Test #3
7) A major risk faced by a swap dealer is credit risk. This is A) the probability that a counterparty will default. B) the probability that both counterparties default. C) the probability floating rates will move against the dealer. D) none of the options
A) the probability that a counterparty will default.
2) A measure of liquidity for a stock market is the turnover ratio; defined as A) the ratio of stock market transactions over a period of time divided by the size, or market capitalization, of the stock market. B) the ratio the size, or market capitalization, of the stock market divided by the value of the stock market transactions over a period of time. C) the ratio of aggregate company sales over a period of time divided by the size, or market capitalization, of the stock market. D) none of the options
A) the ratio of stock market transactions over a period of time divided by the size, or market capitalization, of the stock market.
5) Use the following information to calculate the quality spread differential (QSD). Fixed-Rate Borrowing Cost Floating-Rate Borrowing Cost Company X 10 % LIBOR Company Y 12 % LIBOR + 1.5 % A) 0.50 percent B) 1.00 percent C) 1.50 percent D) 2.00 percent
A) 0.50 percent
6. On the Paris bourse, shares of Avionelle trade at 645. The spot exchange rate is $1.40 = €1.00. What is the no-arbitrage U.S. dollar price of an Avionelle ADR? Assume that transactions costs are negligible and that one ADR represent one underlying share. A) 563.00 B) $32.14 C) 545.00 D) $45.50
A) 563.00
3) Private placement bond issues A) do not have to meet the strict information disclosure requirements of publicly traded issues. B) have auditing requirements that do not adhere to publicly traded issues. C) meet the strict information disclosure requirements of publicly traded issues, but have larger minimum denominations. D) none of the options.
A) do not have to meet the strict information disclosure requirements of publicly traded issues.
7) A __________-__________ bond is a straight fixed-rate bond issued in one currency that pays coupon interest in that same currency, then at maturity, the principal is repaid in another currency. A) dual-currency B) bonds with equity warrants C) warrant-convertible D) exchange-convertible
A) dual-currency
5) A market order A) is an instruction from a customer to a broker to buy or sell at the best price available when the order is received (immediately). B) is an instruction from a customer to a broker to buy or sell in a particular market (e.g., NYSE). C) is always and everywhere "fill-or-kill." D) is always and everywhere "good-till-cancelled."
A) is an instruction from a customer to a broker to buy or sell at the best price available when the order is received (immediately).
LIBOR A) is the rate at which prime banks in London will offer Eurocurrency in the interbank market. B) is a government set rate, like the discount rate. C) is the rate at which prime banks in London will accept interbank deposits. D) none of the options
A) is the rate at which prime banks in London will offer Eurocurrency in the interbank market.
So-called subprime mortgages were typically A) mortgages granted to borrowers with less-than-perfect credit. B) backed by the full faith and credit of the U.S. government. C) held to maturity by the originating lender, thereby assuring that default risk was priced into the rate of return D) none of the options
A) mortgages granted to borrowers with less-than-perfect credit.
5) In contrast to many domestic bonds, which make __________ coupon payments, coupon interest on Eurobonds is typically paid __________. A) semiannual; annually B) annual; semiannually C) quarterly; semiannually D) quarterly; annually
A) semiannual; annually
2) Securities sold in the United States to public investors must be registered with the SEC, and a prospectus disclosing detailed financial information about the issuer must be provided and made available to prospective investors. This encourages foreign borrowers wishing to raise U.S. dollars to use A) the Eurobond market. B) their domestic market. C) bearer bonds. D) none of the options
A) the Eurobond market.
The core of the international money market is A) the Eurocurrency market B) the market for foreign exchange C) the futures forwards and options markets on foreign exchange D) none of the options
A) the Eurocurrency market
8) Assuming that the bond sells at par, the implicit $/£ exchange rate at maturity of a British pound—U.S. dollar dual currency bond that pays £581.40 at maturity per $1,000 of par value is A) $1.95/£1.00. B) $1.72/£1.00. C) $1.58/£1.00. D) $0.5814/£1.00.
B) $1.72/£1.00.
9) In the London market, Rolls-Royce stock closed at £0.875 per share. On the same day, the British Pound sterling to the U.S. dollar spot exchange rate was £0.6366/$1.00. Rolls Royce trades as an ADR in the OTC market in the United States. Five underlying Rolls-Royce shares are packaged into one ADR. The no-arbitrage U.S. price of one ADR is A) $4.87. B) $6.87. C) $5.87. D) $7.87.
