Chapter 24: Enterprise Risk Management
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Page 1
1. One objective of risk management can be to reduce the volatility of a firm’s cash flows.
a.
True
b.
False
ANSWER:
True
1
DIFFICULTY:
Difficulty: Easy
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.24.01 – LO: 24-1
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – AK – DISC: Derivatives
United States – OH – Default City – TBA
TOPICS:
Risk management
KEYWORDS:
10/30/2017 8:16 PM
DATE MODIFIED:
1/8/2018 11:42 AM
2. Which of the following are NOT ways risk management can be used to increase the value of a firm?
a.
b.
c.
d.
e.
ANSWER:
d
POINTS:
1
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.24.01 – LO: 24-1
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
United States – AK – DISC: Derivatives
LOCAL STANDARDS:
United States – OH – Default City – TBA
Risk management
KEYWORDS:
TYPE: Multiple Choice: Conceptual
DATE CREATED:
10/30/2017 8:16 PM
DATE MODIFIED:
1/8/2018 11:42 AM
3. Which of the following statements about interest rate and reinvestment rate risk is CORRECT?
a.
Interest rate price risk exists because fixed-rate debt securities lose value when interest rates rise, while
reinvestment rate risk is the risk of earning less than expected when interest payments or debt principal are
reinvested.
b.
Interest rate price risk can be eliminated by holding zero coupon bonds.
c.
Reinvestment rate risk can be eliminated by holding variable (or floating) rate bonds.
Chapter 24: Enterprise Risk Management
POINTS:
1
DIFFICULTY:
Difficulty: Easy
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.24.07 – LO: 24-7
d.
Interest rate risk can never be reduced.
e.
Variable (or floating) rate securities have more interest rate (price) risk than fixed rate securities.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.24.01 – LO: 24-1
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
STATE STANDARDS:
United States – AK – DISC: Derivatives
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Interest rate and reinvestment rate risk
KEYWORDS:
OTHER:
TYPE: Multiple Choice: Conceptual
DATE CREATED:
10/30/2017 8:16 PM
DATE MODIFIED:
1/8/2018 11:42 AM
4. Interest rate swaps allow a firm to exchange fixed for floating-rate payments, but a swap cannot reduce actual net
interest expenses.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Difficulty: Easy
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.24.07 – LO: 24-7
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – AK – DISC: Derivatives
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Swaps
KEYWORDS:
DATE CREATED:
10/30/2017 8:16 PM
DATE MODIFIED:
1/8/2018 11:42 AM
5. In theory, reducing the volatility of its cash flows will always increase a company’s value.
a.
True
b.
False
ANSWER:
False
Chapter 24: Enterprise Risk Management
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
United States – AK – DISC: Derivatives
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Risk management
DATE CREATED:
10/30/2017 8:16 PM
1/8/2018 11:42 AM
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.24.07 – LO: 24-7
United States – BUSPROG: Analytic
STATE STANDARDS:
United States – AK – DISC: Derivatives
6. The two basic types of hedges involving the futures market are long hedges and short hedges, where the words “long”
and “short” refer to the maturity of the hedging instrument. For example, a long hedge might use Treasury bonds, while a
short hedge might use 3-month T-bills.
a.
True
b.
False
ANSWER:
False
POINTS:
1
Difficulty: Moderate
QUESTION TYPE:
True / False
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.24.07 – LO: 24-7
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
United States – AK – DISC: Derivatives
LOCAL STANDARDS:
United States – OH – Default City – TBA
Futures market hedging
KEYWORDS:
DATE CREATED:
10/30/2017 8:16 PM
1/8/2018 11:42 AM
7. A swap is a method used to reduce financial risk. Which of the following statements about swaps, if any, is NOT
CORRECT?
a.
The earliest swaps were currency swaps, in which companies traded debt denominated in different currencies,
say dollars and pounds.
b.
Swaps are very often arranged by a financial intermediary, who may or may not take the position of one of the
counterparties.
c.
A problem with swaps is that no standardized contracts exist, which has prevented the development of a
secondary market.
d.
A company can swap fixed interest payments for floating interest payments.
e.
A swap involves the exchange of cash payment obligations.
ANSWER:
c
Chapter 24: Enterprise Risk Management
United States – OH – Default City – TBA
TYPE: Multiple Choice: Conceptual
10/30/2017 8:16 PM
1/8/2018 11:42 AM
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Page 4
8. A commercial bank recognizes that its net income suffers whenever interest rates increase. Which of the following
strategies would protect the bank against rising interest rates?
a.
Entering into an interest rate swap where the bank receives a fixed payment stream, and in return agrees to
make payments that float with market interest rates.
b.
Purchase principal only (PO) strips that decline in value whenever interest rates rise.
c.
Enter into a short hedge where the bank agrees to sell interest rate futures.
d.
Sell some of the bank’s floating-rate loans and use the proceeds to make fixed-rate loans.
e.
