____ require the owner to clip coupons attached to the bonds and send them to the issuer to receive coupon payments.
a. Bearer
b. Registered
c. Treasury
d. Corporate
bearer
The yield to maturity is the annualized discount rate that equates the future coupon and principal payments to the initial proceeds received from the bond offering.
a. True
b. False
true
Note maturities are usually ____, while bond maturities are ____.
a. less than 10 years; 10 years or more
b. 10 years or more; less than 10 years
c. less than 5 years; 5 years or more
d. 5 years or more; less than 5 years
less than 10 years; 10 years or more
Investors in Treasury notes and bonds receive ____ interest payments from the Treasury.
a. Annual
b. Semiannual
c. Quarterly
d. Monthly
semiannual
The Treasury has relied heavily on ____-year bonds to finance the U.S. budget deficit.
a. 50
b. 70
c. 10
d. 5
10
Interest earned from Treasury bonds is
a. exempt from all income tax.
b. exempt from federal income tax.
c. exempt from state and local taxes.
d. subject to all income taxes.
exempt from state and local taxes
Treasury bond auctions are normally conducted only at the beginning of each year.
a. True
b. False
false
____ bids for Treasury bonds specify a price that the bidder is willing to pay and a dollar amount of securities to be purchased.
a. Competitive
b. Noncompetitive
c. Negotiable
d. Non-negotiable
competitive
Treasury bond dealers
a. quote an ask price for customers who want to sell existing Treasury bonds to the dealers.
b. profit from a very wide spread between bid and ask prices in the Treasury securities market.
c. may trade Treasury bonds among themselves
may trade Treasury bonds among themselves
Under the STRIP program created by the Treasury, stripped securities are created and sold by the Treasury.
a. True
b. False
false
Bonds issued by ____ are backed by the federal government.
a. the Treasury
b. AAA-rated corporations
c. state governments
d. city governments
the Treasury
Borrowers who have a lower level of income relative to the periodic loan payments are more likely to default on their mortgages.
a. True
b. False
true
Non-U.S. financial institutions never hold mortgages on U.S. property.
a. True
b. False
false
The ____ market accommodates originators of mortgages that desire to sell their mortgages prior to maturity.
a. primary
b. secondary
c. money
d. none of the above
secondary
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. reinve
interest rate
From the perspective of the lending financial institution, there is a ____ degree of interest rate risk for ____-maturity mortgages.
a. higher; shorter
b. higher; longer
c. lower; shorter
d. lower; higher
e. Answers B and C are correct.
answers b and c are correct
During the early years of a 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.
d. Cannot answer without more information.
most of the monthly payment reflects interest
Which of the following will typically require homeowners to ultimately request a new mortgage?
a. graduated-payment mortgage (GPM)
b. growing-equity mortgage
c. balloon-payment mortgage
d. shared-appreciation mortgage
balloon payment mortgage
Which of the following is not true with respect to a growing-equity mortgage?
a. It is similar to a graduated-payment mortgage.
b. It allows borrowers to initially make small payments on the mortgage.
c. It involves increased payments, on a graduated basi
it involves payments that level off after the first five to ten years of the mortgage
____ economic growth will probably ____ the risk premium on mortgages and ____ the price of mortgages.
a. Strong; decrease; decrease
b. Strong; increase; increase
c. Weak; increase; increase
d. Weak; decrease; increase
e. Weak; decrease; decrease
weak; decrease; increase
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. Credit r
credit risk is affected by all of the above
In a short sale of a home:
a. the lender forecloses and then sells the home for less than what is owed on the mortgage.
b. the lender allows the homeowner to sell the home for less than what is owed on the mortgage.
c. the lender does not recover the full
b and c
An investor in interest-only collateralized mortgage obligations (CMOs) would not be concerned that homeowners will prepay the underlying mortgages.
a. True
b. False
false
The valuation of mortgage-backed securities is difficult because of limited
transparency.
a. True
b. False
true
A(n) _________ problem occurs when a person or institution does not have to bear the full consequence of its behavior and therefore assumes more risk than it otherwise would.
a. asymmetric information
b. moral hazard
c. risk adjustment
d. specific hazard
moral hazard
A __________ is a privately negotiated contract that protects investors against the risk of default on particular debt securities such as mortgage-backed securities.
a. default insurance contract
b. default risk swap
c. credit default swap
d. collateraliz
credit default swap
Speculators sell credit default swaps to benefit from the default of specific subprime mortgages.
a. True
b. False
false
Which of the following statements is incorrect?
a. A stock is a certificate representing partial ownership in a corporation.
b. Like debt securities, common stock is issued by firms to obtain funds.
c. Stocks are issued by corporations to raise short-term
stocks are issued by corporations to raise short term funds
Preferred shareholders
a. typically have the same voting rights as common shareholders.
b. do not share the ownership of the firm with common shareholders.
c. typically participate in the profits of the firm beyond the stated fixed annual dividend.
d. may
may not receive a dividend every year
From a cost perspective, preferred stock is a less desirable source of capital for a firm than bonds.
a. True
b. False
true
A ____ requires that dividends cannot be paid on common stock until all current and previously omitted dividends are paid on preferred stock.
a. residual claim
b. preferred margin
c. cumulative provision
d. liquidation claim
cumulative provision
Firms assume ____ risk when they issue preferred stock than when they issue bonds. The payment of dividends on preferred stock ____ be omitted without the firm being forced into bankruptcy.
a. more; can
b. less; can
c. more; cannot
d. less; cannot
less; can
When a corporation first decides to issue stock to the public, it engages in a(n)
a. secondary offering.
b. initial public offering.
c. seasoned equity offering.
d. none of the above
initial public offering
A firm can best avoid the time lag between registering new securities with the SEC and actually selling them by
a. use of proxy.
b. shelf-registration.
c. use of a margin call.
d. use of preemptive rights.
shelf registration
The process by which the lead underwriter solicits indications of interest by institutional investors in an IPO at various possible ____ prices is referred to as ____.
a. IPO; margin selling
b. offer; secondary market building
c. offer; bookbuilding
d. IP
offer; bookbuilding
Municipal general obligation bonds are ____. Municipal revenue bonds are ____.
a. supported by the municipal government's ability to tax; supported by the municipal government's ability to tax
b. supported by the municipal government's ability to tax; sup
supported by the municipal government's ability to tax; supported by revenue generated from the project
In general, variable-rate municipal bonds are desirable to investors who expect that interest rates will ____.
a. remain unchanged
b. Fall
c. Rise
d. none of the above
rise
Which of the following statements is not true regarding zero-coupon bonds?
a. They are issued at a deep discount from par value.
b. Investors are taxed on the total amount of interest earned at maturity.
c. The issuing firm is permitted to deduct the amor
investors are taxed at the total amount of interest earned at maturity
A variable rate bond allows
a. investors to benefit from declining rates over time.
b. issuers to benefit from rising market interest rates over time.
c. investors to benefit from rising market interest rates over time.
d. none of the above.
investors to benefit from rising market interest rates over time
Corporate bonds that receive a ____ rating from credit rating agencies are normally placed at ____ yields.
a. higher; lower
b. lower; lower
c. higher; higher
d. none of the above
higher; lower
A private bond placement has to be registered with the SEC.
a. True
b. False
false
Which of the following institutions is most likely to purchase a private bond placement?
a. commercial bank
b. mutual fund
c. insurance company
d. savings institution
insurance company
A protective covenant may
a. specify all the rights and obligations of the issuing firm and the bondholders.
b. require the firm to retire a certain amount of the bond issue each year.
c. restrict the amount of additional debt the firm can issue.
d. none
restrict the amount of additional debt the firm can issue
A call provision on bonds normally
a. allows the firm to sell new bonds at par value.
b. gives the firm to sell new bonds above market value.
c. allows the firm to sell bonds to the Treasury.
d. allows the firm to buy back bonds that it previously issued.
allows the firm to buy back bonds that it previously issued
When would a firm most likely call bonds?
a. after interest rates have declined
b. if interest rates do not change
c. after interest rates increase
d. just before the time at which interest rates are expected to decline
after interest rates have declined
Assume U.S. interest rates are significantly higher than German rates. A U.S. firm with a German subsidiary could achieve a lower financing rate, without exchange rate risk by denominating the bonds in
a. dollars.
b. euros and making payments from U.S. he
euros and making payments from its German subsidiary
Many bonds have different call prices: a higher price for calling the bonds to meet sinking-fund requirements and a lower price if the bonds are called for any other reason.
a. True
b. False
false
Bonds that are not secured by specific property are called
a. a chattel mortgage.
b. open-end mortgage bonds.
c. debentures.
d. blanket mortgage bonds.
debentures
Bonds that are secured by personal property are called
a. chattel mortgage bonds.
b. first mortgage bonds.
c. second mortgage bonds.
d. debentures.
chattel mortgage bonds
The coupon rate of most variable-rate bonds is tied to
a. the prime rate.
b. the discount rate.
c. LIBOR.
d. the federal funds rate.
