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					Multiple choice type questions for Financial Instruments and Markets
As requested, below are questions from my "data base" of multiple choice type questions. I do
not expect to be able to put the answers on the web before your final exam. I do not have a
"data base" of the answers to these questions.
Some of these questions are on material that was on the first exam and other questions are on
material that I covered last year but did not cover this year (such as margin, selling stock
short). But since some students requested this "data base", it is here, if you find it useful.

Multiple Choice
1. Multiple Choice (____ points; each multiple choice question is worth ___ points)
         Circle the correct answer. If you change your answer, indicate the new choice to the
left of the question and circle it.
1.       Federal Funds are typically:
a.       Loan from a dealer that is collateralized by Treasury securities.
b.       Federal Reserve assets
c.       Loans from the Federal Reserve to banks
d.       Loans from banks to their “best” commercial customers
e.       Overnight loans settled in immediately available funds

2.     Eurodollars are best associated with:
a.     The use of dollar currency ($100 bills) in less developed countries in Europe
b.     The financing of Europeans by domestic US banks
c.     The transfer of ownership of a domestic US bank deposit from a US company to a
              foreign based owner
d.     The development of a common currency in Europe.

3.      A hedger in the futures market hedges to prevent a loss in a business transaction, but
also gives up:
a.      A sizable fee to the exchange
b.      The loss on the futures contract
c.      The opportunity to gain from a favorable turn in prices of the item
d.      The potential gain on the futures contract.

4.     All the following are risks associated with futures contracts except: not good question
a.     Margin risk
b.     Basis risk
c.     Price risk
d.     Manipulation risk

5.     What action would the holder of a maturing (expiring) call option take with an option
which cost $300, had a strike price of $50 and the price of the shares was $52, if the option
expires today:
a.     Let the option expire unexercised
b.     Exercise the option
c.     Request that the $300 be returned
d.     Buy more call options with a strike of $53.
6.     An S&L with a high negative GAP position for the next 180 days would most likely
take which action to hedge its interest rate risk:
a.     Buy futures contracts
b.     Sell futures contracts
c.     Sell put options on futures contracts
d.     Buy put options on futures contracts
e.     Both b and d above

7.     The value of any option varies directly with:
a.     The price variance of the underlying commodity
b.     The time to expiration
c.     The level of interest rates
d.     The expected dividend payments on the underlying stock
e.     Both a and b above

8.      A farmer growing wheat is ______ wheat and may hedge price risk by _______ wheat
futures:
a.      Short; long
b.      Buying; selling
c.      Selling; buying
d.      Long; selling.

9.      First National Bank recently purchased a T-bill futures contract to hedge a risk
position at the bank. If the price of the futures contract is increasing,
a.      First National is “gaining”
b.      First National is “losing” on futures.
c.      First National is neither “gaining nor losing”
d.      None of the above.

10.    Daily changes in futures prices means that one party (hedger or speculator) has gained;
another lost money on the contract. How are the exchanges able to keep the “daily” loser in
the contract and prevent default:
a.     Threat of bankruptcy
b.     Daily margin calls if needed
c.     Loans
d.     Guarantees by third parties

11.     A five-member federal regulatory commission, which serves as the primary regulator
of the futures market is the:
a.      Chicago Mercantile Exchange
b.      Federal Commodity Futures Commission
c.      Commodity Futures Trading Commission
d.      Chicago Board of Trade
12.    A bank that hedges its future funding costs in the T-bill futures market is:
a.     Hedging perfectly
b.     Accepting some basis risk associated with the cross hedge
c.     Speculating
d.     Is not hedging at all.

13.    A hedger in the financial futures market:
a.     Usually buys futures contracts
b.     Usually sells futures contracts
c.     Either buys or sells so that underlying asset gains/losses are directly related to futures
contracts gains/losses
d.     Either buys or sells so that underlying asset gains/losses are inversely related to futures
contract gains/losses.

14.    A hedger in the financial futures market:
a.     Seeks a position in the spot market to offset the price risk that exists in the futures
market
b.     Will purchase financial futures if holding financial assets in the spot market
c.     Seeks to offset the price risk in its spot market position with the nearly equal but
opposite price risk of the futures position
d.     Will always short financial futures to perfect the hedge

15.     The purchase of one million British pounds, delivered in 60 days, from a commercial
bank is:
a.      A call
b.      A swap
c.      A forward contract
d.      A futures contract

16.    An agreement between a business and a large money center bank to purchase 10
million Canadian dollars in 60 days to pay for Canadian imports is called a:
a.     Call option
b.     Forward contract
c.     Put option
d.     Long futures position

17.   Futures contracts differ from forward contracts in all except which of the following
ways:
a.    Forward contracts involve an intermediary or exchange, rather than direct contact
between buyer and seller
b.    Futures contracts are standardized; forward contracts are not
c.    Futures markets are more formal than forward markets
d.    Delivery is made most often in forward contracts
18. The purchase of US Treasury bonds for immediate delivery is a _____ market transaction:
a.     Stock
b.     Spot
c.     Futures
d.     Forward

19.    What is the relationship between spot market prices and forward market prices of a
good or financial asset:
a.     Spot prices represent expected forward prices
b.     Forward prices are always higher than spot prices
c.     Spot prices are always higher than forward prices
d.     Forward prices are expected future spot prices

20.    In a forward contract one party to the contract deals with:
a.     The futures exchange
b.     The counterparty of the forward contract
c.     The opposite swap party
d.     The hedger

21.    Futures contracts differ from forward contracts in that:
a.     Futures contracts are between the individual hedger and speculator
b.     Futures contracts are personalized, unique contracts; forwards are standardized
c.     Futures contracts are marked to market daily with changes in value added or
subtracted from buyer and seller
d.     Forward contracts always require a margin deposit.

22.    If you agreed to pay 100,000 pounds in 90 days for British steel, you could protect
yourself against price risk by:
a.     Selling pounds in the forward market for delivery in 90 days
b.     Buying pounds in the futures market for delivery in 90 days
c.     Selling dollars now
d.     Wait 90 days and buy pounds.

23.    A U.S. importer of Canadian nickel ore, payable in U.S. dollars in 30 days would do
what to minimize its foreign exchange risk:
a.     Pay the invoice in 30 days
b.     Buy a forward contract in U.S. dollars for 30 days
c.     Sell Canadian dollars in the futures market
d.     Purchase Canadian dollars in the futures market.

24.    If a corporation wanted to limit its risk on its long-term costs of financing an
investment project, it could:
a.     Sell T-bill futures for when the funds were needed
b.     Buy T-bill futures for when the funds were needed
c.     Sell T-bond futures for when the funds were needed
d.     Buy T-bond futures for when the funds were needed.
25.    Which of the following intentionally assumes price risk:
a.     Speculators
b.     Hedgers
c.     Traders
d.     Both a and c.

26.    A hedger who holds his futures position after his spot risk has abated is a:
a.     Double hedger
b.     Speculator
c.     Trader
d.     Counterparty

27. An agreement with the futures exchange to buy is a ___ position; to sell, a ___ position”
a.     Spot; futures
b.     High; low
c.     Long; short
d.     Short; long

28.    A margin call on a futures position that has moved adversely is called a(n) ____
margin requirement:
a.     Initial
b.     Maintenance
c.     Ante
d.     Daily settlement

29.    The price sensitivity rule may help:
a.     Determine the number of futures contracts to trade
b.     Present conditions necessary for a hedge to occur
c.     Determine the relative price variability of a futures contract and underlying assets
given a change in interest rates
d.     All the above

30.    All the following will gain if the price of any underlying instrument falls except:
a.     The seller of a futures contract
b.     The buyer of a put
c.     The writer of a call
d.     The buyer of a futures contract

31.     All the following are true except:
a.      A swap is like a forward contract in that it guarantees the exchange of two items of
value at some future point in time
b.      Only the net interest difference is swapped in an interest rate swap
c.      Swap parties usually have the same level of credit risk
d.      Unlike a forward rate, the exact terms of exchange of the swap will vary with changes
in interest rates
32.    Which is NOT a function of the CFTC:
a.     To approve new futures contracts
b.     To monitor enforcement of exchange rules
c.     The make certain people maintain their margin level
d.     To investigate violations of laws

33.     A(n) ____ margin is deposited at the beginning (purchase/sale) of the futures contract;
thereafter, a ____ margin is required depending on the movement in the price of the futures
contract:
a.      Initial; maintenance
b.      Initial; profit
c.      Net; seller’s
d.      Safe; lower

34.      A small commercial bank with rate sensitive assets greater than rate sensitive
liabilities sells T-bill financial futures. The bank is:
a.       Speculating
b.       Hedging
c.       Neither hedging nor speculation
d.       Both hedging and speculating

35.     An insurance company can invest funds that are coming to the company in the future
at today’s interest rates by:
a.      Speculation in financial futures
b.      Buying financial futures
c.      Selling financial futures
d.      Taking no action.

36.     Which of the following is true about hedging using duration analysis:
a.      The institution may hedge its earnings and its net worth
b.      If market value weighted asset duration is greater than the liability counterpart, sell
financial futures to “immunize”
c.      If market value weighted asset duration is greater than the liability counterpart, buy
financial futures to “immunize”
d.      Maturity hedging provides the same hedging as duration hedging.

37.    The major factor determining the survival of a futures contract on a futures exchange
is:
a.     Approval by the CFTC
b.     Trading volume
c.     The amount of hedgers in the market
d.     The amount of advertising by the exchange.
38.    Heavy trading volume in a futures contract provides traders and exchange customers:
a.     Income
b.     Price protection
c.     Liquidity
d.     Margin returns.

39.      For a futures contract hedge to be effective for a financial institution, the change in
value of the futures contract(s) must match or offset the negative value change in the financial
institution, given a change in interest rates. This is called:
a.       The matching concept
b.       The price sensitivity rule
c.       The duration concept
d.       A swap

40.    A hedger must carefully follow the price sensitivity rule of hedging, which is to:
a.     Be certain to always purchase the right number of futures contracts
b.     Be certain there are sufficient funds in the trading account to meet margin
requirements
c.     Develop a feeling for how the futures market works
d.     Make certain that changes in interest rates and prices of the futures position offsets the
negative impact of interest rate changes on the hedger’s spot position.

41.    Hedging the value of equity or net worth of a financial institution entails use of the:
a.     Duration concept
b.     GAP concept
c.     Net interest income concept
d.     Basis risk concept.

42.      A financial institution with an average asset duration much longer than its average
liability duration:
a.       Will lose equity value if interest rates decrease
b.       Will lose equity value if interest rates increase
c.       Will gain equity value if interest rates increase
d.       Will not be affected by changing interest rates

43.     Which of the following statements best describes the concept of net worth
immunization from changes in interest rates by a financial institution:
a.      Structures the mix of financial assets and liabilities so that equity will increase in
value from any change in interest rates
b.      Structuring the mix of financial assets and financial liabilities so that they are equal
c.      Structuring the mix of financial assets and financial liabilities and derivative contracts
so as to increase the value of equity for any change in interest rates
d.      Structure the mix of financial assets and financial liabilities so as to eliminate the
effect of interest rate changes on equity value.
44.    With heavy trading volume of a futures contact, the bid/ask price spreads tend to:
a.     Expand
b.     Widen
c.     Narrow
d.     Flatten.

45.     Which of the following futures hedging risks is associated with embedded options in a
financial asset, such as a call option on a loan:
a.      Basis risk
b.      Related contract risk
c.      Manipulation risk
d.      Margin risk.