B) $6.87.
Teltrex International can borrow $3,000,000 at LIBOR plus a lending margin of 0.75 percent per annum on a three-month rollover basis from Barclays in London. Suppose that three-month LIBOR is currently 5 17Ú32 percent. Further suppose that over the second three-month interval LIBOR falls to 5 1Ú8 percent. How much will Teltrex pay in interest to Barclays over the six-month period for the Eurodollar loan? A) $79,921.875 B) $91,171.88 C) $96,174.39 D) $364,687.52
B) $91,171.88
6) Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years. Their external borrowing opportunities are shown here: Fixed-Rate Floating-Rate Borrowing Cost Borrowing Cost Company X 10% LIBOR Company Y 12% LIBOR + 1.5% A swap bank proposes the following interest only swap: Y will pay the swap bank annual payments on $10,000,000 at a fixed rate of 9.90 percent. In exchange the swap bank will pay to company Y interest payments on $10,000,000 at LIBOR − 0.15 percent; What is the value of this swap to company Y? A) Company Y will save 15 basis points per year on $10,000,000 = $15,000 per year. B) Company Y will save 45 basis points per year on $10,000,000 = $45,000 per year. C) Company Y will save 5 basis points per year on $10,000,000 = $5,000 per year. D) Company Y will only break even on the deal.
B) Company Y will save 45 basis points per year on $10,000,000 = $45,000 per year.
9) S&P Global Ratings has, for years, provided credit ratings on international bonds. A) The ratings reflect the safety of principal for a U.S. investor. B) Their ratings reflect the creditworthiness of the borrower and not exchange rate uncertainty. C) Their ratings reflect creditworthiness of the lender and predict the exchange rate expected to prevail at maturity. D) The ratings are biased since 40 percent of Eurobond issues are rated AAA and 30 percent are AA.
B) Their ratings reflect the creditworthiness of the borrower and not exchange rate uncertainty.
9. Studies examining the influence of industrial structure on foreign equity returns A) conclusively show a connection. B) have been inconclusive C ) show that industrialized economies outperform lesser developed economies. D) none of the options
B) have been inconclusive
Eurocurrency A) is the euro, the common currency of Europe. B) is a time deposit of money in an international bank located in a country different from the country that issued the currency. C) is a demand deposit of money in an international bank located in a country different from the country that issued the currency. D) is either a time deposit of money in an international bank located in a country different from the country that issued the currency or a demand deposit of money in an international bank located in a country different from the country that issued the currency.
B) is a time deposit of money in an international bank located in a country different from the country that issued the currency.
4) A "global bond" issue A) is a very large international bond offering by several borrowers pooled together. B) is a very large international bond offering by a single borrower that is simultaneously sold in several national bond markets. C) has higher yields for the purchasers. D) has a lower liquidity.
B) is a very large international bond offering by a single borrower that is simultaneously sold in several national bond markets.
The Eurocurrency market A) is only in Europe. B) is an external banking system that runs parallel to the domestic banking system of the country that issued the currency. C) has languished following monetary union in Europe. D) none of the options
B) is an external banking system that runs parallel to the domestic banking system of the country that issued the currency.
8) A major risk faced by a swap dealer is mismatch risk. This is A) the probability floating rates and exchange rates will not move together. B) the difficulty in finding a second counterparty with an exact opposite match for a swap that the bank has agreed to take with another counterparty. C) the probability that both counterparties default. D) none of the options
B) the difficulty in finding a second counterparty with an exact opposite match for a swap that the bank has agreed to take with another counterparty.
3) Generally, the higher the turnover ratio, A) the less liquid the secondary stock market, indicating ease in trading. B) the more liquid the secondary stock market, indicating ease in trading. C) the more liquid the primary stock market, indicating ease in trading. D) the more efficient the stock market is.
B) the more liquid the secondary stock market, indicating ease in trading.
9) A major risk faced by a swap dealer is sovereign risk. This is A) the probability that a sovereign counterparty will default. B) the probability that a country will impose exchange restrictions on a currency involved in an existing swap. C) the probability governments will intervene to support an exchange rate. D) none of the options
B) the probability that a country will impose exchange restrictions on a currency involved in an existing swap.
