FIL241 Exam 3 (Ch 8, 9, 10, & 11)

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An investor planning to sell IBM stock in 30 days can protect himself against price risk by _____. A. selling an IBM put option that matures in 30 days B. buying an IBM call option that matures in 30 days C. selling an IBM call option that matures in 30 day D. buying an IBM put option that matures in 30 days

The lowest amount of funds required to open a positions in a futures contract is called a(n) _______ margin. A. initial B. maintenance C. minimum D. enforced E. call

Unlike hedging with options, hedging with futures _____. A. locks in a particular price or rate of return for a hedger B. exposes a hedger to a risk of large losses C. allows a hedger to benefit from the upside price potential of the spot position D. involves no payment of premium E. Both (A) and (D)

A bank that suffers from increasing interest rates would make _____ payments in an interest rate swap in order to hedge; a bank that suffers from declining interest rates would make _____ payments. A. fixed-rate; floating-rate B. fixed-rate; fixed-rate C. floating-rate; fixed-rate; D. floating-rate; floating-rate

A(n) ______ margin is deposited before entering into the futures contract; thereafter, the balance cannot fall below a(n) _______ margin. A. initial; maintenance B. maintenance; initial C. initial; initial D. first; second E. safe; double

An order to the New York Stock Exchange to buy at the best available current price is a _____ order. A. market B. limit C. stop buy D. current E. unconditional

As interest rates rise, the value of principal-only (PO) mortgage-backed strips _______ and the value of interest-only (IO) strips _______. (Assume the underlying mortgages are fixed-rate. Assume no default risk.) A. decreases; increases B. increases; decreases C. does not change; does not change D. decreases; decreases E. increases; increases

GE stock is trading at $20 per share. An order to sell 100 shares of GE at $20.50 per share is a ______ order. A. limit B. stop buy C. market D. current E. conditional

If interest rates unexpectedly decrease, cash flows to interest-only mortgage-backed strips would likely be _____ and cash flows to principal-only strips would likely be _____ anticipated before the interest rate change. (Assume underlying mortgages are fixed-rate. Assume no default risk.) A. lower than; higher than B. higher than; lower than C. lower than; lower than D. higher than; higher than E. about the same as; about the same as

In TIPS, _____ adjusts with inflation. A. the principal B. the coupon rate C. the maturity D. all of the above E. only (A) and (B)

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 E. Corporate bonds can be sold in the primary market through all of the

The U.S. Treasury announces an auction for 2-year T-notes in the amount of $25bln. Non-competitive bids received total $3bln. The following are the top competitive bids received: Bidder #1: $7bln. at 1.25% Bidder #2: $5bln. at 1.32% Bidder #3: $6 bln. at 1.33% Bidder #4: $4bln. at 1.35% Bidder #5: $3bln. at 1.40% Bidder #6: $3bln. at 1.50% What will be the coupon rate on the note? A. 1.25% B. 1.35% C. 1.375% D. 1.40% E. 1.50%

The purchase of U.S. Treasury bonds for immediate delivery is a ____ market transaction. A. spot B. stock C. futures D. forward E. swap

Which of the following statements about STRIPS is NOT true? A. STRIPS provide investors with protection against inflation. B. STRIPS are good for immunizing portfolios from interest rate risk. C. STRIPS help avoid rebalancing the portfolio because duration is the same as maturity. D. STRIPS accrued interest is taxed every year at the federal level.

Which of the following statements is NOT true regarding the risks of investing in mortgages? A. Extension risk is a concern when when interest rates fall. B. Default risk is usually low. C. If interest rates rise, fixed-rate mortgage values decrease. D. Prepayments tend to increase when interest rates decrease. E. All of the above statements are true.

_____ voting gives minority shareholders more control over the firm's decisions. A. cumulative B. straight C. residual D. preferred E. nonparticipating

State whether you agree or disagree with the following statement: "Bank A agrees to sell to Bank B 110 million US dollars for 100 million euros in three months. This is an example of a forward transaction (as opposed to a futures or a spot transaction)."

Agree. It is forward transaction because counterparties interact with each other (not with the futures exchange as in a futures transaction), and delivery will be made in the future (not immediately, as in a spot transaction).

