Chapter 7 Money Markets FIN, FIN 384 Test 3

Which of the following statements about federal agency securities is true? a. All federal agency debt is explicitly guaranteed by the federal government. b. All federal agencies are owned by the federal government. c. Federal agency securities usually have yields of 3 to 20 basis points below Treasury bills. d. All of above statements are true. e. None of the above statements is true.

None of the above statements is true.

The fastest growing debt sector in the U. S. is a. Treasury debt b. federal agency debt c. mortgage debt d. corporate debt

federal agency debt

Yields on three-month T-bills are more similar to a. Two-year Treasury notes rates. b. Ninety-day commercial paper rates. c. federal funds rates. d. Aaa-rated corporate bond rates.

federal funds rates.

Letters of credit are mostly associated with a. financial guarantees. b. investment banking. c. a bond indenture. d. a commercial bank seasonal loan.

financial guarantees.

Which of the following types of mortgages would be most advantageous to have on your house if you expected the annual rate of inflation would be higher than most people thought? a. reverse annuity mortgage b. interest-only mortgage c. adjustable-rate mortgage d. fixed-rate mortgage

fixed-rate mortgage

The quality of a financial guarantee depends on the reputation and financial strength of the a. guarantor b. investor c. borrower d. none of the above

guarantor

Everything else being equal, a bond will sell at a higher yield if it a. has a call provision. b. has low default risk. c. can be converted to stock. d. is listed on an exchange.

has a call provision.

Banks invest in government securities for a variety of reasons except a. income. b. safety. c. acceptable for collateral. d. high relative yield.

high relative yield.

The largest investor in municipal bonds are a. property and casualty insurance companies b. commercial banks c. households d. mutual funds e. pension funds

households

The biggest supplier of funds in the capital markets are a. financial institutions b. state and local governments c. federal government d. households and non-profit organizations

households and non-profit organizations

Small investors are likely to invest in the money market through ____. a. directly; commercial paper b. locally; their credit union c. indirectly; negotiable CDs d. indirectly; money market mutual funds

indirectly; money market mutual funds

Which of the following would be least likely to purchase a tax-exempt municipal bond? a. commercial bank b. casualty insurance company c. mutual fund d. individuals in low tax brackets

individuals in low tax brackets

Which of the following terms is not commonly associated with municipal bonds? a. inflation-protected bonds b. serial bonds c. general obligation bonds d. revenue bonds

inflation-protected bonds

The Tax Reform Act of 1986 increased the popularity of home equity lines of credit because a. tax deductibility of interest for homeowners was reduced. b. interest incurred under home equity lines was made tax deductible, but interest on other household financing was not. c. banks and savings and loans were given tax incentives to make home equity lines of credit. d. the law reduced the rates charged on home equity loans.

interest incurred under home equity lines was made tax deductible, but interest on other household financing was not.

Life insurance companies and pension funds buy corporate bonds for which two major reasons? a. tax sheltering and high yield b. liquidity and high after-tax returns c. liability maturity matching and high after-tax returns d. low risk and liquidity

liability maturity matching and high after-tax returns

A savings and loan with a very low net worth position would most likely take which action? a. invest in conventional fixed-rate loans b. invest in variable-rate loans c. make and sell eligible loans to the FHLMC d. make equity-participation mortgages

make and sell eligible loans to the FHLMC

What are the characteristics of money market instruments?

(a) low default risk; (b) short-term maturity; and (c) high marketability.

The smallest denomination of T-bills is a. $1,000 b. $10,000 c. $100,000 d. $1,000,000 e. $5,000,000

$1,000

You purchase a Treasury inflation-protected note with an original principal amount of $1,000,000 and a 2.8 percent annual coupon (paid semiannually). What will the first coupon payment be if the semiannual inflation over the first six months is 1.2%? a. $14,168 b. $14,000 c. $28,336 d. $28,000 e. $12,336

$14,168

What is the monthly payment on a $200,000 conventional fixed-rate mortgage, 7 percent, financed for 15 years? a. $1830 b. $1798 c. $1679 d. $1721

$1798

You have just purchased a home and borrowed $50,000, 7 percent for 25 years, payable monthly. What is your monthly payment? a. $338 b. $339 c. $353 d. $369

$353

What is the monthly payment on a $100,000 fixed rate loan with a 6.5% rate with a term of 30 years? a. $657 b. $632 c. $638 d. $612

$632

What is the monthly payment on a home costing $150,000, 30 percent down, 25 years at 9 percent? a. $636.09 b. $881.16 c. $763.31 d. $677.82 what was the amount of interest paid in the first month of the loan?