46.    Which of the following best describes the risks associated with futures contract:
a.     The chance of loss or decline in value of a futures contract
b.     The variability of varying values and costs associated with buying and selling futures
contracts
c.     The chance of gain on a futures contract when it was not expected
d.     The chance of loss associated with the default of holder of the opposite position in the
contract.

47.    The futures contract risk associated with the variability of the price of the futures
contract related to the spot risk is called:
a.     Basis risk
b.     Related-contract risk
c.     Margin risk
d.     Default risk

48.    Hedging with futures contracts that have underlying assets slightly different from a
hedger’s spot assets is called:
a.     Basis risk
b.     Cross hedging
c.     Macro hedging
d.     Speculating

49.    A swap contract involves the ___ transfer of cash flows between two parties based on
a(n) ______ amount of funds:
a.     Gross; net
b.     Net; gross
c.     Net; notional principal
d.     Delayed; gross
50.    A swap hedge of interest rate risk must position parties so that:
a.     One benefits from a change in interest rate and one loses
b.     Both parties have a net gain if interest rates change
c.     The spot interest rate risk of each party is offset by the cash flows of the swap, given
any changes in interest rates
d.     The party receiving the variable cash flow always receives a higher amount to compensate for
the risk assumed.

51.    In a swap arrangement both parties may receive more favorable financing rates than
without the swap, plus the swap dealer is well compensated. Where does the cost savings
come from:
a.     The party paying fixed cash flows always pays more than the variable rate party
b.     The bank swap dealer guarantees payment of all obligations
c.     The parties of the swap are able to finance where each has a relative cost advantage
d.     With the swap in place, each party is able to reduce the risk manager payroll

52.    Futures and futures options contracts are all ____ - based contracts, while forward and
swap contracts are ____ - based contracts:
a.     Over-the-counter; exchange
b.     Exchange; over-the-counter
c.     Commodity; financial
d.     Long-term; short-term

53.     An option that gives the holder the right to buy or sell an underlying asset at the strike
price over a period of time is called a(n) ____ option, while an ____ option can only be
exercised at the expiration of the option:
a.      American; European
b.      European; American
c.      Exchange-based; over-the counter based
d.      Futures; European

54.     An option that gives the buyer the right to sell a security or futures contract at a strike
price is called a:
a.      Call option
b.      Forward option
c.      Short option
d.      Put option

55.     The value of all options:
a.      Varies negatively with the price variance of the underlying asset
b.      Varies positively with the length of time to expiration
c.      Varies inversely with the level of interest rates
d.      Increases with decreased volatility of the underlying asset.
56.     A hedger using options on futures contracts versus futures contracts:
a.      Gains and loses with both, given changes in the value of the futures contract
b.      Is able to purchase one way risk insurance for a fee with the option on financial
futures and lock in a given price or return with the futures contract
c.      Is really speculating
d.      Has paid a fee for the chance of gain or loss on both derivatives.

57.    Which is the appropriate operating goal for a commercial bank:
a.     Long-term growth
b.     Deposit growth
c.     Bank safety
d.     Long-term profit maximization

58.    The fastest growing bank holding companies in the U.S. can attribute most of their
growth to:
a.     An increasing number of branches
b.     The rapid growth of deposits from the growing number of households
c.     Improved technological financial innovation
d.     Merger of banks and bank holding companies.

59.    Most of the assets of a commercial bank can best be described as:
a.     Real assets
b.     The financial liabilities of deficit spending units in the economy
c.     Deposits from many sectors of the economy
d.     Associated with the main office and all the branches

60.    Which one of the following is NOT a bank asset:
a.     Federal Funds purchased
b.     Consumer loans
c.     Deposits in other banks
d.     Government securities

61.   Which of the following is the balance sheet account of commercial banks that is a
component of the M1 money supply:
a.    U.S. Treasury deposits
b.    Deposits in other banks
c.    Demand deposits
d.    Certificates of deposit

62.    The LARGEST deposit source of funds for commercial banks is:
a.     Time deposits
b.     Demand deposits
c.     U.S. Treasury deposits
d.     Interest-bearing transaction deposits
63.  Small commercial banks tend to have more ___ and fewer ___ compared to large
commercial banks:
a.   Transaction accounts; time deposits
b.   Borrowed funds; capital stock
c.   Time deposits; borrowed funds
d.   Large time deposits > $100,000; transaction accounts

64.    Small bank deposits in larger money center banks are called:
a.     Holding deposits
b.     Correspondent deposits
c.     Flexibility accounts
d.     Money supply deposits

65.   All but which one of the following are reasons why banks have used the bank holding
company form of organization:
a.    To reduce their tax burden
b.    To expand geographically
c.    To diversify their financial services offerings
d.    To comply with federal regulations

66.    Bank holding companies are regulated by the:
a.     Federal Reserve System
b.     Federal Deposit Insurance Corporation
c.     Office of the Comptroller of the Currency
d.     Office of Holding Company Supervision

67.    Which of the following is NOT an off-balance sheet activity of banks:
a.     Repurchase agreements
b.     Standby letters of credit
c.     Loan brokerage
d.     Securitization

68.    Which of the following is NOT a borrowed fund account:
a.     Federal Funds purchased
b.     Eurodollars
c.     Banker’s Acceptances
d.     Standby letter of credit

69.    In general, which of the following bank investments has the LEAST liquidity:
a.     Treasury bills
b.     Federal Funds sold
c.     Municipal Bonds
d.     Treasury Bonds
70.      Major liabilities for banks include
a.       Business loans
b.       Interest expense paid on deposits
c.       Deposits
d.       Equity capital
e.       Securities held for sale

71.      Which of the following BEST describes bank trust department operations:
a.       Trust operations involve banks acting in a fiduciary capacity for an individual or legal
entity
b.       Smaller banks tend to offer trust departments through correspondent relationships
c.       A large portion of bank trust assets are managed for pension funds
d.       All the above.

72.      Banks hold municipal bonds primarily for the following reason:
a.       High after-tax yields
b.       Low default risk
c.       High marketability
d.       Service to local communities

73. A decrease in unit costs after a merger due to joint use of inputs in producing multiple
products is an example of:
a.    Cost economies of scope
b.    Revenue economies of scope
c.    Cost economies of scale
d.    Revenue economies of scale
e.    X efficiencies

74.      A bank expecting interest rates to rise in the future would prefer to make:
a.       Fixed rate loans
b.       Long-term fixed rate loans
c.       Floating rate loans adjusted every six months
d.       Floating rate loans adjusted monthly to monthly CD rates.

75.      In a standby letter of credit:
a.       The bank establishes a liability
b.       The bank substitutes its creditworthiness for that of its customer
c.       The banks assures a loan applicant that credit will soon be granted
d.       The bank pays a customer to guarantee the bank’s obligations

76.      All the following are characteristics of bank borrowed funds EXCEPT:
a.       They are insured by FDIC
b.       They are short-term money market sources of funds
c.       They are an important source of bank liquidity
d.       Some entail pledging collateral; others do not.
77.    Which of the following is NOT a source of common equity capital for banks:
a.     Common equity
b.     Retained earnings
c.     Capital notes
d.     Reserve for contingencies account.

78.    Commercial banks borrow from their Federal Reserve Bank at the:
a.     Federal Funds rate
b.     Eurodollar rate
c.     Discount rate
d.     Repo rate.

79.     A bank loan manager who is expecting interest rate levels to DECLINE over the next
several years would encourage loan originators to make:
a.      Variable rate loans
b.      Home mortgage loans
c.      Fixed rate loans
d.      Very short-term loans
e.      Loans closely tied to the prime rate.

80.    Which of the following is NOT associated with bank loan securitization activity:
a.     The bank provides credit enhancements
b.     The bank provides the source of funds for the loan securitization
c.     The bank originates the loans
d.     The value of the securities sold to investors exceeds the value of the securitized loans.

81.    Banks have greater liquidity needs than other types of businesses because banks have:
a.     A high proportion of short-term assets
b.     A low proportion of capital
c.     A high proportion of short-term liabilities and outstanding lines of credit
d.     Large amounts of financial assets

82.    Managing a bank maturity GAP is concerned with:
a.     Managing a bank’s assets
b.     Managing a bank’s liabilities
c.     Managing Federal Funds
d.     Managing the relative levels of rate-sensitive assets and liabilities

83.   Which of the following is true about excess reserves:
a.    Excess reserves provide day--to-day liquidity for banks
b.    Excess reserves are required by federal bank regulators
c.    Excess reserves are reserves in excess of those needed for day-to-day liquidity
d.    Excess reserves are reserves in excess of those required by state and local
governments to secure their deposits.
84.   A bank can fail two ways: inadequate liquidity and:
a.    Inadequate reserves
b.    Inadequate liabilities to fund loans
c.    Inadequate loans
d.    Inadequate capital to absorb losses.

85.   A major factor effecting changes in bank industry earnings is:
a.    A change in loan interest rates
b.    Competition from Savings and Loan Associations
c.    Credit loss
d.    Variation in salaries paid

86.   The major sources of bank liquidity are ___ ; the major uses of liquidity are for:
a.    Loans and deposits; borrowed funds and selling assets
b.    Borrowed funds and loans; deposits and selling assets
c.    Selling assets and borrowed funds; loans and deposit withdrawals
d.    Borrowed funds and loans; securities and deposit withdrawals

87.   Important characteristics of secondary reserves include:
a.    Low cost and immediate availability
b.    Excellent liquidity and interest earning
c.    Non-earning asset with immediate liquidity
d.    High income with low risk.

88.   Maturity GAP is defined as:
a.    Rate-sensitive assets divided by rate-sensitive liabilities
b.    Fixed rate assets minus rate-sensitive liabilities
c.    Rate-sensitive liabilities plus rate-sensitive assets
d.    Rate-sensitive assets minus rate-sensitive liabilities

89.   A bank with inadequate required reserves may do ALL but which of the following:
a.    Purchase Federal Funds
b.    Sell repos to deposit customers
c.    Borrow from the Fed
d.    Sell Federal Funds.

90.   Which of the following is NOT a function of bank capital:
a.    To absorb losses
b.    To provide a source of funds
c.    To protect insured depositors
d.    To maintain public confidence.

91.   The adequate level of bank capital is related mostly to:
a.    The level of deposits
b.    The total level of risk, including asset risk
c.    The types of assets held
d.     The profitability objectives of the bank.

92.    The major source of revenue for the bank is____ while the major expense is ____:
a.     Loan interest revenue; salary expense
b.     Security interest revenue; deposit interest expense
c.     Loan interest revenue; deposit interest expense
d.     Non-interest revenue; provision for loan losses.

93.    A bank that emphasizes liquidity and safety is likely to have:
a.     Deposit outflows
b.     Frequent regulator examinations
c.     Lower than average ROA
d.     A high proportion of assets in loans

94.    Using liquidity sources from financing in financial markets is called:
a.     Liability liquidity management
b.     Asset liquidity management
c.     Demand deposit liability management
d.     Equity liquidity management.

95.    When a bank lowers its interest rates, it is likely to attract:
a.     More demand deposits
b.     More large, negotiable certificates of deposit
c.     More securities
d.     More loans.

96.    Bank regulators require minimum capital levels in banks because:
a.     They are interested in maximizing the value of bank shareholders’ equity
b.     They are concerned about the failure of a bank
c. They are concerned that the failure of one bank may undermine the confidence in all banks
d.     Bank regulatory agencies receive a proportion of bank capital each year to fund their
operations.

97.      Which of the following best describes the current risk-weighted asset minimum capital
policy of bank regulators:
a.       The amount of capital required is inversely related to the level of asset risk
b.       The amount of capital required is directly related to the level of asset risk
c.       The amount of capital required is directly related to the market value of equity capital
d.       The amount of capital required is inversely related to the amount of off-balance sheet
risk of the bank.