6) A five-year floating-rate note has coupons referenced to six-month dollar LIBOR, and pays coupon interest semiannually. Assume that the current six-month LIBOR is 6 percent. If the risk premium above LIBOR that the issuer must pay is 1/8 percent, the next period's coupon rate on a $1,000 face value FRN will be A) $29.375 B) $30,000 C) $30.625 D) $61.250
C) $30.625
A bank bought a "three against six" $5,000,000 FRA for a three-month period beginning three months from today and ending six months from today. The reason that the bank bought the FRA was to hedge: the bank accepted a 3month deposit and made a six-month loan. The agreement rate with the seller is 5 percent. Assume that three months from today the settlement rate is 5.25 percent. Who pays whom? How much? When? The actual number of days in the FRA is 90. A) The bank pays $3,084.52 at the end of 3 months B) The bank pays $3,084.52 at the end of 6 months C) The counterparty pays $3,084.52 at the end of 3 months D) The counterparty pays $3,084.52 at the end of 6 months
C) The counterparty pays $3,084.52 at the end of 3 months
One lesson from the credit crunch is that A) in the aggregate, credit scores tend to understate the probability of default—thereby a pool of subprime mortgages is actually quite a safe investment since not every borrower defaults. B) moral hazard, while an issue in the market for used cars, does not seem to affect the U.S. financial system due to the effective regulatory environment. C) bankers seem not to scrutinize credit risk as closely when they serve only as mortgage originators and then pass it on to MBS investors rather than hold the paper themselves. D) none of the options
C) bankers seem not to scrutinize credit risk as closely when they serve only as mortgage originators and then pass it on to MBS investors rather than hold the paper themselves.
3) A swap bank A) can act as a broker, standing ready to buy and sell swaps. B) can act as a dealer, bringing together counterparties to a swap. C) can act as a broker, bringing together counterparties to a swap, and/or as a dealer, standing ready to buy and sell swaps. D) only sometimes acts as a broker, bringing together counterparties to a swap, but never ever acts as a dealer, standing ready to buy and sell swaps.
C) can act as a broker, bringing together counterparties to a swap, and/or as a dealer, standing ready to buy and sell swaps.
8) American Depository Receipt (ADRs) represent foreign stocks A) denominated in U.S. dollars that trade on European stock exchanges. B) denominated in a foreign currency that trade on a U.S. stock exchange. C) denominated in U.S. dollars that trade on a U.S. stock exchange. D) non-registered (bearer) securities.
C) denominated in U.S. dollars that trade on a U.S. stock exchange.
1) A liquid stock market A) is one in which prices reflect all relevant information quickly. B) is one in which prices reflect all publicly available information quickly. C) is one in which investors can buy and sell stocks quickly at close to the current quoted prices. D) is one in which prices reflect price and volume information quickly.
C) is one in which investors can buy and sell stocks quickly at close to the current quoted prices.
Eurodollars refers to dollar deposits when the depository bank is located A) in Europe. B) in Europe, and the Caribbean. C) outside the United States. D) in the United States.
C) outside the United States.
Euro credits A) are credit cards that work in the euro zone. B) are denominated in currencies that are the same as the home currency of the Euro bank. C) short- to medium-term loans of Euro currency extended by Euro banks to corporations, sovereign governments, non prime banks, or international organizations. D) none of the options
C) short- to medium-term loans of Euro currency extended by Euro banks to corporations, sovereign governments, non prime banks, or international organizations.
10) With regard to a swap bank acting as a dealer in swap transactions, interest rate risk refers to A) the risk that a counterparty will default. B) the risk the swap bank faces from fluctuating exchange rates during the time it takes for the bank to lay off a swap it undertakes with one counterparty with an opposing transaction. C) the risk that interest rates changing unfavorably before the swap bank can lay off to an opposing counterparty on the other side of an interest rate swap entered into with the first counterparty. D) the risk that arises from the situation in which the floating-rates of the two counterparties are not pegged to the same index
C) the risk that interest rates changing unfavorably before the swap bank can lay off to an opposing counterparty on the other side of an interest rate swap entered into with the first counterparty.