$881.16 interest - $787.50

With reference to the question above, what is the loan balance after 10 years if paid as agreed? a. $92,721 b. $83,581 c. $85,492 d. $90,785

$90,785

Calculate the bond equivalent yield on a 52-day T-bill selling for 98.555% of its face value. a. 10.85% b. 10.75% c. 10.54% d. 10.29%

10.29%

An investor in the 34 percent federal tax bracket would probably select what investment (all with similar default risk)? a. 7% municipal bond b. 10% corporate bond c. 11% mortgage d. 9% Treasury bond

11% mortgage

How long does it take to repay one-half of the principal on a $70,000, 7 percent, 15 year mortgage loan? a. 75 months b. 90 months c. 112 months d. 123 months e. 131 months

112 months

The yield on a three-year Treasury note is 4.5% and the yield on a three-year TIPS is 2.4%. What is the market's estimate of the annual inflation rate over the next three years? a. 1.1% b. 1.6% c. 4.5% d. 2.4% e. 2.1%

2.1%

A bank agrees to buy T-bills from a securities dealer for $997,250, and promises to sell the securities back to the dealer in 4 days for $997,575. The yield on this reverse repo for the bank is: a. 3.00% b. 2.97% c. 2.91% d. 2.86% e. 2.93%

2.86%

With reference to the question above, if you added $100 to the monthly payment, how soon would your loan be paid off? a. 249 months b. 227 months c. 185 months d. 278 months e. 360 months

249 months

If average corporate bond and tax-exempt municipal bond rates were 8.33% and 6.25% respectively, at what marginal tax rate would an investor be indifferent between the two? a. 18% b. 25% c. 30% d. 33% e. 35%

25%

What is the bank discount rate on a $100,000 face value T-bill priced at $97,500, maturing in 181 days? a. 2.50% b. 4.84% c. 4.97% d. 5.10% e. 5.17%

4.97%

The bank discount rate (ask) on a 71-day T-bill is 4.86%. What is the bond equivalent yield on the T-bill? a. 4.86% b. 4.92% c. 4.98% d. 5.14%

4.98%

A firm buys $1,000,000 of a 30-day commercial paper issue for $995,450. The bond equivalent yield on this commercial paper is: a. 5.56% b. 5.46% c. 5.49% d. 5.54%

5.56%

An ARM has a 5/1 cap (i.e., the rate cannot increase more than 1 percent per year and 5 percent over the life of the mortgage). What will the mortgage rate be after three years if the initial rate is 5%, and interest rates increase by 2% in each of the first three years of the contract? a. 6% b. 7% c. 8% d. 9% e. 10%

8%

Which of the following is not associated with credit enhancements for asset-backed securities? a. Cash-collateral accounts that are deposits set aside to cover losses b. Financial guarantees from bond insurance companies c. Standby letters of credit from major commercial banks d. A guarantee to pay from the borrowers

A guarantee to pay from the borrowers

Interest rate caps on mortgage loans a. limit the size of the increase in the loan rate in any year. b. limit the size of the increase in the loan rate over the life of the loan. c. are required on all ARMs. d. both a and b e. all of the above

ALL

How are the Treasury and federal agency securities different? What difference primarily explains the yield differential between the two securities?

Agency securities have greater default risk and are less marketable than Treasury securities. As a result, Agency securities sell at lower prices (have higher yield) than similar Treasury securities.

Which of the following statements is true? a. All fixed-rate mortgages have interest rate caps. b. All adjustable-rate-mortgages have interest rate caps. c. An interest rate cap on a mortgage reduces the lender's interest rate risk exposure. d. Usually, an annual interest rate cap on a mortgage is 5%, and a lifetime cap is 1-2%. e. Both a and b are true.