LIBOR
Assume that you purchased corporate bonds one year ago that have no protective covenants. Today, it is announced that the firm that issued the bonds plans a leveraged buyout. The market value of your bonds will likely ____ as a result.
a. Rise
b. Decline
decline
During weak economic periods, newly issued junk bonds require lower risk premiums than in strong economic periods.
a. True
b. False
false
____ bonds have the most active secondary market.
a. Treasury
b. Zero-coupon corporate
c. Junk
d. Municipal
Treasury
Some bonds are "stripped," which means that
a. they have defaulted.
b. the call provision has been eliminated.
c. they are transferred into principal-only and interest-only securities.
d. their maturities have been reduced.
they are transferred into principal-only and interest-only securities
____ are not primary purchasers of bonds.
a. Insurance companies
b. Finance companies
c. Mutual funds
d. Pension funds
finance companies
Leveraged buyouts are commonly financed by the issuance of:
a. money market securities.
b. Treasury bonds.
c. corporate bonds.
d. municipal bonds.
corporate bonds
When firms issue ____, the amount of interest and principal to be paid is based on specified market conditions. The amount of the repayment may be tied to a Treasury bond price index or even to a stock index.
a. auction-rate securities
b. structured notes
structured notes
Which of the following statements is true regarding STRIPS?
a. they are issued by the Treasury
b. they are created and sold by various financial institutions
c. they are not backed by the U.S. government
d. they have to be held until maturity
e. all of th
they are created and sold by various financial institutions
Which of the following is not true regarding zero-coupon bonds?
a. They are issued at a deep discount from par value.
b. Investors are taxed annually on the amount of interest earned, even though the interest will not be received until maturity.
c. The is
all of the above
Which of the following is not true regarding the call provision?
a. It typically requires a firm to pay a price above par value when it calls its bonds.
b. The difference between the market value of the bond and the par value is called the call premium.
c
the difference between the market value of the bond and the par value is called the call premium
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
d. none of the above
decline; more
Which of the following would not be a likely example of a protective covenant provision?
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
a call feature
Bonds are issued in the primary market through a telecommunications network.
a. True
b. False
true
Corporate bonds can be placed with investors through a public offering or a private placement.
a. True
b. False
true
When a corporation issues bonds, it normally hires a securities firm that targets large institutional investors such as pension funds, bond mutual funds, and insurance companies.
a. True
b. False
true
Rule 144A, which allows small individual investors to trade privately-placed bonds (and some other securities) with each other without requiring that the firms that issued the securities to register them with the SEC.
a. True
b. False
false
Rule 144A creates liquidity for securities that are privately placed.
a. True
b. False
true
Corporate bonds are more standardized than stocks.
a. True
b. False
false
Structured notes are issued by firms to borrow funds, and the repayment of interest and principal is based on specified market conditions.
a. True
b. False
true
Bonds issued by large well-known corporations in large volume are illiquid because most buyers hold these bonds until maturity.
a. True
b. False
false
The bond market is served by bond dealers, who can play a broker role by matching up buyers and sellers.
a. True
b. False
true
Bond dealers do not have an inventory of bonds.
a. True
b. False
false
Bond dealers specialize in small transactions (less than $100,000) in order to enable small investors to trade bonds.
a. True
b. False
false
Many bonds are listed on the New York Stock Exchange (NYSE).
a. True
b. False
true
The primary investors in bond markets are institutional investors such as commercial banks, bond mutual funds, pension funds, and insurance companies.
a. True
b. False
true
The key difference between a note and a bond is that note maturities are usually less than one year, while bond maturities are one year or more.
a. True
b. False
false
Treasury bonds are issued by state and local governments.
a. True
b. False
false
Stripped bonds are bonds whose cash flows have been transformed into a security representing the principal payment only and a security representing interest payments only.
a. True
b. False
true
Inflation-indexed Treasury bonds are intended for investors who wish to ensure that the returns on their investments keep up with the increase in prices over time.
a. True
b. False
true
Savings bonds are bonds issued by the Federal Reserve.
a. True
b. False
false
Corporate bonds usually pay interest on an annual basis.
a. True
b. False
false
The bond debenture is a legal document specifying the rights and obligations of both the issuing firm and the bondholders.
a. True
b. False
false
A sinking-fund provision is a requirement that the issuing firm retire a certain amount of the bond issue each year.
a. True
b. False
true
Subordinated indentures are debentures that have claims against the firm's assets that are junior to the claims of both mortgage bonds and regular debentures.
a. True
b. False
false
High-risk bonds are called trash bonds.
a. True
b. False
false
Zero-coupon bonds do not pay interest. Instead, they are issued at a discount from par value.
a. True
b. False
true
If interest rates suddenly decline, those existing bonds that have a call feature are less likely to be called.
a. True
b. False
false
Which of the following statements is not true regarding STRIPS?
a. They are not issued by the Treasury.
b. They are created and sold by various financial institutions.
c. They are backed by the U.S. government.
d. They have to be held until maturity.
e. A
they have to be held until maturity
Which of the following is not an example of a municipal bond?
a. general obligation bond
b. revenue bond
c. Treasury bond
d. All of the above are examples of municipal bonds.
treasury bond
Which of the following statements is incorrect?
a. The municipal bond must pay a risk premium to compensate for the possibility of default risk.
b. The Treasury bond must pay a slight premium to compensate for being less liquid than municipal bonds.
c. Th
The Treasury bond must pay a slight premium to compensate for being less liquid than municipal bonds
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 appo
the appointment of a trustee in all bond indentures
Everything else being equal, which of the following bond ratings is associated with the highest yield?
a. Baa
b. A
c. Aa
d. Aaa
Baa
A ____ has first claim on specified assets, while a ____ is a debenture that has claims against a firm's assets that are junior to the claims of mortgage bonds and regular debentures.
a. first mortgage bond; second mortgage bond
b. first mortgage bond; de
first mortgage bond; subordinated deventure
If a firm believes that it will have sufficient cash flows to cover interest payments, it may consider using ____ debt and ____ equity, which implies a ____ degree of financial leverage.
a. more; less; lower
b. more; less; higher
c. less; more; higher
d.
more; less; higher
The yield to investors on Treasury bonds reflects the risk-free rate because these bonds are virtually free from credit (default) risk.
a. True
b. False
true
The issuance of municipal securities is regulated by:
a. the Securities and Exchange Commission.
b. the Consumer Financial Protection Bureau.
c. their respective state governments.
d. the Federal Reserve.
their respective state government
For bonds issued under a _______ arrangement, the underwriter guarantees the issuer that the bonds will be sold at a specified price.
a. specific value
b. fixed proceeds
c. best efforts
d. firm commitment
firm commitment
For bonds issued under a _______ arrangement, the underwriter attempts to sell the bonds at a specified price but makes no guarantee to the issuer.
a. floating value
b. variable proceeds
c. best efforts
d. firm commitment
best efforts
Which of the following eurozone countries has not recently experienced debt repayment problems?
a. Finland
b. Greece
c. Portugal
d. Spain
Finland
The Financial Reform Act of 2010 established the __________ to provide oversight for credit rating agencies.
a. Federal Ratings Bureau
b. Office of Credit Ratings
c. Office of Agency Supervision
d. Ratings Oversight Commission
Office of Credit Ratings
A credit rating agency is paid by:
a. the purchasers of the bonds that the agency rates.
b. the issuers of the bonds that the agency rates.
c. the taxpayers, because the rating agencies are government agencies.
d. the New York Stock Exchange or the over-t
the issuers of the bonds that the agency rates
All of the bonds issued by a particular company will have the same maturity, price, and credit rating.