4) Suppose the quote for a five-year swap with semiannual payments is 8.50-8.60 percent. This means A) the swap bank will pay semiannual fixed-rate dollar payments of 8.60 percent against receiving six-month dollar LIBOR. B) the swap bank will receive semiannual fixed-rate dollar payments of 8.50 percent against paying six-month dollar LIBOR. C) the swap bank will pay semiannual fixed-rate dollar payments of 8.50 percent against receiving six-month dollar LIBOR, and the swap bank will receive semiannual fixed-rate dollar payments of 8.60 percent against paying six-month dollar LIBOR. D) none of the options
C) the swap bank will pay semiannual fixed-rate dollar payments of 8.50 percent against receiving six-month dollar LIBOR, and the swap bank will receive semiannual fixed-rate dollar payments of 8.60 percent against paying six-month dollar LIBOR.
2) The primary reasons for a counterparty to use a currency swap are A) to hedge and to speculate. B) to play in the futures and forward markets. C) to obtain debt financing in the swapped currency at an interest cost reduction brought about through comparative advantages each counterparty has in its national capital market, and the benefit of hedging long-run exchange rate exposure. D) to hedge and to speculate, as well as to play in the futures and forward markets.
C) to obtain debt financing in the swapped currency at an interest cost reduction brought about through comparative advantages each counterparty has in its national capital market, and the benefit of hedging long-run exchange rate exposure.
1) A "Eurobond" issue is A) denominated in a particular currency but sold to investors in national capital markets other than the country that issued the denominating currency. B) usually a bearer bond. C) for example, a Dutch borrower issuing dollar-denominated bonds to investors in the U.K., Switzerland, and the Netherlands. D) all of the options
D) all of the options
1) The term interest rate swap A) refers to a "single-currency interest rate swap" shortened to "interest rate swap." B) involves "counterparties" who make a contractual agreement to exchange cash flows at periodic intervals. C) can be "fixed-for-floating rate" or "floating-for-floating rate." D) all of the options
D) all of the options
10) Factors affecting international equity returns are A) macroeconomic variables that influence the overall economy. B) exchange rate changes. C) the industrial structure of the country. D) all of the options
D) all of the options
10) The role of an underwriter is to A) help negotiate terms with the borrower. B) ascertain market conditions. C) manage the issuance. D) all of the options
D) all of the options
4) The secondary stock markets A) are the markets for "pre-owned" or "used" shares of stock. B) provide marketability to shares. C) provide price discovery or share valuation. D) all of the options
D) all of the options
6) A limit order A) is an instruction from a customer to a broker to buy or sell in at a particular price (or better). B) can be a "day order"—that is the order is cancelled if not executed during that day's trading. C) can be "good-till-cancelled." D) all of the options
D) all of the options
7) A firm may cross-list its share to A) establish a broader investor base for its stock. B) establish name recognition in foreign capital markets, thus paving the way for the firm to source new equity and debt capital from investors in different markets. C) expose the firm's name to a broader investor and consumer groups. D) all of the options
D) all of the options
A forward rate agreement (FRA) is a contract between two banks A) that allows the Euro bank to hedge the interest rate risk in mismatched deposits and credits. B) in which the buyer agrees to pay the seller the increased interest cost on a notional amount if interest rates fall below an agreed rate, and the seller agrees to pay the buyer the increased interest cost if interest rates increase above the agreed rate. C) that is structured to capture the maturity mismatch in standard-length Euro deposits and credits. D) all of the options
D) all of the options
International banks are different from domestic banks in what way(s)? A) International banks can arrange trade financing. B) International banks can arrange for foreign exchange transactions. C) International banks can assist their clients in hedging exchange rate risk. D) all of the options
D) all of the options
Which of the following are principles of sound banking behavior? A) Avoid an undue concentration of loans to single activities. B) Control mismatches between assets and liabilities. C) Expand cautiously into unfamiliar activities. D) all of the options
D) all of the options
5. By investing in international mutual funds, investors can i) save any extra transaction and/or information costs they may have to incur when they attempt to invest directly in foreign markets ii) circumvent many legal and institutional barriers to direct portfolio investments in foreign markets iii) potentially benefit from the expertise of professional fund managers A) i) B) i) and ii) C) ii) and iii) D) i), ii), and iii)
D) i), ii), and iii)
3. Consider a plain vanilla interest rate swap. Firm A can borrow at 8 percent fixed or can borrow floating at LIBOR. Firm B is somewhat less creditworthy and can borrow at 10 percent fixed or can borrow floating at LIBOR + 1 percent. Firm A wants to borrow floating and Firm B prefers to borrow fixed. Both corporations wish to borrow $10 million for 5 years. Which of the following swaps is mutually beneficial to each party and meets their financing needs? A) Firm A borrows $10 million externally for 5 years at LIBOR: agrees to swap LIBOR to firm B for 8 ½ percent fixed for 5 years on a notational principal of $5 million; B borrows S10 million extemally at 10 percent. B) A borrows SI0 million externally for 5 years at LIBOR: agrees to pay 8⅑ percent to B for fixed for 5 years on a notational principal of $5 million: B borrows S10 million externally LIBOR at 10 percent. C)Since the QSD = 0 there is no mutually beneficial swap. D)A borrows SI0 million externally at 8 percent fixed for 5 years; agrees to swap LIBOR to B for 8½ percent fixed for 5 years on a notational principal of S5 million: B borrows $10 million externally at LIBOR + 1 percent.