All adjustable-rate-mortgages have interest rate caps.

Which of the following do not participate in the money markets? a. commercial banks b. the Federal Reserve c. U.S. Treasury dealers d. corporations e. All of the above participate in the money markets.

All of the above participate in the money markets.

Which of the following is not associated with tightened mortgage credit standards? a. More time on the current job required. b. An increase in the required loan/value ratio. c. A decrease in the maximum total debt payments per month per amount of monthly income. d. Decreased maximums in the payment/income ratio of borrowers.

An increase in the required loan/value ratio.

Which of the following securities is not a money market security? a. Ba-rated corporate bonds b. Treasury bills c. certificates of deposit d. banker's acceptance e. P2-rated commercial paper

Ba-rated corporate bonds

Why is a bank line of credit necessary to back up an issue of commercial paper?

Back-up lines of credit would be used if the firm experiences financial difficulties or if credit market conditions tighten. Back-up lines of credit are often required by investors to assure protection of their principal and liquidity.

Why is the banker's acceptance form of financing ideal in foreign transactions?

Banker's acceptance provides two basic services: (a) financing, and (b) services and expertise specifically related to an international transaction.

Which of the following is not true about construction-to-permanent mortgages? a. Bridge financing is provided by lender over the time frame required by the borrower to purchase land and construct the house. b. Both interest and principal payments are made until construction is completed. c. Loan is financed in increments as construction payments have to be made. d. On completion of the construction, loan balance is rolled over into the type of mortgage contract desired by borrower.

Both interest and principal payments are made until construction is completed.

Which of the following statements is true? a. Discount yield is always lower than bond equivalent yield on the same security. b. Discount yield is always higher than bond equivalent yield on the same security. c. Discount yield is always equal to bond equivalent yield on the same security. d. Discount yield can be lower or higher than bond equivalent yield on the same security.

Discount yield is always lower than bond equivalent yield on the same security.

Which of the following is not used to adjust ARM rates? a. Treasury security rates b. Dow Jones Mortgage Rate Index c. S&L cost of funds index d. current fixed-rate mortgage index e. LIBOR

Dow Jones Mortgage Rate Index

Which of the following money market rates is studied closely for indicators of changes in Federal Reserve monetary policy? a. Federal Funds b. Treasury bills c. commercial paper d. banker's acceptances

Federal Funds

Which of the following is associated with a loosening of mortgage credit standards? a. Increased down payments. b. Increased loan/value ratios. c. Decreased in maximum total debt to income ratios d. Increased required use of mortgage insurance e. All of the above

Increased loan/value ratios.

Which statement about Treasury bills is not true? a. They have maturities less than one year. b. Most are sold by "book-entry" method. c. They are sold at a discount. d. Interest on T-bills is tax-deductible for federal income tax purposes.

Interest on T-bills is tax-deductible for federal income tax purposes.

Which of the following statements about negotiable certificates of deposits (NCDs) is true? a. NCDs usually have denominations of less than $100,000. b. NCDs usually have lower yields than regular CDs. c. NCDs have no secondary market d. Large banks are usually able to pay lower interest rates on NCDs than smaller regional banks. e. All of the above statements are true.

Large banks are usually able to pay lower interest rates on NCDs than smaller regional

What types of firms issue commercial paper?

Large businesses with high credit ratings issue commercial paper as an inexpensive source of short-term borrowing.

Which of the following is not true about interest-only mortgages? a. Low payments in initial years (10 to 15 years) - only includes interest on borrowed amount. b. Low payments in initial years (10 to 15 years) - only includes principal repayment on borrowed amount. c. After initial period, payments increase such that entire loan amount is amortized by the end of 30 years. d. None of the above is true.

Low payments in initial years (10 to 15 years) - only includes principal repayment on borrowed amount.

Which of the following is not an advantage of investing in mortgage-backed bonds (MBBs) compared to investing in direct mortgages? a. MBBs are issued in standard denominations. b. MBBs are issued by individuals with limited credit experience. c. MBBs are usually insured and highly collateralized. d. MBBs have cash flow returns similar to corporate bonds.