98.    Regulations provide financial institutions certain benefits such as:
a.     Reducing the chance of failure
b.     Increasing the cost of funds
c.     Increased labor cost to comply with regulations
d.     Increased profit from the added compliance costs.
99.    Insurance or a guarantee to cover losses may create a moral hazard, which is an:
a.     Increase to the chance that a random accident will occur
b.     Incentive to decreased risk-taking by the insured
c.     Incentive to increase risk-taking by the insurance authority
d.     Incentive to increase risk-taking by the insured.

100. Which of the following is a regulatory action to offset the moral hazard of deposit
insurance:
a.     Increasing the required ratio of assets to net worth
b.     Making fewer examinations of banks
c.     Limiting securities investments to investment grade securities only
d.     Expanding the allowable proportion of junk bonds in the investment portfolio.

101.   The maximum amount of FDIC insurance per eligible deposit account is:
a.     $25,000
b.     $50,000
c.     $100,000
d.     $150,000

102.   The original purpose of deposit insurance was to:
a.     Prevent bank runs by large depositors
b.     Increase the regulatory monitoring of banks
c.     Force the banks to invest in less risky investments
d.     Prevent bank panics by insuring the small deposits of many people.

103. Most of the banks in the U.S. are ___ chartered, ____ of the Federal Reserve System
and are insured by the ____
a.     state; members; OTS-SAIF
b.     National; members; OCC-BIF
c.     State; nonmember; FDIC-BIF
d.     National; member; FRB-BIF

104. In a FDIC approved purchase and assumption action of a failed bank, the ____
purchases the ____ of the failed bank and assumes its ____
a.     FDIC ; charter; deposit liabilities
b.     FDIC; assets; loan payments
c.     Assuming bank; deposits; assets
d.     Assuming bank; assets; deposit liabilities

105.   Bank failures are considered to be more important to the economy because:
a.     The failure of a single bank induces fear about the solvency of other banks
b.     They reduce the money supply in the economy
c.     A large number of people in a community lose their liquidity wealth
d.     All the above.
106. In a bank “purchase and deposit assumption” of a failed bank, a depositor with
$110,000:
a.      Would lose $10,000 in the assumption
b.      Would lose nothing - all deposits are assumed by the buying bank
c.      Would be protected by insurance for the entire $110,000
d.      Would lose something between 0 and $10,000 depending on value received by sale of
the assets of the failed bank.

107. While an individual bank’s illiquidity may cause a bank ___, a general loss of faith in
banks’ ability to pay is called a ___
a.     Loss; run
b.     Panic; run
c.     Run; panic
d.     Payoff; regulatory dialetic

108.   The following is NOT a reason to regulate depository institutions:
a.     To promote safety and soundness
b.     To affect the structure of banking
c.     To make certain bank capital ratios are competitive
d.     To protect the interests of consumers.

109.   In a bank examination, the most important area of the CAMEL analysis is:
a.     Bank Capital
b.     Liquidity
c.     Asset quality
d.     Management competency.

110.   Which of the following is NOT an example of depository institution safety legislation:
a.     Consumer Credit Protection Act of 1968
b.     Banking Act of 1933 (Glass-Stegall)
c.     FDIC Improvement Act of 1991
d.     FIRRE Act of 1989.

111.   A Savings and Loan Association can lower its interest rate risk by:
a.     Investing in longer term securities
b.     Increasing the proportion of fixed rate loans
c.     Increasing the proportion of variable rate loans
d.     All the above

112.   Securitization of bank loans has grown dramatically because:
a.     Profits can be increased without increasing capital
b.     Customer relationships are severed when loans are sold
c.     It helps to increase leverage
d.     All the above
113. Savings and Loans Associations are exposed to more interest rate risk than banks
because they have:
a.     Higher fixed costs
b.     More long term deposits
c.     Fewer variable rate loans
d.     None of the above.

114.   The roots of the Savings and Loan crisis are attributable to:
a.     Unfavorable movement in interest rates
b.     Unintended effects of regulation/legislation
c.     Unethical owners
d.     All the above.

115.   Which of the following is NOT true about banking structure today in the U.S.:
a.     The number of bank holding companies is increasing
b.     Super-regional banks emphasize consumer banking
c.     Off-balance sheet activities are becoming a key factor in profitability
d.     The banking industry is subject to dual regulation.

116.   The most significant cause of bank failure today is:
a.     Bank depositor panics
b.     Economic recession
c.     Insufficient bank regulation
d.     Fraud, embezzlement and poor management practices.

117. If you buy a five (5) year coupon bond with a 6 percent coupon rate today at a price of
100. If you sell the bond in one year at a price of 104, what is your REALIZED rate of return:
a.     10 percent
b.     6 percent
c.     4 percent
d.     8 percent

118.   The level of long-term interest rates has ____ since the beginning of the semester:
a.     Fallen
b.     Remained the same
c.     Risen

119.   Keogh plans and IRAs are:
a.     Government sponsored retirement programs for government employees
b.     Insured retirement plans
c.     Individual retirement programs
d.     Pay-as-you go programs.
e.     Defined benefit pension plans
120.   Which of the following is NOT an important source of liquidity for thrifts:
a.     Purchasing Federal Funds
b.     Issuing commercial paper
c.     Buying mortgage-backed bonds
d.     Advances from the Federal Home Loan Bank.

121. The Office of Thrift Supervision, the FDIC-SAIF, and the Resolution Trust
Corporation was created in which of the following legislation:
a.    FIRRE Act of 1989
b.    FDIC-Improvement Act of 1991
c.    Garn-St. Germain Act of 1982
d.    DIDMCA Act of 1980.

122.   The major assets of Savings and Loan Associations are:
a.     Commercial loans
b.     Construction loans
c.     Residential mortgages
d.     Cash and investment accounts

123.   Which of the following would reduce the high negative GAP position of an S&L:
a.     Increased fixed rate mortgages
b.     Increased long-term certificates of Deposit (CDs)
c.     Increased money market deposit accounts
d.     Increased Federal Funds purchased.

124.   The sale of mortgages would offer the thrift institution all the following except:
a.     A source of liquidity from the mortgage portfolio
b.     A source of interest income
c.     An opportunity to reduce a high negative GAP position
d.     An opportunity to make additional mortgage loans

125.   Which of the following statements is NOT true:
a.     Credit unions pay federal income taxes
b.     To use the services of a credit union one must be a member
c.     Credit unions have been exempt from antitrust laws
d.     The total number of credit unions is declining in the U.S.

126. The Resolution Trust Corporation incurred the greatest losses in liquidating ____
assets taken from failed Savings and Loan Associations:
a.      Real estate
b.      Securities
c.      One-to-four family residential mortgages
d.      Commercial and multifamily mortgages

127.   The yield curves has ____ since the beginning of the semester:
a.     Steepened
b.     Flattened
c.     Remained the same

128.   The dollar has _____ versus the yen since the beginning of the semester:
a.     Stayed the same
b.     Appreciated
c.     Depreciated

129. Which of the following is NOT a reason why mutual thrifts converted to stock
institutions:
a.       To obtain federal deposit insurance
b.       To sell stock and increase their net worth
c.       To acquire subsidiaries more easily
d.       To merge with other institutions.

130.   Investment funds provide investors all the following except:
a.     Diversification
b.     Contractual rate of return
c.     Professional management of the assets in the fund
d.     Small minimum investment

131.   Investment funds:
a.     Provide small investors with an economical means to diversify
b.     Excluding money market funds, are risk-free investments
c.     Income is taxed before distributions to shareholders
d.     Invest only in real estate assets.

132.   A no-load investment fund:
a.     Has a fixed net asset value
b.     Is an open-end fund
c.     Has a fixed number of shares outstanding
d.     Has no up-front sales charge.

133. Which of the following is NOT associated with services provided by full-service
brokerage firms:
a.     Execution of trades
b.     Storage of securities
c.     Making a market in the customers’ securities
d.     Investment advice

134. When an investment banker holds a security inventory to make a market in a security
it has just underwritten, it is performing the ____ function in the market:
a.       Registration
b.       Dealer
c.       Broker
d.       Advisory
135. Which of the following is a popular form of venture capital financing that provided
emerging firms downside protection for the venture capital firm, but yet allowed it to
participation in the success of the new business:
a.      Common stock
b.      Debentures
c.      First mortgage bonds
d.      Convertible preferred stock.

136.   Investment funds do NOT provide individual investors the following service:
a.     Varied denominations for investments
b.     Liquidity
c.     Protection from loss of principal invested
d.     Diversification

137. The price of a mutual fund share is:
a. The sum of the value of mutual fund shares divided by the number of corporate shares held
b.      The net asset value of the number of shares issued divided by the number of corporate
shares owned
c.      The net asset value or the value of assets divided by shares issued
d.      The net asset value or the number of shares of corporate stock held divided into the
total value of the stock portfolio.

138.   The major investment of mutual funds is:
a.     Municipal bonds
b.     Common stock
c.     Corporate bonds
d.     Mutual fund shares
e.     Cash

139.   Money market funds are included in definitions of the money supply because:
a.     They are invested in high quality assets
b.     They are invested in short-term assets
c.     They provide investors opportunities to access their MMMF accounts very quickly via
       wire transfers and debit cards.

140.   The capital gains and earnings of mutual funds:
a.     Are taxed at a lower rate than individuals
b.     Are taxed only on the interest income, not the capital gains
c.     Are not taxed so long as they distribute a very high-proportion of earnings to
       shareholders who pay tax on gains and income
d.     Are always invested in tax-free municipal securities to avoid income taxation.

141.   All the following are examples of financial intermediaries except:
       a.      Mutual funds
       b.      Credit unions
       c.      Insurance companies
       d.      Savings Banks
       e.      Auction markets

142.   A corporate bond rated Baa by Moody's or BBB by Standard & Poor's is:
       a.     A "junk bond".
       b.     A bond in default.
       c.     An investment grade bond.
       d.     A bond of the best (highest) quality.

143.   Which of the following bonds has the longest duration:
       a.    an 8-year maturity, 0% bond
       b.    an 8-year maturity, 5% coupon bond
       c.    a 30-year maturity, 0% coupon bond.
       d.    a 30-year maturity, 5% coupon bond
       e.    a 30-year maturity, 7% coupon GNMA

144.   A yield curve depicts the relationship between yield and:
       a.     Safety
       b.     Maturity date
       c.     Risk
       d.     Coupon rate
       e.     Price

145 All other things being equal, which one of the following bonds will have the greatest
price volatility:
        a.       10-year, 5% coupon bond
        b.       5-year, 5% coupon bond
        c.       10-year, 10% coupon bond
        d.       5-year, 10% coupon bond

146.   Duration of a coupon-paying bond normally decreases with an increase in:
       a.     Coupon rate.
       b.     Time to maturity.
       c.     Price

147.   Which of the following option transactions is most similar to buying a share of stock:
       a.    Buying a put
       b.    Buying a call
       c.    Writing a call
       d.    Selling a futures contract

148. The value of a stock put option is positively related (by "positively related, we mean
that if the factor is higher, the option premium is higher) to the following factors except:
         a.      the time to expiration
         b.      the exercise (strike) price
       c.     the stock price
       d.     volatility

149. You wish to buy 100 shares of Hotstock Inc. as quickly as possible. You would most
likely place:
        a.    stop-loss order
        b.    stop-buy order
        c.    market order
        d.    limit-sell order
        e.    limit-buy order

150.   Interest rate risk means a:
       a.      rise in interest rates will cause a gain of principal value for bondholder
       b.      rise in interest rates will cause a loss of principal value for bondholder
       c.      decline in interest rates will cause a loss of principal value for bondholder
       d.      decline in interest rates will not affect the principal value of the bond

151.   The holding period return (HPR) on a share of stock is equal to:
       a.     the capital gain yield over the period plus the inflation rate
       b.     the capital gain yield over the period plus the dividend yield
       c.     the current yield plus the dividend yield
       d.     the dividend yield plus the risk premium
       e.     the change in stock price

152.   On July 6, 1999, a September call option on the 30-year Treasury bond, with a strike
       (exercise) price of 88 was selling for 2.00. [The price (or premium) of this option was
       2.00.] The bonds were currently selling for 89:03. The option was:
       a.      in the money.
       b.      at the money.
       c.      out of the money.