a. True
b. False
false
When purchasing bonds, individual investors can use a ________ to specify the maximum price they are willing to pay for a bond.
a. limit order
b. market order
c. stop order
d. price order
limit order
Online bond brokerage services offer several advantages including:
a. pricing is more transparent because investors can easily compare bid and ask spreads.
b. some services charge commissions, which may be more easily understood than bid and ask spreads.
all of the above
Mortgage-backed securities are commonly contained within collateralized debt obligations.
a. True
b. False
true
Federally insured mortgages guarantee
a. loan repayment to the lending financial institution.
b. that the interest rate will not increase during the life of the mortgage.
c. the lending financial institution a selling price for the mortgage in the seconda
loan repayment to the lending financial institution
At a given point in time, the interest rate offered on a new fixed-rate mortgage is typically ____ the initial interest rate offered on a new adjustable-rate mortgage.
a. Below
b. Above
c. equal to
d. all of the above are very common
above
An institution that originates and holds a fixed-rate mortgage is adversely affected by ____ interest rates; the borrower who was provided the mortgage is adversely affected by ____ interest rates.
a. stable; decreasing
b. increasing; stable
c. increasing
increasing; decreasing
Rates for adjustable-rate mortgages are commonly tied to the
a. average prime rate over the previous year.
b. Fed's discount rate over the previous year.
c. average Treasury bill rate over the previous year.
d. average Treasury bond rate over the previous
average Treasury bill rate over the previous year
Caps on mortgage rate fluctuations with adjustable-rate mortgages (ARMs) are typically
a. 2 percent per year and 5 percent for the mortgage lifetime.
b. 5 percent per year and 15 percent for the mortgage lifetime.
c. 0 percent per year and 10 percent for
2 percent per year and 5 percent for the mortgage lifetime
From the perspective of the lending financial institution, interest rate risk is
a. lower on a 30-year fixed-rate mortgage than on a 15-year fixed-rate mortgage.
b. lower on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage.
c. higher on
lower on a 15 year fixed rate mortgage than on a 30 year fixed rate mortgage
Mortgage companies specialize in
a. purchasing mortgages originated by other financial institutions.
b. investing and maintaining mortgages that they create.
c. originating mortgages and selling those mortgages.
d. borrowing money through the creation of
originating mortgages and selling those mortgages
For any given interest rate, the shorter the life of the mortgage, the ____ the monthly payment and the ____ the total payments over the life of the mortgage.
a. greater; greater
b. greater; lower
c. lower; greater
d. lower; lower
greater; lower
A financial institution has a higher degree of interest rate risk on a ____ than a ____.
a. 30-year fixed-rate mortgage; 15-year fixed-rate mortgage
b. 30-year variable-rate mortgage; 30-year fixed-rate mortgage
c. 15-year fixed-rate mortgage; 30-year fix
30 year fixed rate mortgage; 15 year fixed rate mortgage
A balloon-payment mortgage requires interest payments for a 10- to 20-year period, at the end of which the borrower must pay the full amount of the principal.
a. True
b. False
false
A mortgage that requires interest payments for a three- to five-year period, then full payment of principal, is a(n)
a. chattel mortgage.
b. balloon payment mortgage.
c. variable-rate mortgage.
d. open-ended mortgage bond.
balloon payment mortgage
In an amortization schedule of monthly mortgage payments
a. the amount of interest in each payment is equal to the principal paid.
b. interest payments exceed principal payments early on.
c. principal payments exceed interest payments early on.
d. B and C
interest payments exceed principal payments early on
A mortgage with low initial payments that increase over time without ever leveling off is a
a. graduated payment mortgage.
b. growing-equity mortgage.
c. second mortgage.
d. shared-appreciation mortgage.
growing equity mortgage
The interest rate on a second mortgage is ____ on a first mortgage created at the same time, because the second mortgage is ____ the existing first mortgage in priority claim against the property in the event of default.
a. higher than; behind
b. equal to
higher than; behind
Which of the following mortgages allows the home purchaser to obtain a mortgage at a below-market interest rate throughout the life of the mortgage?
a. second mortgage
b. growing-equity mortgage
c. graduated payment mortgage
d. shared-appreciation mortgag
shared application mortgage
A ____ mortgage allows the borrower to initially make small payments on the mortgage. The payments then increase over the first 5 to 10 years and then level off.
a. graduated payment mortgage
b. growing-equity mortgage
c. second mortgage
d. shared-appreci
graduated payment mortgage
Mortgage companies, commercial banks and savings institutions are the primary originators of mortgages.
a. True
b. False
true
____ was created in 1968 as a corporation that is wholly owned by the federal government. It guarantees payment on mortgages that meet specific criteria.
a. Freddie Mac
b. Ginnie Mae
c. Fannie Mae
d. None of the above
Ginnie Mae
Securitization" refers to the private insurance of conventional mortgages.
a. True
b. False
false
A financial institution may service a mortgage even after selling it.
a. True
b. False
true
The difference between the 30-year mortgages rate and the 30-year Treasury bond rate is primarily attributable to
a. interest rate risk.
b. reinvestment rate risk.
c. credit risk.
d. insurance risk.
credit risk
Mortgage prices would normally be expected to ____ when the interest rates ____, holding other factors constant.
a. increase; increase
b. decrease; decrease
c. increase; decrease
d. none of the above
increase; decrease
Collateralized mortgage obligations (CMOs) are generally perceived to have
a. no prepayment risk but some default risk.
b. no prepayment risk and no default risk.
c. the same interest rate risk as money market securities.
d. a high degree of prepayment ri
a high degree of prepayment risk
Mortgage prices are subject to
a. interest rate risk.
b. credit risk.
c. prepayment risk.
d. all of the above.
all of the above
During a weak economy, the credit risk to a financial institution from investing in mortgage-backed securities representing subprime mortgages is ____ than that of mortgage-backed securities representing prime mortgages.
a. equal to
b. slightly less than
more than
____ are backed by conventional mortgages.
a. Ginnie Mae mortgage-backed securities
b. Federal Reserve mortgage-backed securities
c. Private-label pass-through securities
d. Shared appreciation pass-through securities
private label pass through securities
Which of the following is not a guarantor of federally insured mortgages?
a. the Federal Housing Administration (FHA)
b. the Veteran's Administration (VA)
c. the Federal Deposit Insurance Corporation (FDIC)
d. all of the above are guarantors of federally
the FDIC
____ economic growth will probably ____ the risk premium on mortgages and ____ the price of mortgages.
a. Strong; increase; decrease
b. Strong; increase; increase
c. Weak; decrease; increase
d. Weak; increase; increase
e. Weak; decrease; decrease
weak; decrease; increase
A ____ mortgage allows borrowers to initially make small payments on the mortgage, which are then increased on a graduated basis over the first five to ten years; payments then level off from there on.
a. balloon-payment
b. graduated-payment
c. shared-app
graduated payment
The adjustable-rate mortgage creates uncertainty for the ____ profit margin, but reduces the uncertainty for the ____.
a. originator's; borrower
b. borrower's; originator
c. government's; originator
d. none of the above
borrower's; originator
When financial institutions originate residential mortgages, the mortgage contract should 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 mor
the mortgage contract should specify all of the above
Which of the following is not a common type of mortgage-backed security according to your text?
a. participation certificates (PCs)
b. collateralized mortgage obligations (CMOs)
c. balloon-payment mortgage certificates
d. private-label pass-through securi
balloon payment mortgage certificates
____ risk is the risk that a borrower may prepay the mortgage in response to a decline in interest rates.
a. Interest rate
b. Credit
c. Prepayment
d. Reinvestment rate
prepayment
Mortgage-backed securities are assigned ratings by:
a. rating agencies.
b. the Treasury.
c. the Fed.
d. the mortgage originator.
rating agencies
In a collateralized mortgage obligation (CMO), mortgages are segmented into ____ (or classes).
a. balloon payments
b. Caps
c. Tranches
d. Strips
tranches
The credit crisis is mostly attributed to the use of:
a. strict criteria applied by mortgage originators.
b. liberal criteria applied by mortgage originators.
c. very tough credit ratings applied to mortgages.