MBBs are issued by individuals with limited credit experience.

Why must a financial claim possess these characteristics to function as a money market instrument?

Money market investors demand low-risk securities because their cash excesses are only temporary.

Which of the following statements about balloon payment mortgages is not true? a. It is a traditional loan where interest is paid until the time when the principal is due. b. Terms can be 3, 5 or 7 years. c. Loan is amortized over 15 or 30 year period so that monthly payments are no different than an FRM of equal maturity. d. Rate is variable over the contract term. e. All of the above statements are true.

Rate is variable over the contract term.

The most important regulator in the U.S. capital markets is the a. Federal Reserve System b. Treasury Department c. National Association of Security Dealers (NASD) d. Federal Deposit Insurance Corporation e. Securities and Exchange Commission

Securities and Exchange Commission

Which of the following statements about FHA and VA mortgages is false? a. They are insured by the government. b. They charge for their insurance. c. They have low down payments. d. The borrower is protected in case of default.

The borrower is protected in case of default.

What is most likely to happen to an ARM in a decreasing rate environment? a. The borrower's payments will increase. b. The maturity of the loan will be extended. c. The principal of the loan will increase. d. The borrower's payments will decrease.

The borrower's payments will decrease.

What are the characteristics critical to being able to issue commercial paper?

The rates are lower than rates charged by banks. Because commercial paper is unsecured debt, most investors only want paper with highest credit ratings.

Which of the following is not a reasonable expectation for investors in pass-through mortgage securities? a. The securities are readily marketable. b. They have little default risk. c. The investor receives cash flows in proportion to his/her ownership proportion. d. The timing of the cash flow return from the securities is quite predictable. e. All of the above are reasonable expectations for investors in pass-throughs.

The timing of the cash flow return from the securities is quite predictable.

Which of the following statements is not true of all pass-through securities? a. They may not be repaid in full for 25 to 30 years. b. They are viewed by the capital markets as having average maturities of much less than 30 years. c. Their interest and principal repayments are predictable. d. They pass through all payments of principal and interest from the underlying pool of mortgages to the investors.

Their interest and principal repayments are predictable.

Which one of the following is not true about privately issued passthroughs (PIP) a. They are similar to "Ginnie Maes" in that they are backed by mortgages that qualify for FHA or VA guarantees. b. PIPs are issued by private institutions or mortgage bankers. c. They are similar to "Ginnie Maes" except that they are backed by conventional mortgages that do not qualify for FHA or VA guarantees. d. They are typically used to securitize large, non-conforming mortgage loans called jumbo loans.

They are similar to "Ginnie Maes" in that they are backed by mortgages that qualify for FHA or VA guarantees.

The most common money market instrument utilized in the Fed's open market operations is a. Federal Funds. b. commercial paper. c. Treasury bills. d. Agency securities.

Treasury Bills

Purchasing T-bill via a computerized account without actually receiving the securities is achieved through a _______ Account. a. Direct Purchase b. Treasury Direct c. Fed Purchase d. Federal Benefit

Treasury Direct

Which of the following statements about STRIPs is true? a. STRIPs are sold directly by the Treasury Department b. When a STRIP is created, all interest payments become one security and the principal payment becomes the other. c. Many small investors prefer STRIPs because they require a lower minimum investment than original Treasury notes and bonds. d. Treasury securities dealers create STRIPs because they expect to sell the created zero-coupon securities for more than what they paid for the original Treasury security. e. None of the above statements is true.

Treasury securities dealers create STRIPs because they expect to sell the created zero-coupon securities for more than what they paid for the original Treasury security.

Which of the following is not a difference between municipal bonds (munis) and corporate bonds? a. Interest paid on munis is tax-exempt, while interest paid on corporate bonds is not. b. Munis often have a range of maturities (are serial issues) but corporate bonds do not. c. Unlike corporate bonds, munis are rated by bond-rating agencies such as Moody's. d. All of the above are differences between munis and corporate bonds.

Unlike corporate bonds, munis are rated by bond-rating agencies such as Moody's.

