410 Exam 4
Given a 1% change in interest rates, which of the following will have the greatest percentage price change, assuming all have the same maturity? a. Zero-coupon Treasury bond b. High-coupon corporate bond c. Low-coupon corporate bond d. Low-coupon Treasury bond e. Not enough information is given to answer the question.
A
If the Federal reserve is easing monetary policy at the end of a recession, as with the period after 2009, you would expect the yield curve to be: a. upward sloping. b. flat. c. inverted. d. humped. e. none of the above
A
If the Federal reserve is easing monetary policy at the end of a recession, you would expect the yield curve to be: a. upward sloping. b. flat. c. inverted. d. humped. e. none of the above
A
Long-term interest rates tend to be higher than short-term interest rates: a. at the bottom of the business cycle. b. at the end of an expansionary period. c. at the beginning of a contractionary period. d. at the peak of the business cycle. e. during periods of rapid deflation.
A
Municipal bonds issued for broad city or county needs, such as for new elementary schools, are called: a. General obligation bonds b. Education endowment bonds c. Department of Education mandated bonds d. Pre-secondary education bonds e. No-child-left-behind compliance bonds
A
Prior to the financial crisis, which of the following U.S. government agency securities were backed by the "full faith and credit of the U.S. Government?" a. Government National Mortgage Association (Ginnie Mae) b. Student Loan Marketing Association (Sallie Mae) c. Conventional mortgages d. all of the above e. a. and c. only
A
Securities with embedded options: a. often have higher yields than comparable Treasury securities. b. generally have no prepayment risk. c. are always free of default risk. d. all of the above. e. a. and b. only
A
The underlying mortgages in Ginnie Mae mortgage pools include: a. Federal Housing Association (FHA) mortgages. b. Fannie Mae mortgages. c. privately issued mortgages. d. all of the above e. a. and b. only
A
Which of the following classes of securities are recorded at amortized cost on the balance sheet? a. Held to maturity b. Available for sale c. Trading d. all of the above e. a. and b. only
A
Which of the following classes of securities are recorded at amortized cost on the balance sheet? a. Held-to-maturity b. Available-for-sale c. Trading d. all of the above e. a. and b. only
A
Which of the following is not an objective of a bank's investment portfolio? a. Meeting capital requirements b. Maintaining liquidity c. Diversifying credit risk d. Managing interest rate exposure e. Preserving capital
A
Which of the following is not true regarding collateralized mortgage obligations (CMOs)? a. Interest earned on CMOs is exempt from state income taxes. b. CMO yields are generally higher than comparable Treasury yields. c. CMOs exhibit little default risk. d. All of the above are true. e. Only a. and c. are true.
A
Which of the following is true? Mortgage prepayment risk: A. Is higher on high interest rate mortgages B. Is felt most dramatically when interest rates rise C. Is eliminated by the use of mortgage backed securities D. Is eliminated by the purchase of a stripped mortgage obligation E. All of the above are true
A
Which of the following would be the least liquid over the near term? a. Treasury bills pledged as security b. Fed funds sold c. Deposits at correspondent banks d. Reverse repo e. Investment grade commercial paper
A
Which passive investment strategy differentiates between bonds that have been purchased for liquidity versus income purposes? a. Barbell maturity strategy b. Riding the yield curve c. Laddered maturity strategy d. Timing maturity strategy e. Cycle maturity strategy
A
A bank purchases a new 52-week $1,000,000 face value Treasury bill for $950,000. What is the discount rate on this T-bill (Hint: A 52-week T-bill has an original maturity of 364 days) a. 4.95% b. 5.00% c. 5.06% d. 5.19% e. 5.26%
A dr = [(FV - P)/FV]*(360/n) = [($1,000,000 - $950,000)/$1,000,000]*(360/364) = .0495
A bank purchases a new 52-week $1,000,000 face value Treasury bill for $950,000. What is the discount rate on this T-bill (Hint: A 52-week T-bill has an original maturity of 364 days) a. 4.93% b. 5.00% c. 5.06% d. 5.19% e. 5.26%
A dr = [(FV - P)/FV]*(360/n) = [($1,000,000 - $950,000)/$1,000,000]*(360/365) = .04932
In general, commercial paper: a. is more liquid than a treasury bill. b. has a maturity of 270 days or less. c. sells at a premium to face value. d. all of the above e. a. and b. only
A & B
Suppose a bank has found bank qualified municipal bonds which have a nominal gross rate of return of 8 percent and that it can borrow funds needed for this purchase at a rate of 6.25 percent. This bond is in the 35 percent tax bracket. What is the net after-tax return on this bond? A. 5.20 percent B. 3.5 percent C. 1.75 percent D. 0 percent E. None of the above
B
The fundamental objective of a bank's investment portfolio is to: a. eliminate interest rate risk. b. maximize earnings for a level of risk set by management. c. earn tax-free income. d. meet capital requirements. e. maximize the duration of the assets of the bank.