D)A borrows SI0 million externally at 8 percent fixed for 5 years; agrees to swap LIBOR to B for 8½ percent fixed for 5 years on a notational principal of S5 million: B borrows $10 million externally at LIBOR + 1 percent.
1. When a swap bank serves as a dealer, a) the swap bank stands willing to accept either side of a swap. b) the swap bank matches counterparties but does not assume any risk of the swap. c) the swap bank receives a commission for matching buyers and sellers d) none of the options
a) the swap bank stands willing to accept either side of a swap.
1. A major risk that can be eliminated through a swap is exchange rate risk. a) But only to the extent that the foreign counterparty, or swap bank, will not default in the currency swap b) But only if the bid-ask spreads are wide. c) But swaps can be less efficient in this than just trading at the expected spot exchange rates each year. d) none of the options
a) But only to the extent that the foreign counterparty, or swap bank, will not default in the currency swap
1. Which of the following statements regarding a quality spread differential are true? a) It is the difference between the default-risk premium differential on the fixed-rate debt and default-risk premium differential on the floating rate debt b) It is the sum of the default-risk premium differential and the fixed-rate debt divided by the default risk premium differential on the floating rate debt. c) It is not possible for all parties to have a positive quality spread differential. d) none of the options
a) It is the difference between the default-risk premium differential on the fixed-rate debt and default-risk premium differential on the floating rate debt
5) Regarding the mechanics of international portfolio diversification, which statement is true? a) Security returns are much less correlated across countries than within a county. b) Security returns are more correlated across countries than within a county. c) Security returns are about as equally correlated across countries as they are within a county. d) none of the options
a) Security returns are much less correlated across countries than within a county.
1. The sale of previously issued common stock traded between investors occurs in a) the primary market. b) the secondary market. c) the on-the-run market. d) the dealer market.
b) the secondary market.
1. Floating-for-floating currency swaps a) have different reference rates for the different currencies: e.g. dollar LIBOR versus euro LIBOR b) do not exist. c) offer the swap bank a built-in hedge. d) none of the options
a) have different reference rates for the different currencies: e.g. dollar LIBOR versus euro LIBOR
1. The secondary market for Eurobonds a) is an over-the-counter market. b) is an organized exchange. c) has never developed - there is only a primary market for Eurobonds. d) none of the options
a) is an over-the-counter market.
1. Price discovery in the secondary stock markets a) occurs due to the competitive trading between buyers and sellers, just like on eBay. b) is set once a day at the close. c) is set by the investment bankers at the IPO. d) all of the options
a) occurs due to the competitive trading between buyers and sellers, just like on eBay.
1. Relatively low turnover ratios indicate a) poor liquidity. b) good liquidity. c) strong investment performance. d) low market concentration.
a) poor liquidity.
87) The most widely used futures contract for hedging short-term U.S, dollar interest rate risk is a) the Eurodollar contract. b) . theEuros en contract. c) the EURIBOR contract. d) none of the options
a) the Eurodollar contract.