Bonds issued by foreign entities in the United States are called: a. foreign bonds b. American depository receipts c. Yankee bonds d. Samurai bonds

Yankee bonds

Which of the following money market instruments would typically be used in international transactions? a. a Treasury bill b. a banker's acceptance c. commercial paper d. a negotiable CD

a banker's acceptance

) A reverse repurchase agreement calls for a. a firm to sell securities with the agreement to buy them back later at a higher price. b. a firm to buy securities with the agreement to sell them back later at a higher price. c. a firm to sell securities with the agreement to buy them back later at a lower price. d. a firm to buy securities with the agreement to sell them back later at a lower price.

a firm to buy securities with the agreement to sell them back later at a higher price.

A repurchase agreement calls for a. a firm to sell securities with the agreement to buy them back later at a higher price. b. a firm to buy securities with the agreement to sell them back later at a higher price. c. a firm to sell securities with the agreement to buy them back later at a lower price. d. a firm to buy securities with the agreement to sell them back later at a lower price.

a firm to sell securities with the agreement to buy them back later at a higher price.

Which of the following is not a mortgage-backed security? a. a jumbo mortgage b. a Ginni Mae pass-through c. a collateralized mortgage obligation d. a real estate mortgage investment conduit (REMIC) e. All of the above are mortgage-backed securities.

a jumbo mortgage

Which of the following statements about REMIC securities is false? a. REMIC securities provide tax-free income to investors. b. REMIC securities provide level cash flows similar to CMOs. c. REMIC securities may be backed by pass-through securities issued by FHLMC or FNMA. d. The Tax Reform Act of 1986 encouraged the use of REMICs.

a. REMIC securities provide tax-free income to investors.

The T-bill rate quoted by the Federal Reserve banks is the a. bank discount rate. b. the true rate. c. effective annual rate. d. bond equivalent rate. e. the primary rate

a. bank discount rate.

Which of the following mortgages would you prefer to hold if you were a lender and you expected inflation of uncertain magnitude? a. reverse annuity mortgages b. conventional fixed-rate mortgages c. adjustable-rate mortgage loans d. balloon payment mortgages

adjustable-rate mortgage loans

If you were a manager of a thrift institution and you expected interest rates to increase, what type of mortgage would you most like to hold? a. balloon payment, ten years b. Rollover mortgage, two years c. adjustable-rate mortgage, monthly d. fixed-rate mortgage, 15 years

adjustable-rate mortgage, monthly

Hybrid ARMs would be preferred by borrowers a. seeking a rate lower than comparable fixed rates. b. who may be selling their home soon. c. seeking a fixed payment for a few years. d. all of the above.

all

Mortgage rates, relative to other capital market rates, a. tend to vary with other rates. b. tend to be higher than Treasury bond rates. c. are becoming more uniform across the country. d. all of the above.

all

The demand for junk bonds came primarily from a. life insurance companies b. savings & loans association c. pension funds d. all of the above

all of the above

The fed funds rate is very important to the economy because: a. it measures the return on the most liquid of all the financial assets traded b. it is closely related to the conduct of monetary policy c. it measures directly the availability of excess reserves in the banking system d. all of the above

all of the above

The secondary markets for capital market securities have facilitated economic growth in the U.S. because a. they help provide marketability for capital market claims. b. they have increased people's willingness to buy capital market claims. c. they make people more willing to invest because they can more easily diversify their risk. d. all of the above

all of the above

Which of the following is associated with determining the creditworthiness of a mortgage borrower? a. income stability b. job stability c. prior credit history d. all of the above

all of the above

a. Interest and principal from borrowers are passed through to investor. b. Federally insured imply mortgage loans guaranteed by the FHA, VA, and other authorized federal agencies. c. GNMA pass-throughs are secured by mortgage pools originated by mortgage banks, commercial banks, or other mortgage lending institutions. d. all of the above

all of the above

A non-competitive bid in the Treasury securities auction market is characterized by: a. the bidder specifying the quantity of bills desired b. the bid not exceeding a specific dollar amount c. the bidders paying a price equal to the weighted average price of all competitive bids accepted. d. all of the above.

all of the above.