B
The most aggressive investment maturity strategy that calls for the bank to continually shift the maturities of its securities in response to changes in interest rates and other economic conditions is the A. Barbell strategy B. Rate expectations approach C. Front-end-loaded policy D. Ladder approach E. None of the above
B
Which of the following U.S. government agencies can borrow directly from the U.S. Treasury? a. Government National Mortgage Association (Ginnie Mae) b. Student Loan Marketing Association (Sallie Mae) c. Small Business Administration (SBA) d. all of the above e. a. and c. only
B
Which of the following is considered an active investment strategy? a. Barbell maturity strategy b. Riding the yield curve c. Laddered maturity strategy d. Interest maturity strategy Risk maturity strategy
B
Which of the following statements is (are) correct regarding duration? A. In comparing two bonds with the same yield to maturity and the same maturity, a bond with a higher coupon rate will have a longer duration. B. In comparing two loans with the same maturity and the same interest rate, a fully amortized loan will have a shorter duration than a loan with a balloon payment. C. The duration will always be shorter than the maturity for all debt instruments. D. All of the above E. B and C
B
A bond has six years to maturity and has a coupon rate of 7.5 percent. Coupon payments are made annually and this bond has a face value of $1000. This bond is selling in the market for $1127. What is the yield to maturity on this bond? A. 7.5 percent B. 5 percent C. 11.5 percent D. 2.5 percent E. None of the above
B 1127=75/(1+IRR)+75/(1+IRR)^2+75/(1+IRR)^3+75/(1+IRR)^4+75/(1+IRR)^5+1075/(1+IRR)^6 IRR=5%
A bond has eight years to maturity and a coupon rate of 6.5 percent. Coupon payments are made annually and this bond has a face value of $1000. This bond is selling in the market for $862. If this bond is sold at the end of four years for $1046, what is the holding period return on this bond? A. 6.5 percent B. 12 percent C. 9 percent D. 6 percent E. None of the above
B 864=65/(1+IRR)+65/(1+IRR)^2+65/(1+IRR)^3+(65+1046)/(1+IRR)^4 IRR=12%
An investor can invest in either a tax-exempt security that pays 5% or a taxable corporate security of comparable risk and maturity that pays 8%. At what marginal tax rate will the investor be indifferent between these two securities? a. 25.0% b. 32.5% c. 37.5% d. 57.5% e. 62.5%
C
Banks are generally not allowed to invest in speculative grade bonds. What kind of risk is this designed to limit? A. Liquidity risk B. Business risk C. Credit risk D. Tax exposure E. Interest rate risk
C
Classical economic theory suggests that if the economy is entering into a recessionary the yield curve will be: a. upward sloping. b. flat. c. inverted. d. humped. e. none of the above
C
For which of the following classes of securities are unrealized gains and losses included as income? a. Held to maturity b. Available for sale c. Trading d. all of the above e. b. and c. only
C
For which of the following classes of securities are unrealized gains and losses included as income? a. Held-to-maturity b. Available-for-sale c. Trading d. all of the above e. b. and c. only
C
If the economy is entering into a recessionary period, you would expect the yield curve to be: a. upward sloping. b. flat. c. inverted. d. humped. e. none of the above
C
Most repurchase agreements are secured by: a. municipal securities. b. commercial paper. c. Treasury securities. d. discount window loans. e. cash.
C
Municipal bonds whose primary source of repayment are the revenues from the underlying financed project are known as: a. general obligation bonds. b. credit free bonds. c. revenue bonds. d. exempt bonds. e. liquidity bonds.