A ______ is a right to buy the underlying asset. A. put option B. call option C. long position in a forward contract D. short hedge E. futures contract

A ______ requires the bond issuer to retire a portion of the bond as promised in the _______. A. bearer bond; call provision B. sinking fund provision; indenture C. registered bond; indenture D. general obligation bond; negotiated sale E. serial bond; covenants

A conventional fixed-rate 7% mortgage with the original maturity of 15 years and initial balance of $200,000 will be paid off in ___ months if the borrower pays $100 in addition to the required payment each month. A. 180 B. 175 C. 171 D. 164 E. 156

A mortgage-backed instrument consisting of different classes of related debt obligations, called tranches, and passing through principal and interest payments to investors according to a predetermined schedule is known as _______. A. a pass-through B. a collateralized mortgage obligation (CMO) C. a stripped mortgage-backed security D. none of the above

Amortization of a mortgage is the ______. A. practice of charging interest on a loan B. process of gradually retiring a loan by periodic principal payments C. compounding of interest D. use of debt to enhance the rate of return E. process of making daily payments to the borrower

Frequently, basis risk is the result of _____. A. short squeezes B. cross-hedging C. margin calls D. defaults E. market manipulation

If an investor wanted to purchase bonds with no or extremely low credit risk and to eliminate reinvestment risk, s/he should purchase _____. A. TIPS B. Treasury STRIPS C. Municipal bonds D. Revenue bonds E. Speculative-grade bonds

If bonds are secured only by a firms potential to generate cash flows, they are called _____ bonds. A. convertible B. debenture C. indenture D. speculative-grade E. investment-grade

If the spot price of the underlying asset is less than the strike price, a call option is ______ and a put option is ______. A. in the money; out of the money B. out of the money; in the money C. in the money; in the money D. out of the money; out of the money E. at the money; at the money

Which bond is likely to have the lowest pre-tax yield? A. a 10-year A-rated corporate non-callable bond B. a 10-year A-rated municipal bonds C. a 10-year BBB-rated corporate non-callable bond D. a 20-year BBB-rated corporate callable bond

Which of the following is NOT associated with tightening (i.e., stricter) mortgage credit standards? A. More time on the current job required B. An increase in the required loan-to-value ratio C. A decrease in the maximum total debt payments per month per amount of monthly income D. A decrease in the payment-to-income ratio of borrowers E. both (C) and (D)

Which of the following statements about mortgage rate caps is true? A. Most fixed-rate mortgages have interest rate caps. B. Most adjustable-rate mortgages have interest rate caps. C. An interest rate cap on a mortgage reduces the lender's interest rate risk exposure. D. both (A) and (C) E. both (B) and (C)

An adjustable-rate mortgage has a 5/1 cap (i.e., the rate cannot increase more than 1 percent per year and more than 5 percent over the life of the mortgage). What will the mortgage rate be after three years if the initial rate is 5%, and the interest rate to which the mortgage rate is tied increases by 2% in each of the first three years of the contract? A. 11% B. 7% C. 8% D. 9% E. 10%

An investment bank that maintains some Treasury bond holdings buys Treasury bond futures contracts. If interest rates increase, the market value of the bond holdings will _______ and the position in futures contracts will result in a _______. A. increase; gain B. increase; loss C. decrease; loss D. decrease; gain E. not change; not change

Dollar-denominated bonds sold by foreign entities in Japan are ______. A. Yankee Bonds B. Samurai Bonds C. Eurobonds D. Kamikaze Bonds E. Harakiri Bonds

Income from ____ is exempt from federal income tax. A. Common stocks B. Corporate bonds C. Municipal bonds D. Junk bonds E. Treasury bonds

Mortgage insurance protects the _____. A. seller of the home B. FHA C. lender D. borrower E. government

The difference between yields of debt instruments with different default risk is ____. A. term spread B. credit rating differential C. credit spread D. liquidity premium E. monoline spread

The sale of securities to the public via an investment banker by a new corporation raising funds is called a(n) ____. A. seasoned offering B. secondary offering C. initial public offering D. best efforts offering E. shelf registration

What is the difference between general obligation and revenue bonds? A. General obligations bonds are state and local government bonds sold to finance specific revenue-producing projects, while revenue bonds are state and local government bonds backed by the full faith and credit of the issuing political entity. B. General obligation bonds are backed by projects funded in the event of default; revenue bonds require voter approval. C. General obligation bonds are state and local government bonds backed by the full faith and credit of the issuing political entity, while revenue bonds are state and local government bonds sold to finance specific revenue-producing projects. D. General obligation bonds are always serial issues, while revenue bonds always have sinking funds.

What is the securities distribution method in which the investment banker purchases the securities from the company for a guaranteed price (net proceeds) and then resells the securities to investors at a higher price? A. Primary offering B. Initial public offering C. Underwritten offering D. Negotiated sale E. Rights offering

What is the stock's opening price given the information below? Buy orders: 300 shares at the market price; 200 shares at $38.40; 350 shares at $38.39; 450 shares at $38.38; 500 shares at $38.37; 400 shares at $38.36; Sell orders: 250 shares at the market price; 500 shares at $38.35; 400 shares at $38.36; 600 shares at $38.37; 150 shares at $38.38; 800 shares at $38.39. A. $38.35 B. $38.36 C. $38.37 D. $38.38 E. $38.39

Which of the following bonds are denominated in the currency different from the currency of the country they are sold in? A. Yankee bonds B. Samurai bonds C. Eurobonds D. All of the above E. Only (A) and (B)

Which of the following is NOT a characteristic of individual mortgages or markets for individual mortgages? A. Secured by real property B. Numerous small issuers C. Multiple lenders per issue D. No standardization in terms E. All of the above are characteristics of individual mortgages or markets for individual mortgages.