153. For bonds of the same maturity (Everything else being equal), investors will require
that the bond be issued with a higher coupon (and sell initially at a higher yield) if:
        a.     It has a call provision (i.e., it is callable)
        b.     Its coupon payments are exempt from federal income tax
        c.     It can be converted into common stock
        d.     It has low default risk

154.   Which of the statements below is NOT true:
       a.    By including an accrual tranche in a CMO structure, the average lives of the
             other tranches in a sequential pay structure are reduced
       b.    The IO class receives no principal payments
       c.    The PSA prepayment benchmark is a series of conditional prepayment rates
       d.    The PAC tranche of a CMO will have the greatest average life variability
155.   The intrinsic (exercise) value of an out-of-the money call option is equal to:
       a.     the call premium
       b.     zero
       c.     the stock price minus the exercise price
       d.     the exercise price

156. If the yield on a one-year zero coupon bond is 10 percent and the yield on a two-year
zero coupon bond is 8 percent, what is the one year forward rate (rounded to the nearest
percent)?
       a.     6 percent
       b.     7 percent
       c.     8 percent
       d.     9 percent
       e.     10 percent
       f.     11 percent
       g.     12 percent

157.   Which of the following statements is most correct concerning mutual funds.
       a.    Closed-end funds outperform open-end funds
       b.    Mutual funds act as brokers and/or dealers in securities
       c.    Open-end funds take in funds as deposits and make commercial loans
       d.    No-load funds have a sales charge; load funds do not
       e.    The most important function a mutual fund performs for small investors is
             diversification.

158.   Which of the following statements is true?
       a.    the pure expectations hypothesis indicates a flat yield curve if anticipated
             future short-term rates exceed current short-term rates.
       b.    the basic conclusion of the pure expectations hypothesis is that the long-term
             rate is equal to the next year's short-term rate.
       c.    the liquidity hypothesis indicates that, all other things being equal, longer
             maturities will have lower yields.
       d.    the preferred habitat theory suggest that if lenders buy an instrument with a
             maturity different from the period for which they wish to invest, they need to
             be compensated by an appropriate risk premium whose magnitude will reflect
             the extent of risk aversion to either price or reinvestment risk.

159.   In February 1999, you purchased a zero coupon bond issued in February 1989 and
       maturing in February 2009. What is the remaining Macaulay duration?
       a.     20 years.
       b.     10 years.
       c.       5 years.
       d.      0 years.
160.   Which one of the following is NOT a money market instrument?
       a.    a treasury bill
       b.    a certificate of deposit
       c.    commercial paper
       d.    a treasury bond
       e.    a bankers acceptance

161. Which one of the following is NOT a derivative mortgage security?
      a.     IO
      b.     PO
      c.     CMO
      d.     FNMA MBS

162. The investor of a GNMA MBS has this risk that investors in most corporate bonds do
    not:
       a.     default risk
       b.     prepayment risk
       c.     liquidity risk
       d.     maturity risk

163.   Which of the following is NOT true:
       a.    Fixed payment mortgage loans have shorter lives than coupon bonds of the
             same final maturity
       b.    Prepayments shorten average lives
       c.    Prepayments increase as mortgage interest rates rise
       d.    Prepayments increase as mortgage interest rates fall

164.   Which of the following statements is TRUE regarding a corporate bond?
       a.    A corporate callable bond gives the holder the right to exchange it for a
             specified number of the company's common shares
       b.    A corporate debenture is a secured bond
       c.    A corporate indenture is a secured bond
       d.    A corporate convertible bond gives the holder the right to exchange the bond
             for a specified number of the company's common shares
       e.    Holders of corporate bonds have voting rights in the company.
       f.    Holders of subordinated debt get paid before holders of senior debt

165.   An American put option can be exercised:
       a.   any time on or before the expiration date
       b.   only on the expiration date
       c.   any time in the indefinite future
       d.   only after dividends are paid
166.   A form of short term borrowing by dealers in government securities is:
       a.    reserve requirements
       b.    repurchase agreements
       c.    banker's acceptances
       d.    commercial paper
       e.    brokers' calls

167.   Ceteris paribus, the price and yield on a bond are:
       a.      positively related
       b.      negatively related
       c.      sometimes positively and sometimes negatively related
       d.      not related
       e.      random variables
"Ceteris paribus" means " all other things remaining the same"

168. A coupon bond that pays interest annually, is selling at par value of $1,000, matures in
5 years, and has a coupon rate of 9%. The yield to maturity on this bond is:
        a.     6.00%
        b.     8.33%
        c.     9.00%
        d.     45.00%

169.   The difference between load and no-load funds is that:
       a.     load funds are insured; no-load funds are not.
       b.     load funds do not redeem their own shares; no-load funds do.
       c.     in a load fund the employee is entitled to receive the contributions, and
              earnings thereon, set aside by his employer; in a no-load fund he/she may
              receive only his/her own contributions and the earnings thereon.
       d.     load funds have a sales charge; no-load funds do not.

170.   A Pension plan in which the plan sponsor is responsible only for making specified
       contributions (either a percentage of the employee's salary or a percentage of profits)
       into the plan on behalf of qualifying participants is termed:
       a.      defined contribution.
       b.      defined benefit.
       c.      vested.
       d.      universal life.

171. Advantages of loan sales and securitization typically include all but which one of the
following?
A.     Reduction in credit risk
B.     Reduction in interest rate risk
C.     Reduction in diversification of the loan portfolio
D.     Reduction in adverse effect of regulatory taxes
E.     Increase in overall fee income
172.   A pass-through security is best characterized as
A.     A security with a prorata claim to the underlying pool of assets
B.     A multi-class mortgage backed bond
C.     A bond backed by real estate
D.     A part of a loan sale

173. Which one of the following types of transactions leaves the assets on the balance sheet?
A.    Loan sale without recourse
B.    GNMA pass throughs issued backed by mortgages placed in trust
C.    CMOs issued using mortgage pool as collateral
D.    Mortgage backed bonds issued

174.   For a loan sold with recourse
A.     The loan seller has no further obligation at all to the buyer
B.     The loan seller removes the assets from the balance sheet and does not report a
       contingent liability in the footnotes
C.     The loan buyer cannot collect from the loan seller in the event of borrower default
D.     No reserve requirement is imposed
E.     None of the above

175.   Banks were willing to swap LDC loans for Brady bonds because:
A.     Brady bonds carried higher interest rates than the loans
B.     The bonds had variable interest rates
C.     The bonds were marketable and the loans were not
D.     The bonds were uncollateralized

176. Fraudulent conveyance proceedings are
A.     Charges that a loan was improperly sold according to the conditions of the original
loan agreement
B.     Charge of impropriety in HLTs
C.     Evidence of moral hazard on the part of the loan buyer
D.     Illegal methods to boost borrower’s earnings to increase probability of loan acceptance

177.   One of the reasons insurance firms are now securitizing mortgages is to
A.     Get out of the mortgage market
B.     Place more funds in the money market
C.     Reduce the rate sensitivity of their assets
D.     Improve the liquidity of their assets

178.   Securitizing can help an FI do all but which one of the following?
A.     Reduce its regulatory tax burden
B.     Reduce its exposure to one geographic area
C.     Reduce its interest rate of exposure
E.     Reduce its liquidity risk exposure
E.     Increase its interest income
179. A 3 class CMO has an initial principle balance of $50 million per class. In the first
month, interest payments of $1 million and principle payments of $2 million are received. In
the second month, Class A holders receive interest on _____ principle and Class B holders
receive interest on _____ principle.
A.      $50 million; $50 million
B.      $49 million; $49 million
C.      $49.33 million; $49.33 million
D.      $48 million; $50 million
E.      $49 million; $50 million

180.   Which of the following forms of securitization is usually “double securitization?”
A.     Mortgage backed bonds
B.     CMO
C.     Pass-through
D.     Loan sale

181. The sum of the market values of all the classes of a CMO is greater than the total value
of the GNMA pass-throughs backing the CMO because:
A.      The CMO has less credit risk than the pass-through.
B.      CMO investors can choose their degree of prepayment protection.
C.      The government guarantees CMOs’ performance.
D.      CMOs have more favorable tax status than pass-throughs.
E.      CMOs are more marketable than pass-throughs.

182. You fund the following current quote for the June T-Bond contract: $100,000; Pts
32nd, of 100%
      Open          High        Low         Settle      Open interest
      89-16         89-16       88-22       88-28        45,348
You went short in the contract at the open. Which of the following are true?
I. By the end of the day your margin account would be increased
II. 45,348 contracts were traded that day
III. You agreed to deliver in June $100,000 face value T-Bonds in exchange for $89,500
IV. You agreed to purchase in June, $100,000 face value T-Bonds in exchange for $88,875

a.     I, II and III only
b.     I, II and IV only
c.     I and III only
d.     I and IV only
e.     IV only

183. A contract that gives the holder the right to sell a security at a preset price immediately
before contract expiration is a(n).
a.     American call option
b.     European call option
c.     American put option
d.     European put option
184. A call option on stock with an exercise price of $15 is in the money when the stock
price is _____.
a.      $5
b.      $10
c.      $15
d.      $20

185. You have taken an option position and if prices drop you could go bankrupt, but if
prices rise you might get a small gain. You have
a.      Bought a call option
b.      Bought a put option
c.      Written a call option
d.      Written a put option

186. A(n) __________allows investors to convert a bond into a specified number of
commons stock shares:
a.   call feature
b.   convertibility clause
c.   debenture
d.   bond rating

187. AAA corporation is considering the issue of commercial paper and would like to know
the yield it should offer on its commercial paper. The corporation believes that a 0.5% default
risk premium, a 0.l% liquidity premium, and a 0.4% tax adjustment are necessary to sell its
commercial paper to investors. Furthermore, annualized T-bill rates are 7%. Based on this
information, AAA should offer _____ % on its commercial paper:
a.      8.0%
b.      7.6%
c.      7.5%
d.      7.9%

188.   A bond currently selling at a premium:
       a.    Has a yield to maturity that is less than the coupon rate.
       b.    Has a yield to maturity that is equal to the coupon rate.
       c.    Has a yield to maturity that is greater than the coupon rate.

189. Assume two bonds with the same coupon payments and par values but different
periods to maturity. If interest rates should rise five (5) basis points, the price of the longer
term bond would generally:
       a.     Rise by more than that of the shorter-term bond.
       b.     Fall by the same amount as the price of the shorter-term bond.
       c.     Fall by less than the price of the shorter-term bond.
       d.     Fall by more than the price of the shorter-term bond.
190.   A corporate bond rated Baa by Moody's or BBB by Standard & Poor's is:
       a.     A "junk bond".
       b.     A bond in default.
       c.     An investment grade bond.
       d.     A bond of the best (highest) quality.