C
Packages of high-quality mortgages put together either by a government agency or by a private investment banking corporation to raise more loanable funds for the issuer are known as a (or an): A. Accretion bond B. Participation certificate C. CMO D. Stripped security E. Commercial paper
C
Purchasing power risk refers to: a. the risk that bank customers will not "purchase" bank loans. b. the risk that returns may vary due to anticipated changes in inflation. c. the risk that returns may vary due to unanticipated changes in inflation. d. the changes in foreign exchange. e. none of the above
C
Regulators generally prohibit banks from purchasing ____________ for income purposes. a. Treasury bills b. commercial paper c. common stock d. repurchase agreements e. bankers' acceptances
C
Which of the following bonds will likely have the greatest duration? a. A 2-year zero-coupon bond in a period of low rates b. A 2-year zero-coupon bond in a period of high rates c. A 10-year low-coupon bond in a period of high rates d. A 10-year high-coupon bond in any interest rate environment e. A 5-year low-coupon bond in any interest rate environment
C
Which of the following is not true regarding prepayments? a. The greater the prepayments, the shorter the security's duration. b. Prepayments are relatively low during the first two years of a mortgage. c. Mortgages to older people tend to have more prepayments than mortgages to younger people. d. Prepayments increase as interest rates fall. e. all of the above are true
C
An investor can invest in either a tax-exempt security that pays 5% or a taxable corporate security of comparable risk and maturity that pays 8%. At what marginal tax rate will the investor be indifferent between these two securities? a. 25.0% b. 32.5% c. 37.5% d. 57.5% e. 62.5%
C 1 - (5%/8%) = .375
A bank replaces 5-year corporate bonds with a yield to maturity of 9.75 percent with 5-year municipal bonds with a yield to maturity of 7 percent. This bank is in the 35 percent tax bracket and these bonds have the same default risk. What is the most likely reason this bank changed from the corporate to the municipal bonds? A. Liquidity risk B. Business risk C. Credit risk D. Tax exposure E. Interest rate risk
D
A bond has eight years to maturity and a coupon rate of 6.5 percent. Coupon payments are made annually and this bond has a face value of $1000. This bond is selling in the market for $862. What is the yield to maturity on this bond? A. 6.5 percent B. 10 percent C. 8.5 percent D. 9 percent E. None of the above
D
A new security which was created by the Treasury to protect against inflation risk is called a(n): A. CMO B. FNMA C. GNMA D. TIPS E. CD
D
A security might exhibit negative convexity because: a. its duration is greater than its maturity. b. it has a fixed interest rate below current market rates. c. a bank has a negative GAP. d. it has embedded options. e. markets are not efficient.
D
A security where the interest payments and the principal payments are sold separately is called: A. A Treasury note B. An accretion C. A structured note D. A stripped security E. None of the above
D
All of the following are basic functions of a bank's trading activities except: a. offering investment advice to customers. b. maintaining an inventory of securities for possible sale to investors. c. speculating on short-term interest rate movements. d. All of the above are basic functions of a bank's trading activities. e. None of the above are basic functions of a bank's trading activities.
D
All of the following are capital market instruments except: a. Treasury bonds. b. Government National Mortgage Association (Ginnie Mae) bonds. c. mortgage backed securities. d. Commercial paper e. CMO's
D
All of the following are money market instruments except: a. Treasury bills. b. Eurodollar deposits. c. commercial paper. d. Treasury bonds. e. bankers acceptances.
D
An increase in interest rates will impact the market value of a security because: a. the price of the security will fall. b. the reinvestment rate on the periodic coupon payments increases. c. the reinvestment rate on the periodic coupon payments decreases. d. a. and b. e. a. and c.
D
Banks can effectively improve their portfolios by: a. shortening maturities when yields are expected to fall. b. obtaining less call protection when rates are expected to fall. c. reducing diversification when the economy is slowing down. d. increasing bond quality when quality yield spreads are low. e. all of the above
D
Dollar-denominated deposits issued by branches of foreign banks in the United States are known as: a. Asian bonds. b. Eurodollar bonds. c. Foreign bonds. d. Yankee bonds. e. Domestic bonds.