Which of the following is NOT a difference between futures and forward contracts? A. Futures contracts are standardized in quantities, delivery periods, and grades of deliverable items, whereas forward contracts are not. B. Forward contracts have a greater default risk than futures contracts. C. Futures contracts are agreements to buy/sell a specific amount of an asset at a specific future date, whereas forward contracts are not. D. Forward contracts are traded in the informal over-the-counter market, whereas futures contracts are traded on an organized exchange.

Which of the following is NOT a difference between municipal bonds (munis) and corporate bonds? A. Interest paid on munis is exempt from federal income tax, 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 cannot be rated by bond-rating agencies such as Moodys. D. All of the above are differences between munis and corporate bonds

Which of the following is NOT true regarding forward contracts? A. A forward contract is an agreement to buy or sell a specific amount of an asset at a specific future date and price. B. No money is exchanged at the moment a contract is entered. C. A seller delivers the underlying asset before the settlement date. D. A buyer is said to have a long position; a seller is said to have a short position. E. All of the above statements are true.

Which of the following statements is NOT true of all mortgage-backed 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 easily predictable. D. They pass through payments of principal and interest from the underlying pool of mortgages to the investors. E. All of the above statements are true.

You are a speculator and you expect the price of the stock JP Morgan Chase to appreciate in the near future. If your forecast is correct, what combination of options positions would help you realize the most profit? A. Buy a call, buy a put B. Sell a call, buy a put C. Buy a call, sell a put D. Sell a call, sell a put

A farmer growing wheat is _____ in wheat and may hedge by _____ wheat futures. A. short; longing B. short; selling C. long; buying D. long; selling

All of the following are types of secondary markets except _____ markets. A. direct search B. brokered C. auction D. underwriter E. dealer

An option writer's position if they already own the securities that they have agreed to sell or have already sold short the securities that they have agreed to buy is known as a _____ option. A. naked B. premium C. call D. covered E. futures

Municipal bonds backed by the "full faith and credit" of the issuing entity are called _____ bonds. A. revenue B. industrial development C. mortgage-backed D. general obligation E. Yankee

The New York Stock Exchange is a(n) ____ market. A. auction B. exchange C. secondary D. all of the above E. Only (A) and (B)

The U.S. Treasury announces an auction for 5-year T-notes in the amount of $13bln. No non-competitive bids were received. The following are the top competitive bids received: Bidder #1: $3bln. at 3.15% Bidder #2: $2bln. at 3.16% Bidder #3: $4bln. at 3.175% Bidder #4: $2.5bln. at 3.18% Bidder #5: $1.5bln. at 3.205% Bidder #6: $2bln. at 3.205% Bidder #7: $0.8bln at 3.22% What will be the auction's stop-out yield? A. 3.125% B. 3.175% C. 3.18% D. 3.205% E. 3.25%

The risk of having a futures position liquidated if a margin call is not satisfied is _____ risk. A. basis B. manipulation C. related-contract D. margin E. prepayment

What is the stock's opening price given the information below about orders that arrived overnight? Buy orders: 200 shares at the market price; 400 shares at $15.90; 300 shares at $15.89; 400 shares at $15.88; 300 shares at $15.87; 250 shares at $15.86; Sell orders: 350 shares at the market price; 500 shares at $15.85; 700 shares at $15.86; no orders at $15.87; 150 shares at $15.88; 800 shares at $15.89; 100 shares at $15.90. A. $15.85 B. $15.86 C. $15.89 D. $15.87 E. $15.88

Which of the following is NOT a characteristic of mortgage-backed securities (MBS)? A. They are backed by quality borrowers. B. They are usually insured and highly collateralized. C. They are issued in standardized denominations. D. They are less marketable than individual mortgages. E. All of the above are characteristics of MBS.

Which of the following is NOT specified in an interest rate swap contract? A. notional principal B. fixed rate C. formula for the floating rate D. initial and maintenance margin E. All of the above are specified in a swap contract.

Which of the following statements about FHA and VA mortgages is NOT true? A. They are insured by the government. B. FHA and VA charge for their insurance. C. They have low down payments. D. The borrower is protected in case of default. E. All of the above are true.