d. fixed-rate mortgages with long terms to ma
liberal criteria applied by mortgage originators
Fannie Mae and Freddie Mac experienced financial problems during the credit crisis because they:
a. were unwilling to finance new mortgages.
b. invested heavily in balloon mortgages.
c. invested only in prime mortgages that offered very low returns.
d. in
invested heavily in subprime mortgages
____ mortgages enabled more people with relatively lower income, or high existing debt, or a small down payment to purchase homes.
a. Prime
b. Balloon
c. Amortized
d. Subprime
subprime
The secondary mortgage market that accommodates originators of mortgages who desire to sell their mortgages before maturity.
a. True
b. False
true
Regardless of what happens to market interest rates, most adjustable-rate mortgages (ARMs) specify a maximum allowable fluctuation in the mortgage rate per year and over the mortgage life.
a. True
b. False
true
Some adjustable-rate mortgages (ARMs) contain an option clause that allows mortgage holders to switch to a fixed-rate mortgage within a specified period.
a. True
b. False
true
Mortgage lenders normally charge a higher initial interest rate on adjustable-rate mortgages than on fixed-rate mortgages.
a. True
b. False
false
A balloon-payment mortgage requires interest payments for a three- to five-year period. At the end of this period, full payment of the principal (the balloon payment) is required.
a. True
b. False
true
During the early years of a mortgage, most of the monthly payment reflects principal.
a. True
b. False
false
Mortgages are rarely sold in the secondary market.
a. True
b. False
false
An increase in either the risk-free rate or the risk premium on a fixed-rate mortgage results in a higher required rate of return when investing in the mortgage and therefore causes mortgage prices to decrease.
a. True
b. False
true
Strong economic growth tends to reduce the probability that the issuer of a mortgage will default on its debt payments and therefore tends to decrease mortgage prices.
a. True
b. False
false
The higher the level of equity invested by the borrower, the higher the probability that the loan will default.
a. True
b. False
false
To the extent that shares sold during an IPO are discounted from their appropriate price, the proceeds that the issuing firm receives from the IPO are less than it deserves.
a. True
b. False
true
The transaction costs to the issuing firm in an IPO is usually ____ percent of the funds raised.
a. 1
b. 3
c. 7
d. 25
7
If many investors quickly sell an IPO stock in the secondary market, there will be ____ on the stock's price.
a. upward pressure
b. downward pressure
c. no additional pressure
d. none of the above
downward pressure
The purpose of a lockup provision is to
a. keep individual investors from buying and selling stock.
b. prevent downward pressure on the stock's price.
c. increase the number of outstanding shares.
d. allocate a larger proportion of stock to institutional
prevent downward pressure on the stock's price
When the lockup period expires, the share price commonly
a. remains unchanged.
b. increases significantly.
c. decreases significantly.
d. none of the above
decreases significantly
IPOs tend to occur more primarily during recessions.
a. True
b. False
false
The initial (one-day) return of IPOs in the United States has averaged about ____ percent over the last 30 years.
a. 10
b. 20
c. 30
d. 50
20
The practice of purchasing IPO stock at the offer price and selling the stock shortly afterward is called
a. flipping.
b. skiing.
c. flopping.
d. none of the above
flipping
____ occurs when a securities firm allocates share from an IPO to corporate executives who may be considering an IPO or other business that will require the help of an investment bank.
a. Flipping
b. Spinning
c. Laddering
d. None of the above
spinning
When brokers encourage investors to place bids for IPO shares on the first day that are above the offer price this is referred to as
a. flipping.
b. spinning.
c. laddering.
d. none of the above
laddering
On average, IPOs of firms tend to perform ____ over a period of a year or longer.
a. Well
b. Poorly
c. about the same as the S&P 500 index
d. none of the above
poorly
A firm that wants to engage in a secondary stock offering does not need to file the offering with the SEC.
a. True
b. False
false
A firm will typically attempt to sell shares from a secondary offering
a. far below the prevailing market price.
b. far above the prevailing market price.
c. at the prevailing market price.
d. at the offer price of the IPO.
at the prevailing market price
Buy and sell orders on the OTC market are completed by
a. auction on the trading floor.
b. sealed competitive bids.
c. noncompetitive bids.
d. a telecommunications network.
a telecommunications network
A(n) ____ is a certificate which represents ownership of a foreign stock.
a. ADR
b. SEAQ
c. Nasdaq
d. AMEX
ADR
The first-time issuance of shares by a specific firm to the public is referred to as a(n)
a. stock repurchase.
b. secondary stock offering.
c. initial rights issue.
d. initial public offering (IPO).
initial public offering
A new stock issuance by a specific firm that already has stock outstanding is referred to as a(n)
a. stock repurchase.
b. secondary stock offering.
c. initial rights issue.
d. initial public offering (IPO).
secondary stock offering
Managers of firms may consider a stock repurchase or even a leveraged buyout when they believe their stock is ____ by the market, or a secondary stock offering when they believe their stock is ____ by the market.
a. undervalued; undervalued
b. overvalued;
undervalued; overvalued
The largest organized exchange, listing the largest firms, is the
a. New York Stock Exchange.
b. American Stock Exchange.
c. Midwest Stock Exchange.
d. Pacific Stock Exchange.
NYSE
____ are employed by brokerage firms and execute orders for clients on the floor of the NYSE.
a. Specialists
b. Commission brokers
c. Independent brokers
d. Dealers
independent brokers
The OTC market does not have a trading floor.
a. True
b. False
true
Firms listed as "pink sheets" on the OTC market
a. are typically very large.
b. satisfy Nasdaq's listing requirements.
c. are typically owned by various institutional and individual investors.
d. none of the above
none of the above
The prevailing price per share divided by the firm's earnings per share is known as the
a. dividend yield.
b. price-earnings ratio.
c. fully diluted earnings per share.
d. annual dividend.
price earnings ratio
The ____ is a value-weighted average of stock prices of 30 large U.S. firms.
a. Dow Jones Industrial Average
b. Standard and Poor's 500
c. New York Stock Exchange Index
d. Nasdaq
Dow Jones Industrial Average
The ____ is a value-weighted index of stock prices of 500 large U.S. firms.
a. Dow Jones Industrial Average
b. Standard and Poor's 500
c. New York Stock Exchange Index
d. Nasdaq
Standard and Poor's 500
Sudden favorable news about the performance of a firm will make investors believe that the firm's stock is ____ at its prevailing price.
a. Overvalued
b. Fixed
c. appropriate
d. undervalued
undervalued
Analysts periodically communicate with high-level managers of the firms whose stock they rate.
a. True
b. False
true
Shareholders can most easily measure a firm's performance by monitoring changes in its ____ over time.
a. share price
b. employee job descriptions
c. board of directors
d. asset size
share price
Which of the following is not true regarding the Sarbanes-Oxley Act?
a. It attempts to force accountants to conform to regular accounting standards in preparing a firm's financial statements.
b. It requires that only outside board members of a firm be on
it allows public accounting firms to offer nonaudit consulting services to an audit client whether the client's audit committee preapproves the nonaudit services or not
An example of shareholder activism is
a. communication with the firm.
b. engaging in a proxy contest.
c. filing a lawsuit against the board.
d. all of the above
all of the above
____ are acquisitions that require substantial amounts of borrowed funds.
a. Stock repurchases
b. Corporate controls
c. Leveraged buyouts
d. Stock splits
leveraged buyouts
____ are not barriers to corporate control to eliminate agency problems.
a. Leveraged buyouts
b. Antitakeover amendments
c. Poison pills
d. Golden parachutes
leveraged buyouts
Listing stock on a foreign stock exchange
a. enhances the stock's liquidity.
b. may increase the firm's perceived financial standing.
c. may protect a firm against hostile takeovers.
d. all of the above
all of the above
American Depository Receipts (ADRs) are similar to
a. stock options.
b. bank deposits.
c. stocks.
d. bonds.
stocks
____ are portfolios of international stocks created and managed by various financial institutions.
a. International mutual funds
b. American Depository Receipts
c. Exchange rate options
d. Initial Public Offerings
international mutual funds
____ sell shares to investors and use the proceeds to invest in portfolios of international stocks created and managed by portfolio managers.
a. International mutual funds
b. American Depository Receipts
c. World Equity Depository Receipts
d. Initial Publ
international mutual funds
When a firm buys some of its shares that it had previously issued, this is referred to as a:
a. reverse IPO.
