. Name and briefly describe the two
types.
What is triangular arbitrage?
As with a nonagency RMBS, a servicer is required. Name three responsibilities of a
servicer.
The most prevalent form of deal backed by commercial mortgage loans to multiple
borrowers is the conduit deal. Describe the nature of this “conduit deal”?
Are CMBS and nonagency RMBS structures similar or different? Discuss.
What is a prepayment lockout?
In regards to commercial mortgage loans, name four of the major property types that
have been securitized.