Which of the following statements about STRIPS is true? A. STRIPS are sold directly by the Treasury Department B. When a STRIPS 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.

Which of the following statements about fixed-rate mortgages is wrong? A. A 15-year fixed-rate mortgage has higher required principal payments (the principal portions of the required monthly payments) than a 30-year FRM if the rate and the initial balance are the same. B. The required monthly payment on a typical fixed-rate mortgage consists of the principal and interest components. C. The required payment of a fixed-rate mortgage is constant. D. Observing the amortization schedule of a fixed-rate mortgage, the principal portion of the required payment is decreasing over time while the interest portion is increasing. E. None of the above statements is wrong (i.e., all of the above statements are correct).

Which of the following statements about put options is true? A. When the underlying spot price increases, the value of a put increases. B. When the underlying volatility increases, the value of a put decreases. C. The higher the exercise price, the lower the value of a put. D. The longer the time to expiration, the higher the value of a put. E. none the above

Which of the following statements pertaining to short selling is FALSE? A. Sufficient funds on the account must be available to cover possible loses. B. The broker lends stock to the short seller. C. Short selling is selling a security one does not own. D. Short sellers expect the price of securities sold short to go up. E. All of the above statements are true.

Which type of bonds would a local government issue to fund the building of a toll road? A. General obligation bonds B. Mortgage-backed bonds C. Junk bonds D. Revenue bonds E. Debenture bonds

Who will gain if the price of an underlying asset rises? A. the seller of a futures contract B. the buyer of a put option C. the writer of a call option D. the buyer of a futures contract E. both (B) and (C)

Who will lose if the price of an underlying asset falls? A. the seller of a futures contract B. the buyer of a put option C. the writer of a call option D. the buyer of a futures contract E. both (B) and (C)

A _____ option writer is obligated to _____ an underlying asset if an option holder decides to exercise it. A. call; buy B. call; sell C. put; buy D. put; sell E. both (B) and (C)

Cash flows of which mortgage-backed securities are affected by mortgage prepayments? A. Pass-throughs B. Principal-only strips C. Interest-only strips D. CMOs E. All of the above

If interest rates _______ and bond prices ______, short positions in T-bond futures will _____ value and long positions will _____ value. A. fall; rise; lose; gain B. rise; fall; lose; gain C. fall; fall; gain; lose D. rise; fall; gain; lose E. Both (A) and (D)

Which of the following bonds issued by foreign entities are denominated in the currency of the country they are sold in? A. Yankee bonds B. Samurai bonds C. Eurobonds D. All of the above E. Only (A) and (B)

Which of the following is true about adjustable-rate mortgages (ARMs)? A. The ARM's rate can be adjusted periodically. B. ARMs reduce interest rate risk to the lender. C. ARMs reduce default risk to the lender. D. ARMs are required by law to initially have a rate below the market rate for fixed-rate mortgages of the same maturity. E. Both (A) and (B) are true.

Explain why you agree or disagree with the following statement: "If the highest marginal income tax rate is reduced, municipal bond yields are likely to go up relative to yields of otherwise similar corporate bonds."

I agree with this statement. If the highest marginal income tax rate is lowered, municipal bond will become less attractive due to the tax value loss. Municipal bond yields will likely increase in order to even out the loss.

State whether you agree or disagree with the following statement: "A narrow (i.e., small) bid-ask spread quoted by dealers for a given stock indicates the stock's low liquidity."

I disagree with this statement. The liquidity of a stock refers to the amount of stocks traded daily. Narrow bid-ask spreads indicate a high trading volume, therefore, a high liquidity.

State whether you agree or disagree with the following statement: "A bank that relies on long-term, fixed-rate deposits and makes adjustable-rate loans can hedge its interest rate risk by negotiating an interest rate swap in which it pays a fixed rate of interest and receives a floating rate of interest."

I disagree. The bank should pay a floating rate in a swap because a floating rate loan is one where the interest rate is periodically adjusted. The bank should receive a fixed rate of interest in a swap because a fixed rate loan is one where the interest rate stays constant over the loan's term.

Explain why you agree or disagree with the following statement: "A bank that originates and holds mortgages would reduce default risk if it originates adjustable-rate mortgages (ARMs) as opposed to fixed-rate mortgages (FRMs)"

I do not agree that the bank should originate ARMs as opposed to FRMs to reduce default risk. ARMs often offer lower initial rates to borrowers because of the risk they hold. Adjustable rate mortgages reduce interest rates risk for the lender but that usually increases the default risk. If ARM rates go up, defaults may increase as it becomes more difficult for some borrowers to make the higher payments.

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FIL241 Exam 3 (Ch 8, 9, 10, & 11)

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