191.   Which of the following is an advantage of investing in zero-coupon bonds:
       a.    Interest rate risk is eliminated; the price of the bond will not change.
       b.    Ordinary income taxes are converted into capital gains taxes
       c.    Reinvestment risk is eliminated over the period you own the bond.
       d.    They carry no income tax liability.

192.   A MBB differs from a CMO or a pass-through in that
       a.   The MBB does not result in the removal of mortgages from the balance sheet.
       b.   A MBB holder has no prepayment risk.
       c.   Cash flows on a MBB are not directly passed through from mortgages.
       d.   All of the above.

193.   Which of the following statements is most correct concerning investment companies:
       a.    Closed-end funds redeem their shares.
       b.    The most important function a mutual fund performs for small investors is risk
             reduction through diversification.
       c.    There is active trading of the bonds in the portfolio of a Unit Trust.
       d.    No-load funds have a sales charge.

194.   In the secondary market, investment bankers:
       a.      underwrite securities.
       b.      act as brokers and/or dealers in securities.
       c.      take in funds as deposits and make commercial loans.
       d.      engage in denomination and diversification intermediation.

195.   The statement "Financial intermediaries tend to be highly leveraged" means:
       a.     they operate mostly with borrowed funds.
       b.     they operate with a large capital base.
       c.     they tend to borrow short term and lend long term.
       d.     there is a large spread between interest rates charged borrowers and paid to
              depositors.

196. You purchase a $180,000 house and you pay 20% down. The interest rate is a 9% APR
for 360 monthly payments. What is the monthly payment?
A. $1,159
B. $1,448
C. $1,363
D. $1,072
E. $998
197.   Firms that specialize in helping companies raise capital by selling securities are called:
a.     commercial banks
b.     investment banks
c.     savings banks
d.     credit unions

198.   An interest rate collar is
       a.     Writing a floor and writing a cap
       b.     Buying a cap and writing a floor
       c.     An option on a futures contract
       d.     Buying a cap and buying a floor

199.   The following type(s) of life insurance policies do not have a savings feature
       a.     Term life
       b.     Whole life
       c.     Variable life
       d.     Universal life

200.   The spread between AAA and B bonds:
       a.     tends to widen during economic recessions.
       b.     tends to be constant throughout the business cycle.
       c.     tends to widen during economic expansions.

201.   A _____ placed against mortgaged property ensures that the property cannot be sold
       (except by the lender) until the mortgage is paid off.
A.     Collateral
B.     Lien
C.     Habeas corpus
D.     Down payment
E.     Writ of certiori

202. If a borrower makes a 20% down payment on a conventional mortgage they will be
required to obtain
A.     FHA insurance
B.     VA insurance
C.     Private mortgage insurance
D.     GNMA payment guarantees
E.     None of the above

203. Mortgage payments are _____ on a 15 year fixed rate mortgage than on a 30 year fixed
rate mortgage, and _____ is paid on a 15 year mortgage than on a 30 year mortgage, ceteris
paribus (ceteris paribus means other things the same)
A.     Lower; less interest
B.     Lower; less principal
C.     Higher; less interest
D.     Higher; more interest
204.Risk averse short-term investors will hold long-term bonds over short-term bonds only if:
       a.     expected returns on long-term bonds are less than expected returns on
              short-term bonds.
       b.     prices on long-term bonds are less than prices of short-term bonds.
       c.     expected returns on long-term bonds are greater than implied forward rates.
       d.     yields on long-term bonds exceed current yields on short-term bonds.

205.   Serial bonds differ from most other bonds because:
       a.      They are secured by the assets and taxing power of the issuer.
       b.      Their par value is usually well below $1000.
       c.      Their term-to-maturity is usually over 30 years.
       d.      They have a succession of maturity dates, each maturity date being a small
               bond issue in itself.
       e.      They are exempt from federal, local and state income taxes.

206.   Securities with maturities less than one year are referred to as:
       a.      money market securities
       b.      capital market securities
       c.      bond market securities
       d.      stock market securities

207.   The price noncompetitive bidders will pay at a Treasury bill auction is the:
       a.     highest price entered by a competitive bidder
       b.     highest price entered by a noncompetitive bidder
       c.     the weighted average bid of all competitive bidders
       d.     the auction price determined at the auction.

208.   If an investor purchases a T-bill and sells it prior to maturity, his/her return will be
       based on:
       a.      the difference between the par value and the purchase price
       b.      the difference between the price for which the bill was sold in the secondary
               market and the purchase price
       c.      the difference between the price for which the bill was sold in the primary
               market and the purchase price
       d.      the percentage change in the S&P 500 on the date of purchase.

209.   If an investor purchase a six-month (182 day) T-bill with a $10,000 par value for
       $9,700:
       a.      what is the T-bill discount?
       b.      What is the bond equivalent yield for the T-bill?

210.   At a specific point in time the yield on commercial paper is slightly higher than the
       yield on a T-bill with the same maturity, because commercial paper has:
       a.      higher interest rate risk
       b.      higher maturity risk
       c.      higher default risk
211.   A corporation plans to issue 45-day commercial paper, with a par value of $3,000,000.
       It expects to sell the commercial paper for $2,947,000. Its annaul cost of borrowing is
       estimate to be:
       a.      14.39%
       b.      14.13%
       c.      14.59%
       d.      14.33%

212.   Which of the following is most likely to be used in a repo transaction?
       a.    commercial paper
       b.    certificate of deposit
       c.    treasury bill
       d.    common stock.

213.   A company purchases certain securities for $4,921,349 with an agreement to sell them
       back at a price of $4,950,000 at the end of a 30-day period. The repo rate is:
       a.      7.08%
       b.      6.99%
       c.      6.95%
       d.      7.04%

214.   Which of the following financial institutions is the least likely to participate in the
       money market?
       a.    pension fund
       b.    commercial bank
       c.    finance company
       d.    money market mutual fund

215.   Which of the following is NOT an example of a municipal bond?
       a.    general obligation bond
       b.    revenue bond
       c.    Treasury bond
       d.    Industrial development bond

216.   The legal document specifying the rights and obligations of both the issuing firm and
       the bondholders is the:
       a.     indenture
       b.     debenture
       c.     protective covenant
       d.     sinking-fund

217. The_____ requires that an issuing firm retire a certain amount of a bond issue each year:
       a.    call feature
       b.    convertibility feature
       c.    trustee feature
       d.    sinking-fund provision
218. Which of the following is NOT mentioned in your text as a protective covenant?
      a.     a limit on the amount of dividends a firm can pay
      b.     a limit on the corporate officers' salaries a firm can pay
      c.     the amount of additional debt a firm can issue
      d.     the appointment of a trustee in all bond indentures

   219. Which of the following is NOT true regarding the call provision?
      a.    it typically requires a firm to pay a price above par when it calls its bonds in
            the earlier years that it can call the bonds
      b.    the difference between the market value of the bond and the par value is called
            the call premium
      c.    a principal use of the call provision is to lower future interest payments
      d.    a principal use of the call provision is to retire bonds as required by a sinking
            fund provision
      e.    a call provision is normally viewed as a disadvantage to bondholders

   220. A _________ has first claim on specified assets, while a ___________ is a
       _________ that has claims against a firm's assets that are junior to the claims of
       mortgage bonds.
      a.     first mortgage bond; second mortgage bond
      b.     first mortgage bond; debenture
      c.     first mortgage bond; subordinated debenture
      d.     chattel mortgage bond; subordinated debenture

   221. Which of the following is NOT true regarding zero-coupon bonds:
      a.    they are issued at a deep discount from market value
      b.    investors are taxed annually on the amount of interest earned, even thought the
            interest will not be received until maturity
      c.    the issuing firm is permitted to deduct he amortized discount as interest
            expense for federal income tax purposes, even though it does not pay interest
      d.    zero coupon bonds are purchased mainly for tax-deferred investment accounts,
            such as pension funds and individual retirement accounts

   222. A variable rate bond:
      a.    allows investors to benefit form declining interest rates over time
      b.    allows issuers to benefit from rising market interest rates over time
      c.    allows investors to benefit from rising market interest rates over time.

   223. If interest rates suddenly _________ , those existing bonds that have a call feature
       are ____________ likely to be called:
      a.      decline; more
      b.      decline; less
      c.      increase; more
224. ___________ bonds are bonds issued by foreign governments:
   a.    sovereign
   b.    yankee
   c.    mortgage
   d.    chattel

225. Everything else being equal, which of the following bond ratings is associated with
    the highest yield?
   a.      Baa
   b.      A
   c.      Aa
   d.      Aaa
   e.      U.S. Treasury
   f.      Municipal General Obligation

226. To determine the present value of a bond that pays semiannual interest, which of the
    following adjustments should NOT be made to compute the price of the bond?
   a.     the annualized coupon should be split in half
   b.     the annual discount rate should be divided by 2
   c.     the number of periods should be doubled to reflect two times the number of
          annual periods
   d.     the par value should be split in half

227. Which of the following is NOT correct?
   a.    If the coupon rate of a bond is below the investor's required rate of return, the
         present value of the bond should be below the par value.
   b.    If the coupon rate of a bond is below the investor's required rate of return, the
         present value of the bond should be above the par value
   c.    If the coupon rate of a bond is above the investor's required rate of return, the
         present value of the bond should be below the par value
   d.    If the coupon rate of a bond is equal to the investor's required rate of return, the
         present value of the bond should be equal to the par value

228. According to your text, which of the following is NOT a factor that affects the risk-
    free rate?
   a.       inflationary expectations
   b.       economic growth
   c.       Federal Reserve Open Market Operations
   d.       budget deficit
   e.       the current yield to maturity on outstanding long-term bonds in the economy

229. Assume a bond with $1,000.00 par value, 12 percent ("nominal") coupon
    (remember coupon payments are made semi-annually), two years remaining to
    maturity, and a 10 percent ("nominal") yield to maturity.
   a.     What is the Macaulay duration of this bond?
   b.     What is the modified duration of this bond?
   c.      What is the convexity of this bond?
   d.      What is the price of this bond?