D
In recent years security dealers have assembled pools of federal agency securities whose principal interest yield may be periodically reset based on what happens to a stated interest rate or may carry multiple coupon rates that are periodically adjusted; the foregoing describes a: A. Financial futures contract B. Revenue-anticipation note C. Zero coupon instrument D. Structured note E. None of the above
D
Prior to the financial crisis, which government sponsored enterprise (GSE) securities had only the implied backing of the US Government? a. Farm Credit System b. Federal Home Loan Banks c. Government National Mortgage Association (Ginnie Mae) d. Federal National Mortgage Association (Fannie Mae) e. Student Loan Marketing Association (Sallie Mae)
D
The yield curve tends to be inverted: a. at the trough of the business cycle. b. during periods of rapid inflation. c. at the end of a contractionary period. d. at the peak of the business cycle. e. at the beginning of an expansionary period.
D
Which of the following is true of Treasury bills? a. Interest on Treasury bills is exempt from state income taxes. b. Treasury bills are sold at a discount. c. Treasury bills pay a lower pretax yield than comparable corporate securities. d. All of the above are true. e. a. and c. only
D
Which of the following is/are true? a. For rate increases, the estimated price based on duration will be below the actual price. b. For rate increases, the estimated price based on duration will be above the actual price. c. For rate decreases, the estimated price based on duration will be below the actual price. d. a. and c. e. b. and c.
D
A bank owns a zero coupon bond with 5 years to maturity and a face value of $10,000. If interest rates increase from 6% to 7%, what is the approximate change in price, using Macaulay's duration? a. $343 b. $352 c. -$343 d. -$352 e. not enough information is given to answer the question.
D Price of Bond: FV = 10,000 N = 5 I = 6 PV = ? = $7,472.58 ΔPrice ≈ - Duration * [Δi/(1+i)] * P ΔPrice ≈ -5 * [.01/1.06] * $7,742.58 = -$352.48
. banks that are concerned about the possibility that the purchasing power of both the interest income and principal income on a loan is concerned about which of the following things? A. Business risk B. Liquidity risk C. Tax exposure D. Credit risk E. Inflation risk
E
All of the following are capital market instruments except: a. Treasury bonds. b. Government National Mortgage Association (Ginnie Mae) bonds. c. mortgage backed securities. d. Treasury notes. e. bankers acceptances.
E
Eurodollar: a. deposits are dollar-denominated deposits issued outside the United States. b. markets are less regulated than U.S. security markets. c. rates generally are lower than comparable U.S. CD rates. d. all of the above e. a. and b. only
E
In general, commercial paper: a. is rated by the various rating agencies. b. has a maturity of 270 days or less. c. sells at a premium to face value. d. all of the above e. a. and b. only
E
Mortgage prepayment risk: a. is greatest for stripped securities. b. increases as interest rates increase. c. is eliminated in Z-tranche CMOs. d. is eliminated by buying stripped mortgage backed securities that mature when the bank needs the funds. e. is larger on high-rate mortgages.
E
Principal roles that a bank's investment portfolio play include which of the following? A. Income stability B. Geographic diversification C. Hedging interest rate risk D. Backup liquidity E. All of the above
E
The static spread is: a. the difference between the yield on a zero coupon bond and the yield on a coupon bond. b. the difference between a fixed-rate yield and a floating-rate yield. c. the difference between the yield on new Treasury bills versus new Treasury bonds. d. the difference between expected inflation and the current Treasury bill rate. e. the difference between the yield on a security with options and the yield on a maturity-matched zero coupon Treasury security.
E
The underlying mortgages in Ginnie Mae mortgage pools include: a. Federal Housing Association (FHA) mortgages. b. Veterans Administration (VA) mortgages. c. privately issued mortgages. d. all of the above e. a. and b. only
E
Which of the following U.S. government agency securities are backed by the full faith and credit of the U.S. Government? a. Government National Mortgage Association (Ginnie Mae) b. Student Loan Marketing Association (Sallie Mae) c. Small Business Administration (SBA) d. all of the above e. a. and c. only
E
Which of the following classes of securities are carried at market value on the balance sheet? a. Held to maturity b. Available for sale c. Trading d. all of the above e. b. and c. only
E
Which of the following classes of securities are carried at market value on the balance sheet? a. Held-to-maturity b. Available-for-sale c. Trading d. all of the above e. b. and c. only
E
Which of the following is not one of the Capital Market instruments in which banks invest? A. U.S. Treasury notes B. Corporate notes and bonds C. U.S. Treasury bonds D. Municipal bonds E. Commercial paper
E
Which of the following is true of Treasury bills? a. Interest on Treasury bills is exempt from state income taxes. b. Interest on Treasury bills is exempt from federal income taxes. c. Treasury bills pay a lower pretax yield than comparable corporate securities. d. All of the above are true. e. a. and c. only
E
Which of the following would not be considered a bank qualified municipal security? a. A Hays County general obligation bond to modernize the county fire department. b. A Lubbock County general obligation bond to build a new sewer plant. c. A City of San Marcos general obligation bond to pay for street repairs. d. A City of El Paso general obligation bond to pay for a new city jail. e. A State of Texas bond to finance road repairs.