1. In an interest-only currency swap a) the counterparties must raise the actual notational principal in their home markets; then exchange it for the foreign currency they desire. They must also hedge with forward contracts on the currency. b) the counterparties periodically exchange the amortized portions of the notational principals. c) the counterparties must raise the actual notational principal in their home markets; then exchange it for the foreign currency they desire. They must also hedge with forward contracts on the currency. Additionally, the counterparties periodically exchange the amortized portions of the notational principals. d) none of the options
a) the counterparties must raise the actual notational principal in their home markets; then exchange it for the foreign currency they desire. They must also hedge with forward contracts on the currency.
76) In an FRA, the buyer agrees to pay the seller a) the increased interest cost on a notional amount if interest rates fall below an agreement rate. b) the increased interest cost if interest rates increase above the agreement rate. c) the increased interest cost on a notional amount if interest rates rise above an agreement rate. d) none of the options
a) the increased interest cost on a notional amount if interest rates fall below an agreement rate.
1. The less correlated the securities in a portfolio, a) the lower the portfolio risk. b) the higher the portfolio risk. c) the lower the unsystematic risk d) the higher the diversifiable risk
a) the lower the portfolio risk.
1. The sale of new common stock by corporations to initial investors occurs in a) the primary market. b) the secondary market. c) the OTC market. d) the dealer market.
a) the primary market.
1. Compared with bond markets a) the risk of investing in foreign stock markets is, to a lesser degree, attributable to exchange rate uncertainty. b) the risk of investing in foreign stock markets is, to a much greater degree, attributable to exchange rate uncertainty. c) exchange risk is lower than default risk and interest rate risk. d) all of the options
a) the risk of investing in foreign stock markets is, to a lesser degree, attributable to exchange rate uncertainty.
9) Recent studies show that when investors control exchange risk by using currency forward contracts, a) they can substantially enhance the efficiency of international bond portfolios. b) they can substantially enhance the efficiency of international stock portfolios. c) the risk of investing in foreign stock markets can be completely hedged. d) they can substantially enhance the efficiency of international bond and stock portfolios.
a) they can substantially enhance the efficiency of international bond portfolios.
1. In a dealer market, the broker takes the trade through the dealer, who participates in trades as a principal by buying and selling the security for his own account. a. true b. false
a. true
1. Assuming that the bond sells at par, the implicit S/E exchange rate at maturity of a British pound-U.S. dollar dual currency bond that pays E581.40 at maturity per $1.000 of par value is a) 51,95/E1.00. b) 51.72/E1.00. c) S1.58/E1.00. d) 50.5814/E1.00.
b) 51.72/E1.00.
8) Bema Gold is an exploration and production company that trades on the Toronto Stock Exchange. Assume that when purchased by an international investor the stock's price and the exchange rate were CADS and CAD1.0/USD0.72 respectively. At selling time, one year after the purchase date, they were CAD6 and CAD1.0/USD1.0. Calculate the U.S. investor's annual percentage rate of return in terms of the U.S. dollars. a) -13.60 percent b) 66.67 percent c) 38.89 percent d) 28.00 percent
b) 66.67 percent
88) Consider the position of a treasurer ol' a MNC, who will receive 520,000,000 chat his firm will not need for the next 90 days. To hedge against an interest rate decline a) He could borrow the $20,000.000 in the money market. b) He could take a long position in Eurodollar futures contracts. c) He could take a short position in Eurodollar futures contracts d) none of the options
b) He could take a long position in Eurodollar futures contracts.
1. U.S.-based mutual funds known as country funds: a) Invest in the government securities of different sovereign governments, giving risk-free portfolios effective exchange rate diversification. b) Invests exclusively in stocks of a single country. c) Invests exclusively in government securities of a single country. d) none of the options
b) Invests exclusively in stocks of a single country.
1. Companies domiciled in countries with weak investor protection can reduce agency costs between shareholders and management a) by moving to a better country. b) by listing their stocks in countries with strong investor protection. c) by voluntarily complying with the provisions of the U.S. Sarbanes-Oxley Act. d) by having a press conference and promising to be nice to their investors.
b) by listing their stocks in countries with strong investor protection.
1. A bond market index a) is a reference rate, like LIBOR, that adjustable rate bonds use to set the coupon. b) is analogous to a stock market index. but with bond price data instead of stock price data c) represents a price-weighted average of all bonds that exist. d) none of the options
b) is analogous to a stock market index. but with bond price data instead of stock price data
4) The "world beta" measures the a) unsystematic risk. b) sensitivity of returns on a security to world market movements. c) risk-adjusted performance. d) risk of default and bankruptcy.
b) sensitivity of returns on a security to world market movements.