230.       ____________ is NOT a risk faced by the issuer of a mortgage?
   a.      reinvestment rate risk
   b.      interest rate risk
   c.      prepayment risk
   d.      credit risk

231.      What type of risk is faced by investors in mortgage pass-through securities that
    is NOT faced by investors in corporate securities?
   a.     interest rate risk
   b.     reinvestment rate risk
   c.     credit risk
   d.     prepayment risk

232.       When financial institutions originate residential mortgage, the mortgage
    contract should probably NOT specify:
   a.      whether the mortgage is federally insured
   b.      the amount of the loan
   c.      whether the interest rate is fixed or adjustable
   d.      the maturity
   e.      the employer of the borrower

233.       Which of the following is NOT a derivative mortgage security:
   a.      IO
   b.      PO
   c.      CMO
   d.      REMIC
   e.      FNMA MBS

234.      Financial institutions that hold fixed rate mortgages in their asset portfolios are
    exposed to ___________ risk, because they commonly use funds obtained from short-
    term customer deposits to make long-term mortgage loans:
   a.     exchange rate
   b.     prepayment
   c.     reinvestment rate
   d.     interest rate

235.     During the early years of a 30-year mortgage:
   a. most of the monthly payment reflects principal reduction
   b. most of the monthly payment reflects interest
   c. about half of the monthly payment reflects interest
236.      Financial institutions that originate mortgages may prefer to reduce their
    holdings of __________ mortgages if interest rates are expected to increase:
   a.     fixed-rate
   b.     adjustable-rate
   c.     second
   d.     pass-through

237.       Which of the following institutions is least likely to originate a mortgage:
   a.      commercial bank
   b.      savings institution
   c.      mortgage bank
   d.      investment banking firm

238.        Which of the following institutions is most likely to offer instruments to help
    institutional investors in mortgages hedge against interest rate risk?
   a.       commercial bank
   b.       investment banking firm
   c.       finance company
   d.       mutual fund
   e.       insurance company

239.        The probability that a borrower will default (credit risk) is influenced by all of
    the following except __________:
   a.       economic conditions
   b.       the level of equity invested by the borrower
   c.       the borrower's income level
   d.       the borrower's credit history
   e.       the amount of mortgage loans in the pool collateralizing a participation
            certificate

240.       Which of the following is NOT a common type of mortgage pass-through
    securities according to your text?
   a.      GNMA
   b.      GHA
   c.      FNMA

241. Participation certificates are issued by:
   a.       GNMA
   b.       FNMA
   c.       FHLMC
   d.       FHA
   e.       US Treasury

242.       Collateralized mortgage obligations (CMOs)
   a.      have semiannual interest payments
   b.      have monthly interest payments
   c.       are segmented into classes ("tranches") and the first class has the longest
            payment
   d.       have an average life of thirty years

243. Which of the following is NOT correct regarding organized exchanges trading
    financial futures contracts?
   a.      organized exchanges establish and enforce rules for the trading of financial
           futures contracts
   b.      organized exchanges ensure that the seller of the futures contract always
           delivers the securities covered by the contract, whether the contract was settled
           prior to the settlement date or not
   c.      organized exchanges, settle, clear and guarantee all transactions that occur on
           their exchanges
   d.      the operations of financial futures exchanges are regulated by the Commodity
           Futures Trading Commission (CFTC)

244.       Most financial futures contracts are traded on the:
   a.      New York Stock Exchange
   b.      American Stock Exchange
   c.      NASDAQ
   d.      Chicago Board of Trade or Chicago Mercantile Exchange

245.       A (n) _____________ is not a speculator in financial futures contracts:
   a.      day trader
   b.      positions trader
   c.      hedger

246.       In August, Michael forecasts that interest rates will increase over the next
    month. Thus, Michael calls a broker and sells a Treasury bill futures contract for
    102.00. furthermore, the price of T-bills as of the September settlement date is
    98.00.What is the nominal profit or loss (in dollars) from Michael's speculative
    strategy (ignoring commissions and taxes)?
   a.      $40,000; gain
   b.      $40,000; loss
   c.      $20,000; gain
   d.      $20,000; loss

247.Bold Insurer plans to make a $6 million investment in Treasury bonds five months
    from now. Bold is concerned that interest rate may decline over the next two months,
    increasing the price of Treasury bonds. Thus, Bold plans to purchase Treasury bond
    futures and sell them in three months. The current price of a futures contract is 98:31.
    Assume that the price of a Treasury bonds future contract in three months is 99:17.
   I.      How many Treasury bond future contracts does Bond have to purchase to
           completely hedge its position?
   a.      60
   b.      600
   c.      6
   d.      120

   II.     What is Bond's profit or loss from hedging its position?
   a.      $51,600; loss
   b.      $51,600; profit
   c.      $33,750; profit
   d.      $33,750; loss

248.       Which of the following is NOT a type of stock index futures contract?
   a.      S&P 500 index future
   b.      Mini S&P 500 index futures
   c.      Standard & Poor's Depository Receipt (SPDR) futures
   d.      Nikkei 225 index futures

249.___________ is NOT a settlement date for stock index futures contracts:
   a.     January
   b.     March
   c.     September
   d.     December

250.       Mickey, a private investor, would like to invest in the stock market, but does
    not have sufficient funds for the next two months. Hence, Mickey buys an S&P
    future contract with a September settlement date for a price of 1,750. By the
    settlement date, the S&P index falls to 1,400.
   I.      The value of the S&P 500 futures contract is $ ____________ :
   a.      425,000
   b.      437,500
   c.      875,000
   d.      850,000

   II.     Mickey's nominal profit or loss (ignoring commissions and taxes) on the S&P
           500 index futures is $ ________:
   a.      75,000; profit
   b.      75,000; loss
   c.      87,500; profit
   d.      87,500; loss

251. __________ risk is the risk that the position being hedged by a futures contract is
    NOT affected in the same manner as the instrument underlying the futures contract:
   a.     market
   b.     liquidity
   c.     credit
   d.     basis
252.       Finance companies primarily invest in _______ :

253.       ___________ is NOT included in flotation costs:
   a.      the price at which the stock is sold through the IBF (Investment Banking Firm)
   b.      issue costs
   c.      underwriting spread
   d.      registration expenses
   e.      printing expenses
   f.      legal fees

254.       The greatest risk for finance companies is ____________ risk:
   a.      liquidity
   b.      interest rate
   c.      credit
   d.      exchange rate

255.     To hedge their exposure to interest rate risk, finance companies will probably
    NOT utilize the ___________ markets:
   a.    futures
   b.    bond
   c.    options
   d.    swap

256. Mutual funds are NOT required to disclose which of the following in the prospectus:
   a.    the names of the portfolio managers
   b.    the length of time that the portfolio managers have been employed by the fund
         in that position
   c.    the performance record over the past 10 years in comparison to a broad market
         index
   d.    the number of investors currently investing in the fund.

257.        Which of the following is NOT a way in which mutual funds generate returns
    to their shareholders:
   a.       they can pass on any earned income as dividend payments to shareholders
   b.       they can distribute the capital gains resulting from the sale of securities within
            funds
   c.       mutual fund price appreciation
   d.       all the above are ways in which a mutual fund generates returns to its
            shareholders

258.       The ______________ of a mutual fund indicates the value per share:
   a.      gross asset value
   b.      net asset value
   c.      net stock value
   d.      net bond value
259.       A (n) ___________ fund contains a unique combination of growth stocks, high
    dividend stocks, and fixed-income bonds:
   a.      growth
   b.      capital appreciation
   c.      bond
   d.      growth and income

260.       In the aggregate, mutual funds invest primarily in __________:
   a.      government securities
   b.      common stock
   c.      preferred stock
   d.      corporate bonds

261.       Money market funds in the aggregate invest primarily in:
   a.      repurchase agreements
   b.      CDs
   c.      Commercial paper
   d.      US Treasury securities
   e.      Municipal bonds
   f.      Common Stock
   g.      Bankers Acceptances

262.        _____________ funds sell shares to wealthy individuals and financial
    institutions and use the proceeds to invest in securities:
   a.       growth
   b.       open end
   c.       capital appreciation
   d.       hedge
   e.       specialty

263. The _____________ is NOT involved in the regulation of the securities industry:
   a.     National Association of Securities Dealers
   b.     Financial Accounting Standards Board
   c.     Securities and Exchange Commission
   d.     Federal Reserve Board

264. ____________ insurance protects the policy holders until death or as long as
    premiums are promptly paid:
   a.     whole life
   b.     variable life
   c.     term life
   d.     annuity life

265.       The primary asset of life insurance companies is:
   a.      government securities
   b.      policy loans
   c.      corporate bonds
   d.      mortgages

266. ___________ risk is NOT a major risk faced by life insurance companies:
   a.     interest rate
   b.     reinvestment rate
   c.     credit
   d.     market

267.       The primary use of funds of property and casualty insurance companies is:
   a.      common stock
   b.      U.S. Treasury bonds
   c.      Municipal bonds
   d.      Corporate bonds

268.       Most pension fund contributions come from the __________:
   a.      federal government
   b.      state government
   c.      employee
   d.      employer

269.      With a(n) ________ plan, contributions are dictated by the benefits that will
    eventually be provided:
   a.     matched funding
   b.     projective funding
   c.     defined-benefit
   d.     defined-contribution

270.      Which of the following was NOT a criticism of private pension fund before the
    passage of ERISA (Employee Retirement Income Security Act):
   a.     any time short of the specified number of years resulted in no pension at all
   b.     some funds were underfunded and consequently unable to provide the benefits
          promised to employees at the time of retirement
   c.     some funds were overfunded
   d.     most pension plans had committed to a fixed amount of benefits, so that above-
          average growth of the portfolio value offered no additional pension benefits to
          employees

271.       ERISA:
   a.      required a pension fund to choose one of four vesting schedule options
   b.      required that any contributions be invested in high-growth securities
   c.      insures underfunded pension plans
   d.      allows employees changing employers to transfer any vested amount into the
           pension plan of their new employer or to invest it in an IRA
   272.      Which of the following is true with respect to the PBGC (Pension Benefit
       Guarantee Corporation):
      a.     it receives government support
      b.     it insures about half of all pension plans
      c.     it monitor pension plans periodically to determine whether they can adequately
             provide the benefits they have guaranteed

   273.      Individual Retirement Accounts, Keogh Plans and Employee contributions to
       401-K plans are primarily invested in:
      a.     investment-grade bonds
      b.     junk bonds
      c.     common stock
      d.     preferred stock

   274.____________ is (are) NOT a factor affecting the performance of a pension fund's
       bond portfolio:
      a.     general stock market conditions
      b.     changes in the risk-free rate
      c.     changes in the risk premium
      d.     the abilities of the portfolio managers

275. Which one of the following statements concerning annuities offered by insurers is
NOT true?
a.    Interest on annuities is not taxed until the investor receives the payments.
b.    The tax status of annuity withdrawals is affected by the investor’s income level.
d.    Annuity contributions are not capped by the IRS.
d.    Annuities can be deferred or immediate.
e.    Annuity payments must cease upon the policyholder’s death.

276.   The largest asset category of life insurers is _____ and the largest liability category is:
a.     Bonds, separate account items
b.     Separate account items, current policy claims
c.     Bonds, policy reserves
d.     Policy reserves, mortgage loans
e.     Common stock, dividend reserve

277. Insurance companies, commercial banks and investment banks may now affiliate with
each other and engage in similar lines of business. These powers were granted by the
a.     Glass-Steagall Act
b.     Depository Deregulation Act
c.     Garn-St Germain Act
d.     Riegle-Neal Act
e.     Financial Services Modernization Act
278.   In property and casualty insurance, loss rates are estimated by
a.     Frequency of loss
b.     Severity of loss
c.     Frequency of loss times severity of loss
d.     Premiums times frequency of loss

279. Property and casualty insurers hold _____ short term assets than life insurers because
property and casualty loss rates are _____ predictable than life insurance loss rates.
a.     More, more
b.     More, less
c.     Less, less
d.     Less, more

280.   For P&C insurers if the combined ratio for an insurer is more than 100%, that firm
a.     Could not have been profitable.
b.     Must have been profitable.
c.     May have been profitable if investment returns were high enough.
d.     Was profitable if the LAE was low enough.

281. A best efforts offering is one where
a.       The underwriter bears the risk of an unsuccessful offering.
b.       The bid-ask spread is exceptionally high, but the investment banker does their best to
sell the issue anyway.
c.       The investment banker acts as a principle for the issuer.
d.       The investment banker acts only as a distribution agent.
e.       The issue can only be privately placed.

