An investment banking firm will typically put together a group of firms in order to:
a. Reduce the risk of capital loss.
b. Reduce the risk of default.
c. Increase the revenues generated from the underwriting process.
d. Reduce the risk of pricing the issue.
e. None of the above.
The security market line (SML) is a graphical depiction of:
a. The market model.
b. The capital asset pricing model.
c. The capital market model.
d. The market index.
e. None of the above.
Securities traded in the external market are distinguished by:
a. Being accessible only to foreign investors.
b. Being offered simultaneously to investors in a number of countries.
c. Being issued outside the jurisdiction of any single country.
d. Being traded in Europe only.
e. b and c only.
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.
A fragmented market is one in which some orders for a given stock are handled
differently from other orders.
a. True.
b. False.
When the seller agrees to pay the buyer if a designated reference falls below a
predetermined level, the agreement is called:
a. A swap.
b. A cap.
c. A floor.
d. The strike.
e. None of the above.
With asset securitization more than one institution may be involved so that a thrift or
bank does not have to:
a. Absorb the credit risk.
b. Service the mortgage.
c. Provide the funding.
d. b and c only.
e. All of the above.
For all option-free bonds, the approximate percentage price change that is not explained
by duration will have a:
a. Positive value.
b. Negative value.
c. Unchanged value.
d. Changed value.
e. None of the above.
The binomial option pricing model can handle American call options.
a. True.
b. False.
The financial markets in the U.S. and other major industrialized countries have shifted
from being dominated by retail investors to being dominated by institutional investors.
a. True.
b. False
The value of any financial asset is the present value of the expected cash flows.
a. True.
b. False
Governments-sponsored enterprises, which issue agency securities include:
a. Freddie Mac.
b. Fannie Mae.
c. Federal Home Loan Banks.
d. Federal Farm Credit System.
e. All of the above.
When assessing the credit risk of a corporate issuer rating agencies look at:
a. Corporate governance risk.
b. Financial risk.
c. Business risk.
d. a and c only
e. All of the above.
Antifraud provisions apply to offerings of municipal securities.
a. True.
b. False.
Which of the following allows for paying off bonds prior to maturity?
a. Conversion feature.
b. Sinking fund.
c. Call provision.
d. Retirement feature.
e. All of the above.
With stock index options, the hedger:
a. Has downside risk protection.
b. Locks in a price.
c. Retains the upside potential, which is reduced by the option.
d. a and c only.
e. All of the above.
Because of the tax-exempt feature of municipal bonds, the yield on municipal securities
compared to Treasuries with the same maturity is:
a. Less.
b. Greater.
c. The same.
d. Unknown.
e. None of the above.
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.
The cash flow from a bond consists of periodic coupon interest payments and the
repayment of the principal at maturity.
a. True.
b. False.
A bank cannot invest $1 for every $1 it obtains in deposit because it must maintain a
specified percentage of its deposits in a non-interest bearing account at one of the 12
Federal Reserve Banks.
a. True.
b. False.
The value of a stock index option is equal to:
a. The index value multiplied by $100.
b. The index value multiplied by the number of shares purchased.
c. The index value multiplied by the contract multiple.
d. The share price divided by the index value.
e. None of the above.
If it is not possible to reallocate inputs and outputs in such a way that some will be
better off while nobody will lose, this property is referred to by economists as:
a. Non-Pareto optimal.
b. Pareto optimal.
c. Efficient.
d. Inefficient.
e. None of the above.
At the current time, hedge funds are not regulated by the SEC.
a. True.
b. False.
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.
An investor seeking covered interest arbitrage will accomplish it with short-term
borrowing and lending in the:
a. Domestic money market.
b. Eurocurrency market.
c. Foreign money market.
d. Treasury market.
e. None of the above.
Commercial mortgage loans are ________, which means that if the borrower fails to
make the contractual payments, the lender can only look to the income-producing
property backing the loan for interest and principal repayment.
A) nonpayment loans
B) contractless loans
C) remedial loans
D) nonrecourse loans
The various types of insurance policies differ in the statistical or actuarial accuracy of
estimates of when the event insured against will occur and the amount of the payment.
a. True.
b. False.
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.
The graphical depiction of the relationship between the yield on bonds of the same
credit quality but different maturities is known as:
a. The yield curve.
b. The term to maturity.
c. The term structure of interest rates.
d. The yield spread.
e. None of the above.
The futures price is:
a. The price paid for the futures contract.
b. The price at which the parties in a futures contract agree to transact in the future.
c. The present value of all expected future cash benefits.
d. The cost of the futures contract today.
e. None of the above.
Until the 1960, Regulation Q had virtually no impact on the ability of banks to compete
with other financial institutions to obtain funds because:
a. Market interest rates stayed below the ceiling rate.
b. Market interest rates stayed above the ceiling rate.
c. Market interest rates and the ceiling rate stayed the same.
d. The ceiling rate stayed below the market interest rates.
e. None of the above.