b. leveraged buyout.
c. ladder spin.
d. stock repurchase.
stock repurchase
Whenever _____, the stock price will be driven up.
a. supply exceeds demand
b. demand exceeds supply
c. demand is reduced
d. none of the above
demand exceeds supply
Which of the following is not a form of shareholder activism?
a. investors communicating their concerns to other investors in an effort to place more pressure on the firm's managers or its board members
b. poison pills
c. shareholder lawsuits
d. all of th
poison pills
Initial public offerings (IPOs) tend to occur more frequently during bearish (weak) stock markets.
a. True
b. False
false
Initial public offerings (IPOs) perform ____ on the day following the IPO and ____ for periods of a year or longer after the IPO.
a. well; poorly
b. poorly; well
c. well; well
d. poorly; poorly
well; poorly
Which of the following is not a part of the over-the-counter market?
a. the Nasdaq National Market
b. the Nasdaq Small Cap Market
c. the OTC Bulletin Board
d. the New York Stock Exchange
NYSE
If the secondary market is inactive, then the shares would be illiquid.
a. True
b. False
true
Private firms that need a large equity investment but are not yet in a position to go public may attempt to obtain funding from a venture capital (VC) fund.
a. True
b. False
TRUE
Venture capital (VC) funds receive money from wealth investors and from pension funds that need to receive their money back in one year or less.
a. True
b. False
false
Venture capital (VC) funds commonly serve as advisors to the businesses in which they invest.
a. True
b. False
true
Venture capital (VC) funds usually invest in publicly-traded businesses.
a. True
b. False
false
Venture capital (VC) funds typically plan to exit from their original investment within a period of about one year.
a. True
b. False
false
The phrase "leaving money on the table" refers to investors who pay more for a stock in the secondary market than was paid by those investors who were able to buy shares at the initial (offer) price on the IPO date.
a. True
b. False
false
Underwriters sell most or all of the shares of an IPO to institutional investors.
a. True
b. False
true
The total cost of engaging in an IPO is usually about 1 percent of the total proceeds.
a. True
b. False
false
Since the Sarbanes-Oxley Act of 2002, the initial returns resulting from an IPO have generally been smaller.
a. True
b. False
true
In general, secondary offerings cause an immediate increase in the market price of the stock.
a. True
b. False
false
Electronic stock exchanges that execute stock transactions electronically are referred to as electronic communications networks (ECNs).
a. True
b. False
true
As a result of the Sarbanes-Oxley Act, firms were able to reduce their costs of compiling and reporting financial information.
a. True
b. False
true
The legal protection of shareholders varies substantially among countries.
a. True
b. False
true
Common law countries such as the U.S., Canada, and the United Kingdom allow for more legal protection than civil law countries such as France or Italy.
a. True
b. False
true
The government enforcement of securities laws varies among countries.
a. True
b. False
true
The laws of the financial information that must be provided by public companies is similar among all developed countries.
a. True
b. False
false
Electronic communications networks (ECNs) are passive funds that track a specific index.
a. True
b. False
false
A venture capital fund typically plans to exit from its original investment within about four to seven years.
a. True
b. False
true
Venture capital funds typically take over businesses and manage them.
a. True
b. False
false
Normally, only the owners of preferred stock are permitted to vote on certain key matters concerning the firm, such as the election of the board of directors.
a. True
b. False
false
If investors become dissatisfied with a firm's performance, they can compete with management in soliciting proxy votes in what is known as a proxy fight.
a. True
b. False
true
Initial public offerings (IPOs) tend to occur more frequently during bullish stock markets.
a. True
b. False
true
According to financial research, there is evidence that the stock price associated with an IPO typically rises on the first day but then declines over time.
a. True
b. False
true
Shelf-registration allows firms quick access to funds without repeatedly being slowed by the registration process.
a. True
b. False
true
In addition to the Nasdaq market, the OTC market has another segment known as "pink sheets," where smaller stocks are traded.
a. True
b. False
true
The Dow Jones Industrial Average (DJIA) is a value-weighted average of stock prices of 30 large U.S. firms.
a. True
b. False
true
Research studies have found that the share prices of target firms and of acquiring firms react very positively to announcements of an acquisition.
a. True
b. False
false
If managers believe that their firm's stock price is weak because it is undervalued by the market, they may consider repurchasing a portion of the shares that are outstanding.
a. True
b. False
true
International exchange-traded funds (ETFs) represent international indexes that reflect composites of stocks for particular countries; shares of the index can be purchased or sold, thereby allowing investors to invest directly in a stock index representin
true
Which of the following is not true with respect to venture capital (VC) funds?
a. When a VC fund decides to invest in a business, it will negotiate the terms of its investment, including the amount of funds it is willing to invest.
b. One common exit stra
one common exit strategy for VC funds is to sell its equity stake to the public before the business engages in a public stock offering
The owners of common stock are permitted to vote on the
a. election of the board of directors.
b. authorization to issue new shares of common stock.
c. approval of amendments to the corporate charter.
d. adoption of bylaws.
e. all of the above
all of the above
Which of the following is not true with respect to preferred stock?
a. Preferred stock usually does not allow for significant voting rights.
b. If the firm does not have sufficient earnings from which to pay the preferred stock dividends, the preferred sh
if the firm does not have sufficient earnings from which to pay the preferred stock dividends, the preferred shareholders may force the firm into bankruptcy
Which of the following is false with respect to initial public offerings (IPOs)?
a. IPOs are first-time offerings of shares by a specific firm to the public.
b. Normally, a firm planning an IPO will hire a securities firm to recommend the amount of stock
owners of firms that engage in IPOs are normally required to retain their shares for at least 3 years before selling them in the secondary market
To discourage flipping, some securities firms make ____ shares of future IPOs available to institutional investors that retain shares for a ____ period of time.
a. fewer; long
b. more; short
c. more; long
d. Answers A and B are correct.
more; long
There is strong evidence that IPOs of firms perform ____ on average over a period of a year or longer.
a. Well
b. Poorly
c. very well relative to other firms in their industry
d. none of the above
poorly
Firms are more willing to issue new stock in a secondary stock offering when the market price of their outstanding shares is relatively
a. high.
b. low.
c. either high or low, depending on the overall market.
d. none of the above
high
Pink sheets" are traded on the
a. New York Stock Exchange.
b. American Stock Exchange.
c. over-the-counter market.
d. Nasdaq market.
over the counter market
Which of the following is not a provision specified in the Sarbanes-Oxley Act?
a. It requires that only inside board members of a firm be on the firm's audit committee.
b. It prevents the members of a firm's audit committee from receiving consulting or ad
It requires that only inside board members of a firm be on the firm's audit committee
Which of the following is not a form of shareholder activism?
a. proxy contests
b. antitakeover amendments
c. shareholder lawsuits
d. all of the above are forms of shareholder activism
antitakeover amendments
Which of the following is not a barrier to corporate control?
a. antitakeover amendments
b. proxy contests
c. poison pills
d. golden parachutes
e. all of the above are barriers to corporate control
proxy contests
Possible disadvantages of private stock exchanges to investors include:
a. only large institutional investors may purchase shares in privately listed stocks
b. required disclosures may be less than those required when a firm goes public.
c. trading volume
b and c
After an IPO, firms commonly list their shares on a private stock exchange.
a. True
b. False
false
Managers protected by golden parachutes may be more willing to make decisions that increase the company's earnings in the long run, even though the decisions adversely affect the stock price in the short run.
a. True
b. False
true
A firm whose stock price has risen:
a. will not have to pay a premium if it acquires another firm.
b. has an incentive to use its stock as currency to acquire the shares of a target firm.
c. is likely to be a candidate for a leveraged buyout.
d. is likely
has an incentive to use its stock as currency to acquire the shares of a target firm
Most individual investors attend road shows of firms that are about to go public before they purchase shares at the time of an IPO.
a. True
b. False
false
When a corporation makes a secondary offering, it may direct sales of the stock to its existing shareholders by giving them:
a. preemptive rights.
b. limit orders.
c. subscription rights.
d. presumptive rights.
preemptive rights
When a firm goes public and issues stock in the primary market:
a. the equity investment in the firm declines.
b. the firm's debt level increases.