77 In an FRA. the seller agrees to pay the buyer a) the increased interest cost if interest rates fall below the agreement rate. b) the increased interest cost if interest rates increase above the agreement rate. c) the increased interest cost on a notional amount if interest rates fall below an agreement rate. d) none of the options
b) the increased interest cost if interest rates increase above the agreement rate.
1. When a swap bank serves as a broker. a) the swap bank stands willing to accept either side of a swap b) the swap bank matches counterparties but does not assume any risk of the swap. c) the swap bank receives a commission for matching buyers and sellers. d) none of the options
b) the swap bank matches counterparties but does not assume any risk of the swap.
1. The two primary reasons for an interest rate swap are a) to better match maturities of assets and liabilities; to obtain low cost debt b) to better match maturities of assets and liabilities: to obtain cost savings via the quality spread differential c) to obtain low cost debt; to achieve cost savings via the quality spread d) none of the options
b) to better match maturities of assets and liabilities: to obtain cost savings via the quality spread differential
1. Exchange rate fluctuations contribute to the risk of foreign investment through three possible channels (i) the volatility of the investment due to the volatility of the exchange rate (ii) the contribution of the cross-product term (iii) its covariance with the local market returns Which of the following contributes and accounts for most of the volatility? a) (i) and (ii) b) (ii) and (iii) c) (i) and (iii) d) only (ii)
c) (i) and (iii)
7) Emerald Energy is an oil exploration and production company that trades on the London Stock Exchange. Over the past year, the stock has gone from £50 per share to £55, but over the same period, the dollar has appreciated from $1.21 = £1 to $1.10 = El. Calculate the U.S. investor's annual percentage rate of return in terms of the U.S. dollars. a) 3.5 percent b) -1 percent c) 0 percent d) There is not enough information to compute the investor's annual percentage rate of return in terms of the U.S. dollars.
c) 0 percent
1. Emerald Energy is an oil exploration and production company that trades on the London Stock Exchange. Over the past year, the stock has enjoyed a 20 percent return in pound terms, but over the same period, the exchange rate has fallen from $2,00 = El to $1,80 - El. Calculate the investor's annual percentage rate of return in terms of the U.S. dollars. a) 3.5 percent b) 9.25 percent c) 8 percent d) There is not enough information to compute the investor's annual percentage rate of return in terms of the U.S. dollars.
c) 8 percent
1. In a currency swap, a) it may be the case that two counterparties have equivalent credit ratings. b) it may be the case that firms have a comparative advantage in borrowing in their domestic markets c) Both A and B d) none of the options
c) Both A and B
1. Investors can reduce portfolio risk by a) holding securities that are less than perfectly correlated. b) diversifying portfolio holdings internationally. c) both A and B. d) neither A or B.
c) both A and B
1. You are the debt manager for a U.S.-based multinational. You need to borrow €100,000,000 for five vears. You can either borrow the €100,000.000 directly in Germany or borrow dollars in the U.S. and enter into a currency swap with a swap bank. One risk that you face by using the swap that you do not face by borrowing euros directly is a) exchange rate risk. b) sovereign risk. c) credit risk. d) interest rate risk.
c) credit risk.
1. The credit rating of an international borrower a) depends on the volatility of the exchange rate. b) depends on the volatility, but not absolute level, of the exchange rate. c) is usually never higher than the rating assigned to the sovereign government of the country in which it resides. d) is unrelated to the rating assigned to the sovereign government of the country in which it resides.
c) is usually never higher than the rating assigned to the sovereign government of the country in which it resides.
2) Systematic risk is a) diversifiable risk. b) the risk that remains until investors fully diversify their portfolio holdings. c) non-diversifiable risk and the risk that remains even after investors fully diversify their portfolio holdings. d) none of the options
c) non-diversifiable risk and the risk that remains even after investors fully diversify their portfolio holdings.
67) Eurodollars refers to dollar deposits when the depository bank is located a) in Europe. b) in Europe, and the Caribbean. c) outside the United States. d) in the United States,
c) outside the United States.