282.   The largest source of funds for a securities firm is
a.     Short positions in securities and commodities
b.     Payables to other broker dealers
c.     Securities sold under repurchase agreement
d.     Call loans
e.     Securities purchased under agreements to sell

283.   Underwriter spreads will normally be larger on
a.     A shelf offering than on an IPO
b.     A best efforts offer than on an IPO
c.     A best efforts offer than on a seasoned offering
d.     An IPO than a seasoned offering

284.   Factoring is
a.     Equipment leasing
b.     Servicing mortgage factors
c.     Purchasing corporate accounts receivables at a discount
d.     Financing automobile purchases
e.     Making installment loans to customers
285.   A finance company that makes loans to high risk customers is called a
a.     Subprime leader
b.     Commercial bank
c.     Factor
d.     Warehouse lender
e.     Supraprime lender

286. Finance companies enjoy several advantages over banks. These include all but which
one of the following?
a.      Finance companies can offer various types of products and services without regulatory
interference.
b.      Many finance companies have considerable knowledge and expertise about specific
industries and products.
c.      Finance companies can accept riskier customers than banks.
d.      Finance companies generally have lower overhead than banks.
e.      Finance companies have lower funds costs than banks.

287.   Finance companies are legally defined as
a.     Institutions that make loans and accept deposits
b.     Institutions that accept members who have a common bond
c.     Institutions whose primary assets are loans to individuals and businesses
d.     Institutions that primarily make mortgage loans
e.     None of the above

288.   Open end mutual funds guarantee
a.     Investors a minimum rate of return
b.     Investors a minimum NAV
c.     To redeem investor’s shares upon demand at current NAV
d.     To earn the rate promised in the prospectus

289. A fund has a NAV of $30 per share but the shares are currently selling for $32. This
fund must be
a.    An open ended fund
b.    A closed end fund
c.    A balanced fund
d.    An aggressive growth fund
e.    A money market mutual fund

290.   As compared to purchasing a stock, a no load mutual fund investor will usually get
a.     Commissionless reinvestment opportunities
b.     Better diversification
c.     Free switching between funds within the same family
d.     Lower commissions costs
e.     All of the above
291.   Investors pay load charges to receive
a.     Higher returns on their investments
b.     Additional services from funds
c.     Voting shares of stock
d.     Advice on which fund to buy
e.     12B-1 remunerations

292.   The primary regulator of mutual funds is the
a.     NASD
b.     CFTC
c.     NYSE
d.     SEC
e.     NSMIA

293. Which of the following are true about a Roth IRA?
a.     Contributions are tax deductible
b.     Withdrawals are always taxed
c.     You must begin withdrawals at age 59 ½
d.     Employers match contributions
e.     They are only available to individuals earning less than $95,000, or households
earning less than $150,000

294. A retirement account specifically designed for self-employed persons is a
A. Roth IRA
B. Traditional IRA
C. Keogh
D. Public Pension plan
E. Social Security “Pay as You Go”

295. FI’s management purpose is to
A. Minimize risk to ensure solvency
B. Maximize risk to maximize shareholder return
C. Choose which risks to bear and which to forego
D. Maximize the bank president’s wealth
E. Provide the cheapest loan rates to customers

296. The risk that an unanticipated increase in liability withdrawals may cause an FI to have
to sell assets at fire sale prices is an example of
A. Credit risk
B. Liquidity risk
C. Interest rate risk
D. Sovereign risk
E. Technology risk
297. The risk that a foreign government will suspend public and private debt payments is
A. Credit risk
B. Liquidity risk
C. Interest rate risk
D. Sovereign risk
E. Technology risk

298. Second Bank now offers web banking services. Last week a computer glitch posted all
web deposit transfers to the wrong accounts. This is an example of
A. Credit risk
B. Liquidity risk
C. Technological risk
D. Operational risk

299. Credit risk can be reduced by
A. Screening potential borrowers for credit worthiness
B. Monitoring borrowers conditions after loan origination
C. Making loans to many borrowers instead of to only one or two
D. Requiring collateral to back a loan
E. All of the above

300. A thrift makes long term fixed rate mortgages funded with short term deposits and
then interest rates rise. Which of the following is true?
A. Profitability would decline
B. Profitability would increase
C. The market value of equity increases
D. Interest income would fall

301. If an FI could hedge all its risks, the FI’s shareholders could expect to earn
A. The industry average return
B. The T-Bill rate
C. The same rate as the S&P 500
D. The appropriate rating corporate bond rate
E. A zero rate of return

302. The U.S. decision to freeze Iranian assets during the Iranian hostage crisis of the
Carter Administration is an example of _____ to Iranian FIs.
A. Credit risk
B. Liquidity risk
C. Foreign exchange risk
D. Sovereign risk
E. Insolvency risk

303. CHIPS and ACH are
A. Potato products of Frito Lay
B. Check clearing systems run by the Federal Reserve
C. Retail payment systems used in Europe
D. International bank regulators
E. Wholesale electronic payment systems

304. USE THIS INFORMATION FOR 304 & 305
A corporate customer obtains a $1 million line of credit from a bank. The customer agrees to
pay a 9% interest rate and agrees to make compensating balances of 6% of the total credit line
and 3% of the amount actually borrowed. These will be held in non-interest bearing
transactions deposits at the bank for one year. The bank charges a 1% loan origination fee on
the amount borrowed and a 0.25% commitment fee on the unused line of credit. The
expected draw down (loan amount) is 60% of the line for one year. Reserve requirements are
10%.
304. What is the expected rate of return to the bank (to the nearest basis point)?
A. 12.15%
B. 11.98%
C. 11.51%
D. 11.69%
E. 9.50%

305. What is the expected cost rate to the corporate customer (to the nearest BP)?
A. 12.25%
B. 11.98%
C. 11.51%
D. 11.69%
E. 9.50%

306. Most loan policies specify a maximum loan to value (LTV) ratio on real estate loans.
The LTV is a ratio of
A. Book/market value of the loan
B. Loan amount/borrower’s personal equity
C. Unused credit line/total line of credit
D. Loan/collateral value
E. Loan/maximum amount of consumer debt

307.
     Mortgage        Gross Annual   Projected Monthly Annual Property           Other Debt
     Applicant          Income        Mortgage Pymt.            Taxes            Pymts.
   John             $90,000          $2,100                $3,000             $500
   Bob              $50,000          $1,000                $2,000             $300
   GDS cutoff: 30%
   TDS cutoff: 40%
307. Using only the TDS criteria which one of the following statements is true?
A. John gets the loan but not Bob
B. Bob gets the loan but not John
C. Both get the loan
D. Neither get the loan
308. Individual credit scoring models typically do NOT include:
A. Income
B. Length of time in residence
C. Credit history
D. Age
E. Ethnic background

309. A bank is using the RAROC to evaluate large business loans. The benchmark rate of
return is 12%. The one year loan earns 9% and the bank must pay 8.1% to raise the funds.
Expected losses are 0.4% If the loan defaults, 90% of the money lent will be lost. Based on
historical default rates, the extreme worst loss case scenario is about 5%. Should the bank
make the loan? Why or why not.
A. Yes because the RAROC is 11.11%
B. No because the RAROC is 11.11%
C. Yes because the RAROC is 12.45%
D. No because the RAROC is 12.45%
E. No because the RAROC is less than 8.5%

310. Which one of the following is not an example of purchased liquidity management?
A. Reduction in vault cash
B. Increase in Euro dollar deposits
C. Repurchase agreement
D. Fed funds borrowed
E. Issuance of a negotiable CD

311. If a bank relies solely on purchased liquidity the bank will likely
A. Maintain large amounts of liquid assets
B. Fund its loan commitments with asset sales
C. Be forced to borrow money at short notice
D. Be required to raise equity capital quickly
E. Be forced to liquidate liabilities at fire sale prices

312. Core deposits include all but which one of the following?
A. Retail demand deposits
B. NOW accounts
C. MMDAs
D. Savings accounts
E. Negotiable CDs

313. A bank has a negative repricing gap using a 6 month maturity bucket. Which one of
the following statements is most correct if MMDAs are rate sensitive liabilities?
A. If all interest rates are projected to increase, to limit a profit decline when this occurs, the
bank could encourage its retail deposit customers to switch from 2 year CDs at current rates to
3 month CDs.
B. If all interest rates are projected to decrease, to limit a profit decline when this occurs, the
bank could encourage its retail deposit customers to switch from MMDAs to 2 year CDs at
current rates.
C. If all interest rates are projected to decrease, to limit a profit decline when this occurs, the
bank could encourage its retail deposit customers to switch from MMDAs to 2 year CDs at
current rates.
D. If all interest rates are projected to increase, to limit a profit decline when this occurs, the
bank could encourage its retail deposit customers to switch from 2 year CDs at current rates to
MMDAs.
E. If all interest rates are projected to increase, to limit a profit decline when this occurs, the
bank could encourage its retail deposit customers to switch from MMDAs to 2 year CDs at
current rates.

314. A bank is facing a forecast of rising interest rates. How should they set the repricing
and duration gap?
A. Positive repricing gap and negative duration gap
B. Negative repricing gap and positive duration gap
C. Positive repricing gap and positive duration gap
D. Negative repricing gap and negative duration gap

315. A bank has a negative duration gap. Interest rates decline. Which one of the following
best describes the effects of the interest rate change?
A. The bank’s market value of equity is unchanged since the market value of its assets and
liabilities move in the same direction.
B. The bank’s market value of equity goes up because the market value of its assets goes up
by more than the market value of its liabilities goes down.
C. The bank’s market value of equity goes down because the market value of its assets goes
up by more than the market value of its liabilities goes down.
D. The bank’s market value of equity goes down because the market value of its assets goes
down by more than the market value of its liabilities goes down.
E. The bank’s market value of equity goes down because the market value of its liabilities
increases by more than the market value of its assets increases.

316. With a 9 month maturity bucket, a 3 month loan would be considered a _____ asset
and a 30 year mortgage with a rate adjustment in 6 months would be classified as a _____
asset.
A. Rate sensitive asset; fixed rate asset
B. Rate sensitive asset; rate sensitive asset
C. Fixed rate asset; fixed rate asset
D. Fixed rate asset; rate sensitive asset

317. A bank has a negative repricing gap. This implies that
A. Some RSAs are financed by fixed rate liabilities
B. Some RSLs are financing fixed rate assets
C. Some RSAs are financing equity
D. The bank has no fixed rate assets
318. A bank has three assets. It has $40 million invested in commercial loans with a 6
month duration, $30 million invested in T-Bonds with a 10 year duration and $30 million in
one 1 year maturity T-Bills. What is the duration of the bank’s asset portfolio in years?
A. 2.50 years
B. 3.83 years
C. 2.95 years
D. 3.50 years
E. 11.5 years

319. Which of the following requires daily cash flow settlements between the parties?
A. Forward contract
B. Futures contract
C. Options contract
D. Swap contract

320. A futures contract
A. Is not marked to market.
B. Has significant default risk.
C. Is non-standardized.
D. Is traded over the counter.
E. Is marketable.