c. the number of the firm's owners increases.
d. A and C
the number of the firm's owners increases
At any given point in time, the price at which banks will buy a currency is ____ the price at which they sell it.
a. higher than
b. lower than
c. the same as
d. none of the above
lower than
Which of the following is most likely to provide currency forward contracts to their customers?
a. commercial banks
b. international mutual funds
c. brokerage firms
d. insurance companies
commercial banks
The ____ allowed for the devaluation of the dollar in 1971.
a. Bretton Woods Agreement
b. Louvre Accord
c. Smithsonian Agreement
d. none of the above
Smithsonian Agreement
The Bretton Woods Era was the era
a. of free-floating exchange rates.
b. of floating rates without boundaries, but subject to government intervention.
c. in which governments maintained exchange rates within 1 percent of a specified rate.
d. in which exch
in which governments maintained exchange rates within 1 percent of a specified rate
A system whereby exchange rates are market determined without boundaries but subject to government intervention is called
a. a dirty float.
b. a free float.
c. the gold standard.
d. the Bretton Woods era.
a dirty float
A system whereby one currency is maintained within specified boundaries of another currency or unit of account is a
a. pegged system.
b. free float.
c. dirty float.
d. managed float.
a pegged system
A country that pegs its currency is still able to maintain complete control over its local interest rates.
a. True
b. False
false
If the demand for British pounds ____, the pound will ____, other things being equal.
a. increases; appreciate
b. decreases; appreciate
c. increases; depreciate
d. B and C
increases; appreciate
A(n) ____ in the supply of euros for sale will cause the euro to ____.
a. increase; appreciate
b. increase; depreciate
c. decrease; depreciate
d. none of the above
increase; depreciate
Beginning with an equilibrium situation, if European inflation suddenly ____ than U.S. inflation, this forced ____ pressure on the value of the euro.
a. becomes much higher; upward
b. becomes much higher; downward
c. becomes much less; upward
d. becomes m
b and c
Purchasing Power Parity suggests that the exchange rate will on average change by a percentage that reflects the ____ differential between two countries.
a. Income
b. interest rate
c. Inflation
d. Tax
inflation
In reality, exchange rates do not always change as suggested by purchasing power parity.
a. True
b. False
true
If U.S. interest rates suddenly become much higher than European interest rates (and if it does not cause concern about higher inflation there), the U.S. demand for euros would ____, and the supply of euros to be exchanged for dollars would ____, other fa
decrease; increase
When a government influences factors, such as inflation, interest rates, or income, in order to affect currency's value, this is an example of
a. direct intervention.
b. indirect intervention.
c. a freely floating system.
d. a pegged system.
indirect intervention
Which of the following statements is incorrect?
a. Central banks often consider adjusting a currency's value to influence economic conditions.
b. If the U.S. central bank wishes to stimulate the economy, it could weaken the dollar.
c. A weaker dollar coul
direct intervention occurs when the central bank influences the factors that determine the dollars value
Direct intervention is always extremely effective.
a. True
b. False
FALSE
If the U.S. government imposed trade restrictions on U.S. imports, this would ____ the U.S. demand for foreign currencies, and would place ____ pressure on the values of foreign currencies (with respect to the dollar).
a. increase; upward
b. increase, dow
limit; downward
If a commercial bank expects the euro to appreciate against the dollar, it may take a ____ position in euros and a ____ position in dollars.
a. short; short
b. long; short
c. short; long
d. long; long
long; short
Generally, a ____ home currency can ____ domestic economic growth.
a. weak; dampen
b. strong; stimulate
c. strong; dampen
d. A and B
strong; dampen
A ____ home currency can ____ domestic inflation.
a. strong; increase
b. weak; decrease
c. strong; decrease
d. A and B
strong; decrease
If the forward rate of a foreign currency ____ the existing spot rate, the forward rate will exhibit a ____.
a. exceeds; discount
b. is below; premium
c. is below; discount
d. A and B
is below; discount
____ forecasting involves the use of historical exchange rate data to predict future values.
a. Technical
b. Fundamental
c. Market-based
d. Mixed
technical
____ forecasting is usually based on either the spot rate or the forward rate.
a. Technical
b. Fundamental
c. Market-based
d. Mixed
market based
Fundamental forecasting has been found to be consistently superior to the other forecasting techniques.
a. True
b. False
false
Which of the following is not a method of forecasting exchange rate volatility?
a. using the volatility of historical exchange rate movements
b. using a time series of volatility patterns in previous periods
c. using the volatility of future exchange rate
using the volatility of future exchanges rate movements
Which of the following statements is incorrect?
a. Forward contracts are contracts typically negotiated with a commercial bank that allow the purchase or sale of a specified amount of a particular foreign currency at a specified exchange rate on a specifi
the forward market is located in NYC
Currency futures contracts differ from forward contracts in that they
a. are an obligation.
b. are not an obligation.
c. are standardized.
d. can specify any amount and maturity date.
are standardized
If the spot rate ____ the exercise price, a currency ____ option would not be exercised.
a. remains below; call
b. remains below; put
c. remains below; put
d. A and B
remains below; call
lThe pegged exchange rate system is no longer used by any countries.
a. True
b. False
false
If a firm planning to hedge receivables is certain of the future direction a spot rate will move, and requires a tailor-made hedge in terms of amount and maturity date, it should use a
a. call options contract traded on an exchange.
b. futures contract tr
forward contract
The speculative risk of purchasing a ____ is that the foreign currency value ____ over time.
a. put option; increases
b. put option; decreases
c. call option; increases
d. futures contract; increases
put option; increases
Bank A asks $.555 for Swiss francs and Banks B and C are willing to pay $.557 for francs. An institution could capitalize on these differences by engaging in
a. covered interest arbitrage.
b. triangular arbitrage.
c. locational arbitrage.
d. witching hour
locational arbitrage
According to interest rate parity, if the interest rate in a foreign country is ____ than in the home country, the forward rate of the foreign country will have a ____.
a. higher; discount
b. lower; premium
c. higher; premium
d. A and B
a and b
____ serve as financial intermediaries in the foreign exchange market by buying or selling currencies to accommodate customers.
a. Pension funds
b. International mutual funds
c. Insurance companies
d. Commercial banks
e. None of the above
commercial banks
If European inflation suddenly becomes much higher than U.S. inflation, the U.S. demand for European goods will ____. In addition, the supply of euros to be sold for dollars will ____; both forces will place ____ pressure on the value of the euro.
a. incr
decrease; increase; downward
If British interest rates suddenly increase substantially relative to U.S. interest rates, the demand by U.S. investors for British pounds ____, the supply of British pounds to be sold in exchange for dollars ____, and the British pound will ____.
a. incr
increases; decreases; appreciate
A country that pegs its exchange rate to another exchange rate does not have complete control over its interest rates.
a. True
b. False
true
The euro is presently pegged to the British pound in order to stabilize international payments between European countries.
a. True
b. False
false
Financial institutions rarely use the forward market.
a. True
b. False
false
If the quoted cross rate between two foreign currencies is not aligned with the two corresponding exchange rates, investors can profit from triangular arbitrage.
a. True
b. False
true
The indirect exchange rate specifies the value of the currency in U.S. dollars.
a. True
b. False
false
The forward rate premium is dictated by the national income differential of the two currencies.
a. True
b. False
false
The potential benefits from using foreign exchange derivatives are independent of the expected exchange rate movements.
a. True
b. False
false
The forward rate is the exchange rate for immediate delivery.
a. True
b. False
false
The Smithsonian Agreement allowed for a devaluation of the dollar and for a widening of the boundaries within which currencies were allowed to fluctuate.
a. True
b. False
true
A country that pegs its currency does not have complete control over its local interest rates, as its interest rates must be aligned with the interest rates of the currency to which it is tied.
a. True
b. False
true
Exchange rates usually change precisely as suggested by the purchasing power parity (PPP) theory.
a. True
b. False
false
Central bank intervention can be overwhelmed by market forces and may not always succeed in reversing exchange rate movements.
a. True
b. False
true
When countries experience substantial net outflows of funds, they commonly use indirect intervention by raising interest rates to discourage excessive outflows of funds and therefore limit any downward pressure on the value of their currency.
a. True
b. F
true
The forward rate premium reflects the percentage by which the spot rate exceeds the forward rate on an annualized basis.
a. True
b. False
false
The primary advantage of currency options over forward and futures contracts is that they provide a right rather than an obligation to purchase or sell a particular currency at a specified price within a given period.
a. True
b. False
true
A speculator who expects a foreign currency to appreciate could purchase the currency forward and, when received, sell it in the spot market.
a. True
b. False
true
The following information refers to Fresno Bank and Champaign Bank.