E
. A bond has three years to maturity and has a coupon rate of 15 percent. This bond is selling in the market for $1072 and has a yield to maturity of 12%. What is the duration of this bond? A. 3 years B. 1 year C. 1.92 years D. 2.45 years E. 2.64 years
E ((150*1)/(1+0.12)^1+(150*2)/(1+0.12)^2+(1150*3)/(1+0.12)^3)/1072=2.64
A security's bid price will be greater than its ask price.
F
In general, banks are less willing to sell securities when the market value is greater than the book value.
F
An important investment security popular with banks that must by law mature within one year from the date of issue and which has a high degree of safety and marketability is the: A. Treasury bill B. Treasury note C. FNMA note D. Bankers' acceptance E. Eurodollar CD
A
As market rates rise, prepayment speed _______, while modified duration _________. a. slows, lengthens b. slows, shortens c. accelerates, lengthens d. accelerates, shortens e. accelerates, is unaffected
A
A "bank qualified" municipal security is issued by a: A. Small local government issuing no more than $10 million of public-purpose securities B. State or local governmental unit whose credit rating is at least single A. C. State or local governmental unit whose security issues have been acceptably rated by bank examiners. D. State or local government that has issued private-purpose securities to promote local economic development. E. None of the above.
A
A bond that has positive convexity: a. is more price sensitive when rates fall then when rates rise. b. is more price sensitive when rates rise then when rates fall. c. has a negative duration. d. has a duration greater than maturity. e. a. and d.
A
A short-term interest-bearing time draft created by a high-quality bank is called: a. commercial paper. b. a bankers acceptance. c. a Eurodollar deposit. d. a reverse repurchase agreement. e. a negotiable CD.
B
All of the following are classified as Type I securities by the Federal Reserve except: a. Treasury bonds. b. Tennessee Valley Authority bonds. c. State of Illinois general obligation bonds. d. Department of Housing and Urban Development bonds. e. Treasury bills.
B
Fluctuations in the timing of cash payments flowing from an underlying pool of securitized assets is referred to as: A. Income risk B. Prepayment risk C. Liquidity risk D. Capital risk E. None of the above
B
For which of the following classes of securities are unrealized gains and losses included as a component of capital? a. Held to maturity b. Available for sale c. Trading d. all of the above e. a. and c. only
B
For which of the following classes of securities are unrealized gains and losses included as a component of capital? a. Held-to-maturity b. Available-for-sale c. Trading d. all of the above e. a. and c. only
B
Riding the yield curve: a. is risk-free. b. generally involves buying securities with a longer maturity than the intended holding period. c. can only be accomplished with stripped Treasury securities. d. all of the above e. a. and c. only
B
. _____________ is the method by which banks can provide a safeguard for the deposits of governmental units. A. Hedging B. Collateralization C. Pledging D. Securitization E. Window dressing
C
A bank's promise to pay the holder a designated amount of money on a designated future date is known as a (or an): A. Promissory guarantee B. Discount security C. Bankers' acceptance D. In the money option E. Accretion note
C
A portfolio is equally invested in securities with 1-, 2-, and 3-years to maturity. Each year as the 1-year securities mature, the funds are reinvested in 3-year securities. This is an example of which investment strategy? a. Barbell maturity strategy b. Riding the yield curve c. Laddered maturity strategy d. Timing maturity strategy e. Cycle maturity strategy
C
Fixed-rate mortgages and adjustable-rate mortgages prepay at different rates.
T
Most long-term municipal bonds are serial bonds
T
The security activities of large banks and small banks are fundamentally different.
T
Municipal bonds whose primary source of repayment are the revenues from the underlying financed project are known as: a. general obligation bonds. b. credit free bonds. c. revenue bonds. d. exempt bonds. e. liquidity bonds.
c