The management fee structure for hedge funds is:
a. A flat fee per investor or investor group.
b. A fixed fee based on the market value of assets managed.
c. A performance-based incentive fee.
d. b and c only.
e. None of the above.
When the value of the assets of a defined benefit plan is exceeded by the value of its
liabilities, the plan is said to:
a. Have a surplus.
b. Have a deficit.
c. Be overfunded.
d. a and c only.
e. None of the above.
The “Big Board” is the name commonly used for:
a. The American Stock Exchange.
b. The Philadelphia Stock Exchange.
c. The New York Stock Exchange.
d. The London Stock Exchange.
e. None of the above.
According to the McCarran Ferguson Act of 1954, the insurance industry is regulated
by:
a. The individual states.
b. The federal government.
c. The Securities and Exchange Commission.
d. a and b only.
e. None of the above.
Traditional mortgages were financed mainly by depository institutions with very
short-term funds, even though a mortgage is a very long-term instrument. This
mismatch of maturities was solved with the:
a. Adjustable-rate mortgage.
b. Graduated-payment mortgage.
c. Balloon mortgage.
d. Reverse mortgage.
e. Growing equity mortgage.
Of the five factors that influence the price of an option:
a. The strike price must be estimated.
b. The stock price is observed.
c. The standard deviation must be estimated.
d. b and c only.
e. All of the above.
An option, which may be exercised only at the expiration date, is called:
a. An American option.
b. A European option.
c. An OTC option.
d. An exchange-traded option.
e. None of the above.
Portfolio theory deals with:
a. The selection of portfolios that maximize expected returns consistent with
individually acceptable levels of risk.
b. The relationship that should exist between security returns and risk.
c. The effects of investor decisions on security prices.
d. a and b only.
e. All of the above.
When a position is first taken in a futures contract, the investor must deposit a
minimum dollar amount per contract as specified by:
a. The Federal Reserve.
b. The pit trader.
c. The exchange.
d. An informal agreement between the parties involved.
e. None of the above.
When an investment banker works with a corporation to issue an asset-backed security
it generates revenue from the:
a. Spread income
b. Bid-ask spread.
c. Gross spread.
d. Underwriter discount.
e. None of the above.
Depository institutions have obligations that include:
a. Commercial paper.
b. Bankers acceptances.
c. Certificates of deposits.
d. b and c only.
e. All of the above.
When the seller agrees to pay the buyer if the designated reference exceeds a
predetermined level, the agreement is referred to as:
a. A cap.
b. A floor.
c. The strike.
d. A swap.
e. None of the above.
Exchanges impose restrictions as to when a short sale may be executed, which is
referred to as:
a. Trading halts.
b. Circuit breakers.
c. Tick-test rules.
d. Price limits.
e. None of the above.
The capital structure of banks, like that of all corporations, consists of:
a. Demand deposits.
b. Debt
c. Equity.
d. Time deposits.
e. b and c only.
The term upstairs markets refers to:
a. The markets located on the top floor of the NYSE.
b. A network of trading desks of the major securities firms and other institutional
investors that communicate electronically with each other.
c. The market for trading listed stocks in the OTC market.
d. The market for trading stocks not listed on a major stock exchange.
e. None of the above.
Liquidity-generating innovations:
a. Increase the liquidity of the market.
b. Allow borrowers to draw upon new sources of funds.
c. Allow market participants to circumvent capital constraints imposed by regulations.
d. a and b only.
e. All of the above.
A stop order that designates a price limit is called:
a. Stop order.
b. Limit order.
c. Stop-limit order.
d. Market order.
e. Fill order.
The driving force in the development of a strong secondary market for residential
mortgage loans was a financial innovation, which involves:
a. The pooling of mortgages.
b. The issuance of securities collateralized by these mortgages.
c. Asset securitization.
d. A and b only.
e. All of the above.
GSE securities are not backed by the full faith and credit of the U.S. government. Thus,
investors purchasing GSEs are exposed to:
a. Credit risk.
b. Currency risk.
c. Political risk.
d. Inflation risk.
e. None of the above.
Option strategies that do not involve an offsetting or risk-reducing position in either
another option or the underlying common stock is called:
a. Naked strategies.
b. Covered strategies.
c. Hedge strategies.
d. Active strategies.
e. Passive strategies.
Risk arbitrage to lock in a spread, if the exchange is consummated on the announced
terms, involves:
a. Buying the shares of the target company and shorting the shares of the bidding
company.
b. Buying the shares of the target company and buying an equal number of shares of the
bidding company.
c. Buying the shares of the target company and selling short an equal number of shares
of the acquiring firm.
d. a and c only.
e. All of the above.
Describe the risks an investor in mortgage pass-throughs is exposed to.
The key distinction between a primary market and a secondary market is that:
a. In the secondary market the issuer receives funds from the buyer.
b. In the secondary market the issuer of the asset does not receive funds from the buyer.
c. In the secondary market the existing issue changes hands.
d. b and c only.
e. None of the above.
The timing and magnitude of the payments for an insurance company is much more
uncertain because of:
a. The actuarial problems in estimating the life expectancy of individuals.
b. The fact that payments are contingent on uncertain future events.
c. The long lag between the receipts and payments for an insurance company.
d. The continued viability of the insurance company.
e. None of the above.
Describe the role of government dealers and government brokers in the Treasury
securities market.
Explain the delivery options embedded in the Treasury bond and note futures contracts
and their impact on the futures price.
A stop order that designates a price limit is a:
a. Stop order.
b. Limit order.
c. Stop-limit order.
d. Market-if-touched order.
e. None of the above.
The Treasury does not issue:
a. Zero-coupon Treasury securities.
b. Bills.
c. Notes.
d. Bonds.
e. All of the above.
What are the basic components of the option price?
An insurance product that is not guaranteed by the insurance company’s general account
is:
a. Whole life insurance.
b. Universal life insurance.
c. Variable life insurance.
d. Fixed annuity.
e. GIC.
Companies that provide insurance for both life and health and property and casualty are
called:
a. Life insurance companies.
b. Property and casualty insurance companies.
c. Multi-line insurance companies.
d. Health insurance companies.
e. None of the above.
In all rating systems the term high grade means:
a. High probability of future payments.
b. High credit risk.
c. Low credit risk.
d. a and b only.
e. a and c only.
Within the corporate market sector, issuers are classified as:
a. Utilities.
b. Industrials.
c. Finance.
d. Banks.
e. All of the above.
Bankers’ acceptances are sold on a discounted basis just like:
a. Treasury bills.
b. Commercial paper.
c. CDs.
d. a and b only.
e. All of the above.