Bid Rate on Euros Ask Rate on Euros
Fresno Bank $1.002 $1.009
Champaign Bank $0.997 $1.000
Based on this information, locational arbitrage would be profitable.
a. True
b. False
true
Purchasing power parity suggests that the forward rate premium (or discount) should be about equal to the differential in interest rates between the countries of concern.
a. True
b. False
false
____ are not foreign exchange derivatives.
a. Forward contracts
b. Currency futures contracts
c. Currency swaps
d. Currency options
e. All of the above are foreign exchange derivatives.
all of the above are foreign exchange derivatives
____ serve as financial intermediaries in the foreign exchange market by buying or selling currencies to accommodate customers.
a. Commercial banks
b. International mutual funds
c. Insurance companies
d. Pension funds
e. All of the above
commercial banks
In a(n) ____ exchange rate system, the foreign exchange market is totally free from government intervention.
a. Pegged
b. dirty floating
c. freely floating
d. Bretton Woods
e. none of the above
freely floating
The supply and demand for a currency are influenced by all of the following, except
a. differential interest rates.
b. differential inflation rates.
c. direct government intervention.
d. indirect government intervention.
e. The supply and demand for a cur
the supply and demand for a currency are affected by all of the above
If U.S. inflation suddenly becomes much higher than European inflation, the U.S. demand for European goods will ____. In addition, the supply of euros to be sold for dollars will ____; both forces will place ____ pressure on the value of the euro.
a. incr
increase; decline; upward
Which of the following is the least feasible strategy for a speculator who expects the Australian dollar to depreciate?
a. sell Australian dollars forward and then purchase them in the spot market just before fulfilling the forward obligation
b. sell futu
purchase call options on Australian dollars; at some point before the expiration date, exercise the call option and then sell the Australian dollars received in the spot market
The act of capitalizing on the discrepancy between the forward rate premium and the interest rate differential is called
a. triangular arbitrage.
b. locational arbitrage.
c. covered interest arbitrage.
d. interest rate parity.
covered interest arbitrage
The indirect exchange rate is always the reciprocal of the direct exchange rate.
a. True
b. False
true
The exchange rate between two foreign (nondollar) currencies is known as a(n):
a. indirect dollar rate.
b. forward rate.
c. cross-exchange rate.
d. derived exchange rate.
cross exchange rate
The devaluation of a country's currency:
a. makes foreign products more expensive for consumers in that country.
b. increases foreign demand for that country's exports.
c. can lead to deflation in that country.
d. A and B
a and b
Currency futures contracts are standardized, whereas forward contracts are more flexible and can specify whatever amount and maturity date are desired.
a. True
b. False
true
When the Federal Reserve attempt to lower interest rates by increasing the U.S. money supply, it puts upward pressure on the value of the dollar.
a. True
b. False
true
A speculator who expects the euro to depreciate might:
a. sell euros forward and then purchase them in the spot market just before fulfilling the forward obligation.
b. purchase euros forward and, when they are received, sell them in the spot market.
c. p
sell euros forward and then purchase them in the spot market just before fulfilling the forward obligation
Which of the following statements is incorrect?
a. Banks have expanded their business across services over time.
b. Acquisitions have been a convenient method for banks to grow quickly and capitalize on economies of scale.
c. The banking industry has beco
banks have expanded their business across services over time
Commercial banks have expanded in recent years not only by acquiring other banks but also by acquiring other types of financial service firms.
a. True
b. False
true
Commercial banks can be a lender or a borrower when using repurchase agreements and loans in the federal funds market.
a. True
b. False
true
The operations, management, and regulation of a financial conglomerate are the same irrespective of the types of services offered.
a. True
b. False
false
____ are offered to bank customers who desire to write checks against their account.
a. Time deposit accounts
b. CDs
c. Demand deposit accounts
d. Money market deposit accounts
demand deposit accounts
Which type of savings account transfers funds to a checking account when checks are written?
a. ATS
b. passbook savings
c. CDs
d. MMDAs
ATS
A(n) ____ account provides checking services as well as interest.
a. demand deposit
b. negotiable order of withdrawal (NOW)
c. passbook savings
d. time deposit
negotiable order of withdrawal
Protective covenants impose conditions in which the bank must provide additional loans to a borrower to protect the borrower from going bankrupt.
a. True
b. False
false
A ____ is a time deposit offered by some large banks to corporations, with a specific maturity date, minimum deposit of $100,000 or more, and a secondary market.
a. retail CD
b. negotiable CD
c. market CD
d. protective CD
negotiable CD
A bank's sources of funds represent liabilities or equity of the bank.
a. True
b. False
true
Money market deposit accounts differ from conventional time deposits in that they
a. specify a maturity.
b. offer limited check writing privileges.
c. are less liquid.
d. none of the above
offer limited check writing privileges
The intent of federal funds transactions is to
a. correct short-term fund imbalances experienced by banks.
b. correct long-term fund imbalances experienced by banks.
c. serve as a permanent source of bank capital.
d. serve as the primary depository source
correct short term fund imbalances experienced by banks
For any given bank, federal funds ____ represent a(n) ____.
a. purchased; asset
b. sold; liability
c. purchased; liability
d. A and B
purchases; liability
The federal funds rate is ____ the yield on a Treasury security with a similar term remaining until maturity.
a. substantially above
b. substantially below
c. close to
d. none of the above; the rate is much higher than the Treasury yield in some periods,
close to
Obtaining funds through ____ is not a common source of funds for banks to satisfy a temporary deficiency of funds?
a. issuing bonds
b. the federal funds market
c. repurchase agreements
d. borrowing from the Federal Reserve
issuing bonds
Which of the following is true?
a. The primary credit lending rate is set by the president of the United States.
b. The federal funds rate is set by the president of the United States.
c. The primary credit lending rate is set by commercial banks.
d. The
the primary credit lending rate is now set at a level above the federal funds rate
The Federal Reserve provides loans to banks in order to
a. resolve permanent shortages of funds experienced by banks.
b. resolve temporary shortages of funds experienced by banks.
c. finance the shortages of funds of finance companies.
d. none of the abov
resolve temporary shortages of funds experienced by banks
When a bank in need of funds for a few days sells some of its government securities to a corporation with a temporary excess of funds, then buys them back shortly thereafter, this is a
a. federal funds loan.
b. discount window loan.
c. repurchase agreemen
repurchase agreement
When banks need funding for just a few days, they would most likely
a. issue bonds and then call them.
b. issue stock and then repurchase it.
c. borrow in the federal funds market.
d. issue NCDs.
borrow in the federal funds market
Because U.S. dollars are widely used as an international medium of exchange, the Eurodollar market is very active.
a. True
b. False
true
Subordinated notes and debentures are examples of
a. primary capital.
b. secondary capital.
c. depository sources of funds.
d. repurchase agreements.
secondary capital
All other things equal, when banks issue new stock, they
a. increase reported earnings per share.
b. decrease their ability to absorb operating losses.
c. dilute the ownership of the bank.
d. A and B
dilute the ownership of the bank
As a source of funds, small banks rely more heavily on ____, and larger banks rely more heavily on ____.
a. time deposits and foreign deposits; savings deposits and short-term borrowings
b. savings deposits and short-term borrowings; foreign deposits and
savings and time deposits; foreign deposits and short term borrowings
Cash held ____ represents the major portion of a bank's required reserves.
a. at other commercial banks
b. in a bank's vault
c. on deposit at the federal funds window
d. on deposit with the Board of Governors
in a bank's vault
The main use of bank funds is for
a. loans.
b. investment securities.
c. fixed assets.
d. repurchase agreements.
loans
Bank loans designed to support a firm's ongoing business operations are called
a. term loans.
b. working capital loans.
c. direct lease loans.
d. revolving credit loans.