Buying inverse floaters.
Difficulty: Moderate
Multiple Choice
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United States – BUSPROG: Analytic
United States – AK – DISC: Derivatives
United States – OH – Default City – TBA
TYPE: Multiple Choice: Conceptual
10/30/2017 8:16 PM
1/8/2018 11:42 AM
9. Company A can issue floating-rate debt at LIBOR + 1% and can issue fixed rate debt at 9%. Company B can issue
floating-rate debt at LIBOR + 1.5% and can issue fixed-rate debt at 9.4%. Suppose A issues floating-rate debt and B
issues fixed-rate debt, after which they engage in the following swap: A will make a fixed 7.95% payment to B, and B
will make a floating-rate payment equal to LIBOR to A. What are the resulting net payments of A and B?
a.
A pays a fixed rate of 9%, B pays LIBOR + 1.5%.
b.
A pays a fixed rate of 8.95%, B pays LIBOR + 1.45%.
c.
A pays LIBOR plus 1%, B pays a fixed rate of 9.4%.
d.
A pays a fixed rate of 7.95%, B pays LIBOR.
e.
None of the above answers is correct.
A pays LIBOR + 1% to its lenders, receives LIBOR from B, and pays B 7.95%, for a net fixed
Chapter 24: Enterprise Risk Management
1
Difficulty: Moderate
False
IFMG.DAVE.19.24.07 – LO: 24-7
United States – AK – DISC: Derivatives
Swaps–nonalgorithmic
10/30/2017 8:16 PM
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Page 5
10. Suppose the September CBOT Treasury bond futures contract has a quoted price of 89’09. What is the implied annual
interest rate inherent in this futures contract?
a.
6.32%
b.
6.65%
c.
7.00%
d.
7.35%
e.
7.72%
ANSWER:
c
1
Difficulty: Moderate
Multiple Choice
False
IFMG.DAVE.19.24.07 – LO: 24-7
United States – AK – DISC: Derivatives
United States – OH – Default City – TBA
10/30/2017 8:16 PM
11. Suppose the December CBOT Treasury bond futures contract has a quoted price of 80’07. What is the implied annual
interest rate inherent in the futures contract?
a.
6.86%
b.
7.22%
Chapter 24: Enterprise Risk Management
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
IFMG.DAVE.19.24.07 – LO: 24-7
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
United States – AK – DISC: Derivatives
LOCAL STANDARDS:
United States – OH – Default City – TBA
Treasury bond futures contracts
OTHER:
TYPE: Multiple Choice: Problem
c.
7.60%
d.
8.00%
e.
8.40%
ANSWER:
d
POINTS:
1
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
IFMG.DAVE.19.24.07 – LO: 24-7
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
United States – AK – DISC: Derivatives
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Treasury bond futures contracts
OTHER:
TYPE: Multiple Choice: Problem
10/30/2017 8:16 PM
DATE MODIFIED:
1/8/2018 11:42 AM
12. Suppose the December CBOT Treasury bond futures contract has a quoted price of 80’07. If annual interest rates go
up by 1.00 percentage point, what is the gain or loss on the futures contract? (Assume a $1,000 par value, and round to the
nearest whole dollar.)
a.
−$78.00
b.
−$82.00
c.
−$86.00
d.
−$90.00
e.
−$95.00
POINTS:
1
Chapter 24: Enterprise Risk Management
DATE CREATED:
10/30/2017 8:16 PM
1/8/2018 11:42 AM
Copyright Cengage Learning. Powered by Cognero.
Page 7
13. Speculative risks are symmetrical in the sense that they offer the chance of a gain as well as a loss, while pure risks are
those that can only lead to losses.
a.
True
b.
False
ANSWER:
True
1
DIFFICULTY:
Difficulty: Easy
True / False
HAS VARIABLES:
False
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – AK – DISC: Derivatives
United States – OH – Default City – TBA
TOPICS:
Speculative versus pure risk
DATE CREATED:
10/30/2017 8:16 PM
DATE MODIFIED:
1/8/2018 11:42 AM
14. Which of the following statements is most CORRECT?
a.
Futures contracts generally trade on an organized exchange and are marked to market daily.
b.
Goods are never delivered under forward contracts, but are almost always delivered under futures contracts.
c.
There are futures contracts for currencies but no forward contracts for currencies.
d.
Futures contracts don’t have any margin requirements but forward contracts do.
e.
One advantage of forward contracts is that they are default free.
ANSWER:
a
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.24.05 – LO: 24-5
United States – BUSPROG: Analytic
STATE STANDARDS:
United States – AK – DISC: Derivatives
LOCAL STANDARDS:
United States – OH – Default City – TBA
Forwards vs. futures
KEYWORDS:
TYPE: Multiple Choice: Conceptual
DATE CREATED:
10/30/2017 8:16 PM
DATE MODIFIED:
1/8/2018 11:42 AM