321. . The price of a bond falls from par to 98. Even if you do nothing this would still
result in an immediately recognized loss on a ____ on a bond, and a paper gain on a bond
_____.
A. Long forward contract; put option
B. Long futures contract; call option
C. Call option; put option
D. Long futures contract; put option
E. Short forward contract; call option

322. The safest way to hedge a bond asset is to
A. Purchase a call option on the bond
B. Write a call option on the bond
C. Purchase a put option on the bond
D. Write a put option on the bond

323. After 1989 savings institutions have primarily been regulated by:
A. Federal Home Loan Bank Board
B. Federal Deposit Insurance Corporation
C. Office of Thrift Supervision
D. National Credit Union Administration
324. Disintermediation refers to
A. Taking money out of depository institutions
B. Putting money in depository institutions
C. A negative net interest margin
D. Making disparaging remarks about banks and thrifts

325. Regulatory forbearance refers to
A. The creation of the Resolution Trust Corporation
B. Not enforcing existing regulations
C. Regulation Q ceilings on deposit rates
D. The creation of the Office of Thrift Supervision

326. Since the QTL requirement of FIRREA, the majority of assets of savings associations are
A. Mortgage related
B. Commercial loans
C. Consumer loans
D. Consumer checking accounts

327.   The minimum acceptable bond rating for many regulated financial institutions is:
       a.    Aa3 Moody’s; AA- S&P
       b.    A3 Moody’s; A- S&P
       c.    Baa3 Moody’s; BBB- S&P
       d.    Ba3 Moody’s; BB-
       e.    Caa Moody’s; CCC

328.   In comparison to small banks, larger banks typically have
       a.    More equity capital
       b.    Fewer business loans
       c.    Less diversified loan portfolios
       d.    More sources of non-interest income

329. A loan commitment is an off balance sheet _____ and a letter of credit is an off
balance sheet _____.
       a.      Asset; asset
       b.      Liability; liability
       c.      Asset; liability
       d.      Liability; asset

330. Credit unions have several advantages over banks. These include:
I. Credit unions are not taxed
II. Credit unions can collectively pool funds
III. Credit unions are better diversified than banks
A. I only
B. II only
C. III only
D. I and III only
E. I and II only

331.   Core deposits are deposits that are
a.     At the bank solely for the interest rate earned
b.     Very stable funds sources
c.     Typically for larger denominations than hot money sources
d.     Very frequently turned over

332. A bank with a temporary funds deficit could engage in which one of the following to
obtain funds?
a.      Reverse repo
b.      Repo
c.      Lend Fed Funds
d.      Buy T-bills

333.   Deposits at the Federal Reserve are used for all of the following except
a.     To meet legal reserve requirements
b.     To assist in check clearing
c.     To purchase Treasury securities
d.     To earn interest
e.     To facilitate wire transfers

334.   Purchased funds include all but which one of the following?
a.     Brokered deposits
b.     Wholesale CDs
c.     Fed funds purchased
d.     Repurchase agreements
e.     Demand deposits

335.   The primary assets of credit unions are:
a.     Consumer loans and mortgages
b.     Commercial loans and mortgages
c.     Auto loans and checking accounts
d.     Commercial real estate and auto loans

336. Which act eliminated the Federal Home Loan Bank Board (and the FSLIC) and
established the Office of Thrift Supervision?
a.      FDICIA
b.      FIRREA
c.      Riegle-Neal Act
d.      Financial Services Modernization Act
e.      Glass-Steagall Act

337. Which of the following is true?
A. Forward contracts have no default risk
B. Futures contracts require an initial margin requirement be paid
C. Forward contracts are marked to market daily
D. Forward contract buyers and sellers do not know who the counterparty is
E. Futures contracts are only traded over the counter

338. Which one of the following 5 C’s of credit is NOT correctly defined?
A. Capacity – Whether the borrower has enough other credit available to pay off the loan in
the event of cash flow problems.
B. Capital – The borrower’s equity.
C. Character – A measure of the borrower’s intention/willingness to repay the loan.
D. Conditions – Assessing how economic conditions could affect the borrower’s ability to
repay the loan.
E. Collateral – An asset of the borrower which the lender may seize in the event of default on
the loan.

339.
  BALANCE SHEET RUGGERS ENTERPRISES

  Assets                          Liabilities and Equity
  Accounts receivable      75     Current Liabilities      150        Cash Sales      200
  Inventory               125     Long Term Debt           200        Credit Sales    500
  Fixed Assets            400     Common Stock             100        Expenses        600
                                  Retained Earnings        150        Interest        25
     Total                600         Total                600        Taxes           30
                                                                      NI              45

  Peer Average Ratios
  Current Ratio                       1.5
  Days Sales in Receivables           45
  Sales to Working Capital            14
  Sales to Fixed Assets               1.9
  Fixed Charge Coverage Ratio         6
  Debt to Asset Ratio                 50%
  Income to Sales                     17%
339. Altman’s Z-score model is Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5
X1 = Working Capital/Total Assets
X2 = Retained Earnings/Total Asset
X3 = EBIT/Total Assets
X4 = Market Value Equity/Book Value Long Term Debt
X5 = Sales/Total Assets
Using the Altman’s Z model, Ruggers’s Z-score is
A. 3.22
B. 2.45
C. 1.81
D. 3.97
E. None of the above
340. A firm with a low Z-score has high
A. Insolvency risk
B. Interest rate risk
C. Liquidity risk
D. International risk

341. A bank has a positive repricing gap. This implies that
A. Some RSAs are financed by fixed rate liabilities
B. Some RSLs are financing fixed rate assets
C. Some RSAs are financing equity
D. The bank has no fixed rate assets

342. Federal Bank regulators require banks to do all but which one of the following when
banks take a position in forwards and futures for their own account?
A. Establish internal guidelines regarding hedging activity
B. Establish trading limits
C. Disclose large position that materially affect risk to shareholders and investors
D. Obtain shareholder and regulatory approval prior to implementation of a hedging program

343. A homeowner can obtain a $150,000 thirty year fixed rate mortgage at a rate of 8.5%
with zero points or at a rate of 7.75% with 2.75 points.
What is the net present value of paying the points?
A. $10,992
B. $8,368
C. $6,868
D. $3,248
E. -$2,467

344. Plain vanilla interest rate swaps are exchanges of
A. Principle only
B. Interest only
C. Principle and interest
D. Principle and currency
E. Interest rate and currency

345.     The January 31, 2000 ask price quote on a Treasury strip maturing January 1, 2005 is
68:10.   With semi-annual compounding, the ask yield is:
a.       7.77%
b.       7.64%
c.       7.85%
d.       7.70%
e.       7.93%

346.     A banker’s acceptance is:
a.       A time draft drawn on the exporter’s bank.
b.       A method to help importers evaluate the creditworthiness of exporters.
c.     A liability of the importer and the importer’s bank.
d.     An add on instrument.
e.     For greater than 1 year maturity.

347.   Which one of the following statements is NOT true? Commercial paper:
a.     Is an unsecured short term promissory note.
b.     Has a maximum maturity of 270 days.
c.     Is virtually always rated by at least one ratings agency.
d.     Has no secondary market.
e.     Carries above prime interest rates.

348. A 90 day $1 million CD has a 7% annual rate quote. If CD rates fall to 6.5% in 10
days, what would your profit be if you then sold the CD (ignoring commissions and taxes)?:
a.     $1,230
b.     $3,012
c.     $14,444
d.     $2,468
e.     $4,388

349. A person who enters a forward contract to sell British pounds in six months would
worry about the counter party defaulting on the contract if over the next six months:
a.     The dollar depreciated
b.     The pound appreciated
c.     The exchange rate remained unchanged
d.     The NYSE went out of business
e.     The dollar appreciated

350.   The largest source of income at a typical bank is
a.     Interest income on securities held for sale
b.     Interest income on securities held for investment
c.     Interest income on loans and leases
d.     Non-interest income
e.     Dividends on stock

351. A municipal bond is paying a 6% annual coupon. An equivalent risk corporate bond
is paying 7%. Investors in a tax bracket of _____ or higher would prefer the municipal bond.
a.      85.7%
b.      14.28%
c.      19.25%
d.      80.75%
e.      25.75%

352. Major provisions of the Financial Services Modernization Act of 1999 include all of
the following except:
a. Allowing bank holding companies to open insurance underwriting affiliates and vice versa
b. Allowing bank holding companies to open or merge with investment banks
c. Created one regulator to oversee all activities of financial service firms

353. The Glass-Steagall Act prohibited affiliations between commercial and investment
banking activities with three major securities underwriting exemptions. Which one of the
following underwriting activities was not exempted
A. Issues of treasury bills, notes, and bonds
B. Issues of municipal general obligation bonds
C. Private placements of all types
D. Issues of municipal revenue bonds

354. The entire contract between the bondholders and bond issuer is called the _____.
A. Covenant
B. Debenture
C. Indenture
D. Serial
E. Monitor

355. Brady bonds are sometimes converted to _____ when the issuer’s credit rating
improves.
A. Samurai bonds
B. Zombie bonds
C. Bulldog bonds
D. Sovereign bonds
E. Phoenix bonds

356. A _____ is used to help retired people receive monthly income in exchange for the
equity in their home.
A. SAM
B. Equity Participant Mortgage
C. RAM
D. PLAM
E. GEM

359. Which of the following statements about GNMA is/are true?
I. GNMA provides timing insurance.
II. GNMA creates pools of mortgages and issues securities.
III. GNMA insures only FHA, VA and FmHA loans.
IV. GNMA requires that all mortgages in the pool have the same interest rate.

A. I, II , III and IV are true
B. I, III and IV only
C. I, II and III only
D. II, III and IV only
E. III and IV only
360. The advantage of a CMO to an investor over a pass-through is
A. The CMO increases the predictability of the period over which cash flows will be received
B. The CMO reduces credit risk
C. The CMO is not taxable and the pass-through is taxable
D. CMO rates of return are guaranteed

361. An IO holder benefits from _____ than expected prepayments, and a PO holder benefits
from lower than expected _____.
A. Lower; prepayment rates
B. Higher; prepayment rates
C. Lower; interest rates
D. Higher; interest rates


Examples of Problems that could be found as multiple choice questions -
   1.      Suppose the Fed increases reserve requirements from 10% to 12%, thereby
           eliminating $120 million in excess reserves. What is the total change in deposits
           (with no drains)?
   2.      An investor is trying to decide between a muni paying 8% or an equivalent taxable
           corporate paying 10%. What is the minimum marginal tax rate the investor must
           have to consider buying the municipal bond?
   3.      The nominal interest rate is 10%, and the expected inflation rate is 6%. According
           to the Fisher effect, what is the approximate real interest rate?
   4.      If the yield on a one-year zero coupon bond is 10 percent and the yield on a
           two-year zero coupon bond is 12 percent, what is the one year forward rate
           (rounded to the nearest percent)?
   5.      A T-Note with a $1000 par is quoted at 102:18 Bid, 102:20 Ask. What is the clean
           price (i.e., the price that does not include accrued interest) for you to buy this T-
           note?
   6. On June 15, 2002 you purchase a $10,000 par T-Note that matures in 5 years. The
coupon rate is 4% and the price quote is 99:24. The last coupon payment was May 15, 2002
and the next is November 15, 2002 (184 days total). What is the accrued interest?



SHORT ANSWER TYPE QUESTIONS
1. What do you expect the FOMC (Federal Reserve Open Market Committee) to decide
   about interest rates at the next FOMC meeting ? What is the date of the next FOMC
   meeting? What interest rate does the FOMC target? Why?
2. What is the coupon rate and yield on the new ten-year note?
3. Explain the concept of "fair value" for the S&P 500 Index Futures contract.
4. How are coupon rates on newly auctioned U.S. Treasury securities determined?
5. How is a CMO structured?
6. How can a financial institution raise funds in the Repo market?
7. When is the quarterly refunding? What months? What securities?
8. What is an on-the-run Treasury security? What is an Off-the-run Treasury security?
   1.     Deriving Expected Future Rates: Pure Expectations Theory
Time Period         Spot Rate             Forward Rates        Expected Future
 (years)            Yield Curve           of Interest          Single-Year Spot Rates
                                                                      of Interest
       0            7.00%
       1            8.00                         8.0%                 8.0%
       2            8.75                         9.5                  9.5
       3            9.33                         10.5                 10.5
       4            9.79                         11.2                 11.2
       5            10.13                        11.5                 11.5

Using the Spot Rate given above, calculate the two-year spot rates for subsequent years (i.e.,
the two-year rate spanning years two and three, and the two-year spot rate spanning years
three and four.)

				
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