The bank discount rate (ask) on a 91-day T-bill is 5.35%. What is the price of the $1000 T-bill?

b. $986.48

An investor in a first-level CMO tranche with claims on a pool of mortgages is likely to a. have a much higher risk position than lower level tranches. b. have more certain returns and less default-risk exposure. c. wait until all tranches are paid before receiving a return. d. have lower risk but a much more varied return than lower level tranches.

b. have more certain returns and less default-risk exposure.

The Wall Street Journal publishes T-bill price (bid/ask) based on the ___________ rate; with the __________ rate provided as the quoted (ask) yield on the T-bill. a. bond equivalent; bank discount b. effective annual; bank discount c. bank discount; bond equivalent d. bank equivalent; bank discount

bank discount; bond equivalent

A time draft drawn on and accepted by a commercial bank that orders to pay a specified amount of money to the bearer on a given date is called a _______ a. letter of credit b. negotiable certificate of deposit c. banker's certificate of support d. reverse repurchase agreement e. banker's acceptance

banker's acceptance

A competitive bid in the Treasury securities auction market has all of the following characteristics except: a. the bidder specifying the quantity of bills desired b. the price the investor wishes to pay c. large, institutional investors d. bids for a maximum of $5,000,000.

bids for a maximum of $5,000,000.

Which of the following yield calculations on a Treasury bill provides the best comparison yield for competing coupon-bearing securities of the same maturity? a. bank discount rate b. CD equivalent rate c. bond equivalent rate d. the prime rate.

bond equivalent rate

Corporate bonds are less marketable than money market instruments and corporate equities because a. they have special features (e.g., call provisions) that make them difficult to value. b. they are long-term securities, which tend to be riskier and less marketable. c. both a and b d. Corporate bonds are in fact not less marketable than money market instruments and corporate equities.

both a and b

Banks can satisfy their short-term borrowing needs by a. Federal Funds purchased. b. Federal Funds sold. c. issuing negotiable CDs. d. both a and c

both a and c

Like other capital market segments, mortgage markets a. bring together borrowers and suppliers of long-term funds. b. are always secured by the pledge of real property. c. are characterized by small, risky borrowers. d. issued in standard denominations. e. all of the above

bring together borrowers and suppliers of long-term funds.

A prepayment option on a mortgage is similar to a _______ option on a bond. a. put b. call c. conversion d. default

call

Privately placed securities a. have to be registered with SEC. b. never trade in the secondary market. c. can only be sold to large, sophisticated investors (e.g., financial institutions). d. cannot be originally sold to less than 35 investors. e. both c and d.

can only be sold to large, sophisticated investors (e.g., financial institutions).

Which of the following is not an example of capital market securities? a. common stocks b. convertible bonds c. commercial paper d. mortgages

commercial paper

Which of the following may be a liability of a non-financial business corporation? a. commercial paper b. Federal Funds c. Treasury securities d. agency securities

commercial paper

The money market security represented by the largest dollar amount outstanding is a. commercial paper. b. federal agency issues. c. negotiable CDs. d. Treasury bills.

commercial paper.

Most general obligation bonds are sold through a. direct placement. b. negotiated bids. c. competitive bids. d. private placement.

competitive bids.

An important economic function of the U.S. government security dealer is to a. underwrite Treasury securities. b. "make a market" for Treasury securities. c. support open market operations of the Federal Reserve. d. all of the above

d. all of the above

Large industrial U.S. corporations are involved in the money market by a. investing excess cash balances. b. buying and selling goods on credit in international trade. c. issuing commercial paper. d. all of the above

d. all of the above

Money market securities have very little a. default risk. b. price risk. c. marketability risk. d. all of the above.

d. all of the above.

All of the following bond terms relate to maturity except a. serial. b. debenture. c. sinking fund. d. call provision.

debenture

When a firm issuing commercial paper uses a backup line of credit, it _____. a. increases the credit risk for investors b. decreases the credit risk for investors c. has no impact on investors d. decreases the marketability of commercial paper

decreases the credit risk for investors

As interest rates rise, the value of PO strips _______ and the value of IO strips _______. a. decreases; increases b. increases; decreases c. does not change; decreases d. decreases; decreases e. increases; increases

decreases; increases

Credit-rating agency ratings are associated with which of the following investor risks? a. interest rate risk b. default risk c. purchasing power risk d. reinvestment risk e. exchange rate risk

default risk

Which of the following is true about reverse annuity mortgages (RAMs)? a. RAMs allow homeowners to borrow against the equity on their homes at low rates. b. Typically obtained by older people whose home loans have been paid off, but can use income of the real estate investment they own. c. Typical term is no more than 20 years and could be for borrower's lifetime as an annuity. d. Homeowners' equity declines by amount borrowed. e. All of the above are true.

e. All of the above are true.