working capital loans
____ loans are primarily used to finance the purchase of fixed assets.
a. Term
b. Working capital
c. Informal line of credit
d. Revolving credit
term
Which of the following is most appropriate for a business that may experience a sudden need for funds but does not know precisely when?
a. working capital loan
b. direct lease loan
c. term loan
d. informal line of credit
informal line of credit
A ____ loan may be especially appropriate when the bank wishes to avoid adding more debt to its balance sheet.
a. Term
b. Bullet
c. direct lease
d. revolving credit
direct lease
The interest rate banks charge their most creditworthy customers is known as the
a. federal funds rate.
b. primary credit lending rate.
c. prime rate.
d. call money rate.
prime rate
Transaction deposits do not include
a. demand deposits.
b. NCDs.
c. NOW accounts.
d. all of the above are transactions deposits
NCDs
Commercial banks are not allowed to invest in
a. Treasury securities.
b. Freddie Mac securities.
c. Fannie Mae securities.
d. Banks can invest in all securities mentioned above.
banks can invest in all securities mentioned above
Money market deposit accounts (MMDAs)
a. require a maturity of 6 months or longer.
b. allow a limited number of checks to be written against the account.
c. pay a higher interest rate than CDs.
d. none of the above
allow a limited number of checks to be written against the account
Which of the following accounts does not allow checks (at least a limited amount) to be written?
a. NOW accounts
b. money market deposit accounts (MMDAs)
c. retail CDs
d. all of the above allow checks to be written
retail CDs
Banks sometimes need funds and sometimes have excess funds available. Which of the following is commonly a source of bank funds and a use of bank funds?
a. MMDAs
b. federal funds
c. the discount window
d. retail CDs
federal funds
The bank holding company structure allows more flexibility to borrow funds, issue stock, repurchase the company's own stock, and acquire other firms.
a. True
b. False
true
Like other market interest rates, the primary credit lending rate moves in reaction to changes in demand or supply of funds or both.
a. True
b. False
false
The yield on repurchase agreements is slightly higher than the federal funds rate at any given point in time.
a. True
b. False
false
Bank regulators are concerned that banks may maintain a higher level of capital than they should and have therefore imposed capital requirements on them.
a. True
b. False
false
In a revolving credit loan, the bank typically charges businesses a commitment fee on any unused funds.
a. True
b. False
true
Bank rates on credit card balances are usually not very different from the rate charged on business loans.
a. True
b. False
false
While U.S. banks have expanded into non-U.S. markets, few non-U.S. banks have entered U.S. markets.
a. True
b. False
false
____ is (are) not a major source of funds for commercial banks.
a. Deposit accounts
b. Borrowed funds
c. Commercial loans
d. Bank capital
e. All of the above are commercial banks sources of funds.
commercial loans
Which of the following statements is incorrect with respect to the federal funds market?
a. It allows depository institutions to accommodate the short-term liquidity needs of other financial institutions.
b. Federal funds purchased represent an asset to t
federal funds purchased represent an asset to the borrowing bank and a liability to the lending bank that sells them
The federal funds rate is typically ____ the primary credit lending rate.
a. greater than
b. less than
c. equal to
d. none of the above
greater than
____ are the largest bank source of funds as a percentage of total liabilities.
a. Small-denomination time deposits
b. Money market deposit accounts (MMDAs)
c. Transaction deposits
d. Borrowed funds
e. Savings deposits (including MMDAs)
savings deposits
____ do not specify a maturity and provide limited check-writing ability (they allow only a limited number of transactions per month).
a. Money market deposit accounts (MMDAs)
b. Negotiable CDs (NCDs)
c. Retail CDs
d. Callable CDs
e. Negotiable order of w
money market deposit accounts
____ loans are extended primarily to finance the purchase of fixed assets such as machinery.
a. Term
b. Working capital
c. Federal fund
d. Direct lease
term
Which of the following is not an off-balance sheet activity for commercial banks?
a. consumer loans
b. loan commitments
c. standby letters of credit
d. swap contracts
e. All of the above are off-balance sheet activities.
consumer loans
A ____ is a type of loan commitment.
a. standby letter of credit (SLC)
b. note issuance facility (NIF)
c. forward contract
d. swap contract
e. none of the above
note issuance facility
When a bank obtains funds through a ____, the provider of the funds receives collateral.
a. retail CD
b. NOW account
c. repurchase agreement
d. money market deposit account
repurchase agreement
When banks obtain funds in the federal funds market, the providers of the funds are
a. other depository institutions.
b. nonfinancial corporations.
c. consumers.
d. the Federal Reserve.
other depository institutions
A single loan in the federal funds market is usually for ____; when a bank sells a single repurchase agreement, the maturity is usually ____.
a. just a few days; one year or more
b. several weeks; one year or more
c. several weeks; just a few days
d. just
just a few days; just a few days
The interest rate charged on loans between depository institutions is commonly referred to as the
a. federal funds rate.
b. discount rate.
c. primary credit lending rate.
d. none of the above
federal funds rate
The interest rate charged on loans from the Federal Reserve to banks is commonly referred to as the
a. federal funds rate.
b. primary credit lending rate.
c. repo rate.
d. none of the above
primary credit lending rate
The primary credit lending rate is determined by
a. the Federal Reserve.
b. Congress.
c. the Treasury.
d. the President of the United States.
the Federal Reserve
Bank capital represents funds obtained through ____ and through ____.
a. issuing stock; offering long-term CDs
b. issuing repurchase agreements; issuing bonds
c. issuing stock; retaining earnings
d. offering long-term CDs; issuing bonds
issuing stock; retaining earnings
Banks sometimes prefer to minimize their amount of capital since
a. interest payments must be paid by the bank on all capital that is held.
b. they try to avoid diluting ownership of the bank.
c. A and B
d. none of the above
they try to avoid diluting ownership of the bank
When a bank obtains funds through ____, households are not a common provider of the funds.
a. NOW accounts
b. retail CDs
c. passbook savings accounts
d. NCDs
NCDs
Which of the following is not an off-balance sheet activity?
a. highly leveraged transactions (HLTs)
b. standby letters of credit
c. forward contracts
d. swap contracts
highly leveraged transactions
A bank's uses of funds represent liabilities of a bank.
a. True
b. False
false
____ are the largest bank source of funds (as a percentage of total liabilities).
a. Small-denomination time deposits
b. Large-denomination time deposits
c. Transaction deposits
d. Savings deposits (including MMDAs)
transaction deposits
The five largest banks in the United States account for about one-tenth of all assets in U.S. banks.
a. True
b. False
false
From a bank manager's perspective, the differential in interest between a bank's loans and its deposits;
a. must not exceed the federal funds rate.
b. is called the primary credit lending rate.
c. must be sufficient to cover the bank's other expenses and
must be sufficient to cover the bank's other expenses and generate a reasonable profit for the bank's owners
In a loan participation arrangement, normally all of the participating banks are exposed to credit (default) risk.
a. True
b. False
true
Banks will not accept intangible assets, such as patents and brand names, as collateral for commercial loans.
a. True
b. False
false
Proprietary trading is generally less risky than a bank's lending operations.
a. True
b. False
false
When a bank engages in proprietary trading, it:
a. uses its own funds to make investments.
b. is not subject to regulations.
c. lends the funds in the federal funds market.
d. normally uses the funds to build its capital.
uses its own funds to make investments
In a standby letter of credit, a bank agrees to:
a. charge a fixed interest rate for a line of credit for a specified period.
b. back a customer's obligation to a third party.
c. provide a customer with funds up to a specified maximum amount over a specif
back a customer's obligation to a third party
A forward contract on currency:
a. is a way to hedge credit (default) risk.
b. is used to to swap fixed interest payments in euros for variable interest payments in dollars.
c. is an agreement between a customer and a bank to exchange one currency for ano
is an agreement between a customer and a bank to exchange one currency for another on a specified date at a specified exchange rate
Before the credit crisis, _________ were heavily used to protect against the credit (default) risk from investing in mortgage-backed securities.
a. standby letters of credit
b. interest rate swap contracts
c. credit default swap contracts
d. forward contr
credit default swap contracts
Before establishing foreign branches, a U.S. bank must obtain the approval of the:
a. U.S. Treasury.
b. U.S. Commerce Department.
c. Federal Deposit Insurance Corporation.
d. Federal Reserve.
Federal Reserve