The term structure of interest rates is the relationship between the yields on comparable
securities but different:
a. Spreads.
b. Maturities.
c. Credit ratings.
d. Provisions.
e. None of the above.
In the presence of inflation-driven high interest rates, mortgage repayment in real terms
is no longer level, but instead starts high and ends low, shutting off many
would-be-borrowers. This problem is referred to as:
a. Pipeline risk.
b. Mismatch problem.
c. Tilt problem.
d. Maturity problem.
e. Inflation problem.
Most financial futures contracts have settlement dates in March, June, September, and
December.
a. True.
b. False.
A depository institution seeks to earn income from the positive spread between the
assets it invests in and the cost of its funds.
a. True.
b. False.
If the escrow is properly structured, prerefunded bonds are among the safest of all
municipal securities since they are collateralized by:
a. U.S. government obligations.
b. State general obligation bonds.
c. The general taxing power of the issuer.
d. Insurance policies.
e. None of the above.
The difference between the expected return in the market and the riskfree rate is called:
a. The market risk premium.
b. The market price of risk.
c. The risk premium.
d. The market sensitivity index.
e. a and b.
Interest rate swaps:
a. Can be replicated by a package of forward contracts.
b. Are more liquid than interest rate forward contracts.
c. Cost more than a package of interest rate forward contracts.
d. a and b only.
e. All of the above.
In a tap system:
a. There is a regular calendar auction.
b. Winning bidders are allocated securities at the highest yield accepted by
the government.
c. Additional bonds of a previously outstanding bond issue are auctioned.
d. Auctions are announced when market conditions appear favorable.
e. Winning bidders are allocated securities at the yield they bid.
Failure to make preferred stock dividends does not force the issuer into bankruptcy.
a. True.
b. False.
Regardless of the property type, the two measures that have been found to be key
indicators of the potential credit performance are the ________.
A) debt-to-equity leverage ratio and the loan-to-value ratio.
B) debt-to-service coverage ratio and the loan-to-value ratio.
C) debt-to-service coverage ratio and the value-to-loan ratio.
D) debt-to-equity leverage ratio and the value-to-loan ratio.
The length of time between the date the instrument was issued and is scheduled to make
final payment is called:
a. Holding period.
b. Term to maturity.
c. Maturity.
d. b and c only.
e. All of the above.
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.
Investment banking firms are engaged in which of the following activities?
a. Public offering and trading of securities.
b. Private placement of securities.
c. Securitization of assets.
d. Mergers and acquisitions.
e. All of the above.
The development of the theoretical relationship between risk and expected return is
built on the portfolio theory and capital market theory.
a. True.
b. False.
A convertible bond is a corporate bond with a call option to buy the common stock of
the issuer.
a. True.
b. False.
In an asset-backed security transaction:
a. There is no active management.
b. There is no business risk.
c. The servicer simply collects the cash flow.
d. All of the above.
e. None of the above.
The only party that is required to perform in an interest rate agreement is the:
a. Writer.
b. Holder.
c. Buyer.
d. Dealer.
e. None of the above.
Interest income from Treasury securities is tax-exempt from Federal taxation.
a. True.
b. False.
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.
The risk that the issuer of a bond may not be able to make timely interest and principal
payments is called:
a. Credit risk.
b. Default risk.
c. Market risk.
d. a and b only.
e. All of the above.
Banks that create bankers’ acceptances are called accepting banks.
a. True.
b. False.
The monthly cash flow that an investor in an SBA-backed security receives consists of:
a. The coupon interest based on the coupon rate set for the period.
b. The scheduled principal repayment.
c. Prepayments.
d. All of the above.
e. a and b only.
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.
A transaction in which an investor borrows to buy shares using the shares themselves as
collateral is called:
a. Short selling.
b. Buying on margin.
c. Going long.
d. Going short.
e. None of the above.
For covered bonds, the composition of the cover pool may change over time.
a. True.
b. False.
Diversification reduces the variability of returns if the correlation among security
returns is:
a. High.
b. Low.
c. The same.
d. Indifferent.
e. None of the above.
Treasury securities that adjust for inflation are referred to as:
a. Inflation indexed bonds.
b. Real return bonds.
c. TIPS.
d. LEAPS.
e. None of the above.
The traditional process in the U.S. for issuing new securities involves investment
bankers, which perform which of the following functions?
a. Advising the issuer on the terms and timing of the offering.
b. Buying the securities from the issuer.
c. Distributing the issue to the public.
d. All of the above.
e. None of the above.
Investment bankers act as brokers and dealers in the buying and selling of securities.
a. True.
b. False.
Commercial banks issue securities backed by auto loans.
a. True.
b. False.
Depository institutions accommodate net withdrawals and loan demand by:
a. Attracting additional deposits.
b. Selling securities it owns.
c. Raising short-term funds in the money market.
d. Using existing securities as collateral for borrowing from a federal agency or other
financial institution.
e. All of the above.
An agreement whereby two parties agree to exchange periodic payments is called:
a. An option.
b. A futures contract.
c. A swap.
d. Cap and floor agreements.
e. None of the above.
An insurance company is defined by the type of risk insured against.
a. True.
b. False.
Mortgage loans tend to be rather illiquid because:
a. There is no secondary market.
b. They are large.
c. They are irreversible.
d. They are indivisible.
e. b and d only.
The minimum level by which an investor’s equity position may fall as a result of
unfavorable price movement before the investor is required to deposit additional margin
is called:
a. The initial margin.
b. The maintenance margin.
c. The variation margin.
d. A and b only.
e. None of the above.