A repurchase agreement is like a secured loan because a. it involves two parties. b. it involves collateral, in this case the sale of a security under agreement to repurchase. c. it is backed by a mortgage on real property. d. it is like the secured lending in that a mortgage is effected by the lender.

it involves collateral, in this case the sale of a security under agreement to repurchase.

In the 1980s, low credit quality businesses were able to first issue their new bond securities in which market? a. municipal bond market b. junk bond market c. investment-grade bond market d. secondary market e. subprime mortgage market

junk bond market

Issuers of commercial paper tend to be a. large financial and nonfinancial firms b. firms with high credit risk c. small banks d. wealthy individuals e. both a and b

large financial and nonfinancial firms

Private mortgage insurance protects the a. seller of the home. b. FHA. c. borrower. d. lender. e. government.

lender.

Which of the following hold the largest percentage of mortgages outstanding in the United States? a. life insurance companies and pension funds b. government agencies c. mortgage pools d. thrift institutions

mortgage pools

Two mortgage investors, who have increased the percentage of mortgages outstanding in the last 20 years, are a. thrift institutions and commercial banks. b. commercial banks and insurance companies/pension funds. c. mortgage pools and thrift institutions. d. mortgage pools and commercial banks.

mortgage pools and commercial banks.

The largest sector of the capital debt market is associated with a. corporate bonds b. mortgages c. state and municipal bonds d. U.S. Treasury debt

mortgages

Which of the following money market instruments is not sold on a discount basis? a. commercial paper b. negotiable certificates of deposit. c. Treasury bills d. banker's acceptances e. All of the above instruments are sold on a discount basis.

negotiable certificates of deposit.

A capital market financing is most likely to finance a. new plant and equipment. b. seasonal inventory needs. c. a quarterly dividend payment. d. the sale of common stock.

new plant and equipment.

Investors in the money markets are generally willing to take which of the following risks? a. default risk b. interest rate risk c. liquidity risk d. all of the above e. none of the above

none of the above DILA

Mortgages with government or private mortgage insurance a. are likely to sell at lower prices and lower rates than comparable conventional mortgages. b. are less likely to default that conventional mortgages. c. offer the investor less default risk than conventional mortgages. d. will be written under the credit standards of the originator, and not the standards of the agency or insurance company.

offer the investor less default risk than conventional mortgages.

Mortgage bankers are most likely to be involved in the _______ of a mortgage contract. a. origination b. funding c. servicing d. insuring

origination

Federal Funds are typically a. Treasury deposits. b. Federal Reserve assets. c. commercial bank deposits at the Federal Reserve. d. overnight interbank loans settled in immediately available funds

overnight interbank loans settled in immediately available funds

Mortgage bankers usually do not a. permanently fund mortgages b. originate mortgages c. service mortgages d. collect monthly payments from borrowers

permanently fund mortgages

Unlike noncallable corporate bonds, mortgages have _______ risk. a. default b. interest rate c. prepayment d. both a and c

prepayment

TIPS have less _____ risk than "regular" Treasury securities of the same maturity. a. default b. price c. liquidity d. foreign exchange

price

The original purpose of the Federal Home Loan Mortgage Corporation (Freddie Mac) was to a. make home loans to low income individuals. b. purchase the conventional mortgages from thrift institutions. c. purchase the insured conventional mortgages from financial institutions. d. purchase the government insured mortgages from thrift institutions.

purchase the conventional mortgages from thrift institutions.