1. A "bearer bond" is one that a) shows the owner's name on the band. b) the owner's name is recorded by the issuer c) possession is evidence of ownership d) shows the owner's name on the bond, and the owner's name is recorded by the issuer.
c) possession is evidence of ownership
68) Euro credits a) are credit cards that work in the euro zone. b) are denominated in currencies that are the same as the home currency of the Euro bank. c) short- to medium-term loans of Euro currency extended by Euro banks to corporations, sovereign governments, non prime banks, or international organizations d) none of the options
c) short- to medium-term loans of Euro currency extended by Euro banks to corporations, sovereign governments, non prime banks, or international organizations
6) The "Sharpe performance measure" (SHP) is a) a "risk-adjusted" performance measure. b) the excess return (above and beyond the risk-free interest rate) per standard deviation risk c) the sensitivity level of a national market to world market movements. d) a "risk-adjusted" performance measure, as well as the excess return (above and beyond the risk-free interest rate) per standard deviation risk.
d) a "risk-adjusted" performance measure, as well as the excess return (above and beyond the risk-free interest rate) per standard deviation risk.
1. A "registered bond" is one that a) shows the owner's name on the bond. b) the owner's name is recorded by the issuer. c) the owner's name is assigned to a bond serial number recorded by the issuer d) all of the options
d) all of the options
1. Changes in exchange rates a) explain a larger portion of the variability foreign bond indexes than foreign equity indexes. b) do not affect all foreign equity markets equally. c) affect dollar-denominated forcion equity returns, but this risk can be hedged. d) all of the options
d) all of the options
1. Macroeconomic factors affecting international equity returns include a) exchange rate changes. b) interest rate differentials. c) changes in inflationary expectations. d) all of the options
d) all of the options
1. Market makers in the secondary bond market a) stand ready to buy or sell for their own account. b) quote bid and ask spreads. c) trade directly with one another, through a broker or with retail customers. d) all of the options
d) all of the options
1. The lead manager will sometimes invite co-managers to form a managing group to: a) help negotiate terms with the borrower b) ascertain market conditions c) manage the issuance d) all of the options
d) all of the options
10) Advantages of investing in U.S.-based international mutual funds include a) lower transactions costs relative to direct investing. b) circumvention of many legal and institution barriers to direct portfolio investment in many foreign markets. c) professional management, potentially expertise in security selection, definitely record-keeping. d) all of the options
d) all of the options
2) Major distinguishing features between domestic banks and international banks are a) the types of deposits they accept. b) the types of loans and investments they make. c) membership in loan syndicates. d) all of the options
d) all of the options
56) Examples of operational risk include a) computer failure b) poor documentation c) fraud d) all of the options
d) all of the options
91) 'Who benefits from debt-for-equity swaps? a) The creditor bank b) The LDC c) The market maker d) all of the options
d) all of the options
3) Investors can enhance benefits from international diversification by using a) industry funds. b) factor funds. c) stvle funds. d) all of the options.
d) all of the options.
1. A "foreign bond" issue is a) one denominated in a particular currency but sold to investors in national capital markets other than the country that issued the denominating currency, b) one offered by a foreign borrower to investors in a national market and denominated in another nation's currency, c) for example, a German MNC issuing euro-denominated bonds to U.S. investors. d) one offered by a foreign borrower to investors in a national market and denominated in that nation's currency (e.g.. a German MNC issuing dollar-denominated bonds to U,S. investors).
d) one offered by a foreign borrower to investors in a national market and denominated in that nation's currency (e.g.. a German MNC issuing dollar-denominated bonds to U,S. investors).
11) Greater stability of earnings is possible with international diversification describes which reason for international banking? a) low marginal costs b) knowledge advantage c) growth d) risk reduction
d) risk reduction
1. A ten-year floating-rate note (FRN) has coupons referenced to 3-month pound LIBOR, and pays coupon interest quarterly. Assume that the current 3-month LIBOR is 4 percent. IF the risk premium above LIBOR that the issuer must pay is 1/8 percent, the next period's coupon payment on a E1,000 face value FRN will be a) E31.25. b) E82.50. c) €165.00. d) £41.25.
d) £41.25.
1) In the context of investments in securities (stocks and bonds), portfolio risk diversification refers to a. the time-honored adage "Don't put all your eggs in one basket." b. Investors' ability to reduce portfolio risk by holding securities that are less than perfectly correlated c. The fact that the less correlated the securities in a portfolio, the lower the portfolio risk d. all of the options
d. all of the options