Investors in U.S. Treasury STRIPs are primarily interested in eliminating which of the following bond investor risks? a. default risk b. price risk c. reinvestment risk d. foreign exchange risk

reinvestment risk

Which of the following money market securities is backed by specified collateral? a. negotiable CDs b. banker's acceptances c. repurchase agreements d. commercial paper

repurchase agreements

A contract designed to use the equity in a home for retirement income without any required payments is called a(n) a. rollover mortgage b. reverse annuity mortgage c. adjustable-rate mortgage d. home equity loan

reverse annuity mortgage

In the primary market, corporate bonds cannot be sold through a. securities exchanges such as NYSE b. competitive sales c. negotiated sales d. private placement

securities exchanges such as NYSE

Which of the following is not a characteristic of money market instruments? a. short term to maturity b. small denominations c. low default risk d. high marketability e. All of the above are characteristics of money market securities.

small denominations

Industrial development bonds (IDBs) are debt securities issued by: a. the federal government b. non profit organizations c. state and local government agencies d. nonfinancial businesses.

state and local government agencies

Mortgage-backed securities often have payment patterns that are "doubly convex," which means a. the contract is very complex. b. that significant changes in the level of interest rates, up and down, produces losses for the investor. c. that conventional mortgages have double the default risk than other types of mortgages. d. that investors are exposed to both interest rate risk and default risk.

that significant changes in the level of interest rates, up and down, produces losses for the investor.

Securitization of loan portfolios, such as credit card loans and mortgage loans, will occur if a. the financial market will pay more for the loan portfolio than the issued asset-backed securities. b. the financial market will pay more for the issued asset-backed securities than the loan portfolio. c. a financial guarantee is obtained from a commercial bank. d. the borrowers permit

the financial market will pay more for the issued asset-backed securities than the loan portfolio.

All but one of the following may be associated with the increased globalization of bond markets: a. the globalization of business activity b. increased volatility in foreign exchange rates c. Improved computer and telecommunications technology d. the reduction in trade barriers and standardization of regulations.

the reduction in trade barriers and standardization of regulations.

Amortizing a mortgage loan means that a. a long-term is converted to a short-term loan. b. the equity in the house declines as the loan is paid down. c. the loan is repaid in equal, consecutive payments. d. interest is paid first entirely, and then the principal

the loan is repaid in equal, consecutive payments.

Hybrid ARMs protect both lender and borrower from interest rate risk because a. the mortgage payment stays fixed for a time before it begins to vary with interest rates. b. hybrid ARMs guarantee the lender a fixed return and borrowers a fixed payment for the life of the contract. c. rates and house payments will vary quite frequently. d. these mortgages are insured by the FHA.

the mortgage payment stays fixed for a time before it begins to vary with interest rates.

The incentive to securitize a portfolio of loans is a. the profit from the loan revenue. b. the profit from the interest on the asset-backed securities issued. c. the profit from the fees paid for financial guarantees. d. the profit from the difference between the loan revenue and the costs of guarantees and return on the asset-backed securities.

the profit from the difference between the loan revenue and the costs of guarantees and return on the asset-backed securities.

With reference to the question above, an investor in the 34 percent marginal corporate tax bracket would purchase a. the tax-exempt bond. b. the corporate bond. c. either security (i.e., the investor is indifferent) d. the security with the higher pre-tax yield. e. both a and d

the tax-exempt bond.

Federal agency securities have higher yields than Treasury securities because a. they are less marketable than Treasury securities. b. they have higher exchange rate risk than Treasuries. c. they are more affected by interest rate risk. d. they are associated with mortgages that are riskier securities. e. Federal agency securities actually have lower yields than Treasury securities.

they are less marketable than Treasury securities.

State and local governments make mortgage loans at below-market rates of interest because a. they want to compete with the thrifts. b. they want to help local thrift institutions. c. they can obtain funds for mortgage financing cheaply by selling tax-exempt securities. d. they lend to lower income, larger home buyers.

they can obtain funds for mortgage financing cheaply by selling tax-exempt securities.

A savings and loan writing ARMs and expecting mortgage interest rates to decrease in the future would want a. an interest rate "cap" on their loans. b. a second mortgage on the home. c. to lengthen the "adjusting" time period. d. no limits on the variability of the rates.

to lengthen the "adjusting" time period.