Cheat Sheets Final Financial Market

Bond Price

C: Coupon payment = F*Coupon rate

r: Require of return
F: Face/Par value of bond
n: Years to maturity
Monthly payment (home mortgage)

YTM

EAR

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 Multiple-Choice
(Tìm Theo Thứ Tự Bảng Chữ Cái)
1. ____ and _____ allows a financial intermediary to offer safe liquid liabilities as deposits while investing the
depositors money in riskier illiquid assets. Monitoring ; diversification
2. _____ is the process of taking possession of the mortgaged property to satisfy the debt in the event of failure to
repay the mortgage and foregoing claim to any deficiency. Foreclosure
3. A European investor can earn a 4.75% annual interest rate in Europe or 2.75% per year in the United
State.2.75 percent per year in the United States. If the spot exchange rate is $1.58 per euro, at what one-year
forward rate would an investor be indifferent between the U.S and Japanese investments? $1.5498
4. A $2 million jumbo CD is paying a quoted 3.55 percent interest rate on 180-day maturity CDs. How much
money will you have at maturity if you invest in the CD? $2,035,500
5. A $25,000 face value GNMA pass-through quote sheet lists a spread to average life of 103, PSA of 220, and a
price of 101-09. This means that I. the pass-through yield is 103 basis points above the comparable maturity
Treasury bond. II. the pass-through is being prepaid more quickly than standard PSA. III. the pass-through is
priced at $25,272.50. I and II only
6. A ___ placed against mortgaged property ensures that the property cannot be sold (except by the lender) until
the mortgage is paid off lien
7. A _____ position in T-bond futures should be used to hedge falling interest rates and a _____ position in T-
bond futures should be used to hedge falling bond prices. long; long
8. A 10-year annual payment corporate bond has a market price of $1,050. It pays annual interest of $100 and its
required rate of return is 9 percent. By how much is the bond mispriced? Underpriced by $14.18
9. A 10-year maturity coupon bond has a six-year duration. An equivalent 20-year bond with the same coupon
has a duration less than 12 years.
10. A 10-year,annual payment corporate coupon bond has an expected return of 11 percent and a required return
of 10 percent. The bond’s market price is: less than its present value.
11. A 12-year annual payment corporate bond has a market price of $925. It pays annual interest of $60 and its
required rate of return is 7 percent. By how much is the bond mispriced? Overpriced by $4.43
12. A 15-year corporate bond pays $40 interest every six month. What is the bond’s price if the bond’s promised
YTM is 5.5 percent? $1,253.12
13. A 180-day $3 million CD has a 4.25 percent annual rate quote. If you buy the CD, how much will you collect in
180 days? $3,063,750
14. A 50-day maturity money market security has a bond equivalent yield of 3.60 percent. The security's EAR is
3.66 percent.
15. A 90-day T-bill is selling for $9,900. The par is $10,000. The effective annual return on the T-bill is (watch your
rounding) 4.16 percent.
16. A bank has a negative duration gap. Interest rates decline. Which one of the following best describes the effects
of the interest rate change? 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.
17. A bank has a negative repricing gap and estimates that the spread between RSAs and RSLs will move inversely
with interest rates. If interest rates increase, NII will fall
18. A bank has a positive repricing gap using a six-month maturity bucket. Which one of the following statements
is most correct? If all interest rates are projected to decrease, to limit a profit decline when this occurs, the bank could
encourage its retail loan customers to switch from one-month reset floating rate loans to three-year fixed-rate loans at
current rates.
19. A bank has a positive repricing gap. This implies that: some RSAs are financed b y fixed-rate liabilities.
20. A bank has book value of $5 million in liquid assets and $95 million in non-liquid assets. Large depositors
unexpectedly withdraw $9.5 million in deposits. To cover the withdrawals the bank sells all of its liquid assets
at book value. To raise the additional funds needed the bank sells the necessary amount of non-liquid assets at
80 cents per dollar of book value. As a result, the bank's equity will _____________.fall $3.6 million
21. A bank has made a risky loan to a midsize consumer goods manufacturer. With the weaker economy, the
borrower is expected to have trouble repaying the loan. The bank decides to purchase a digital default option.
Which one of the following payout patterns does a digital option provide?The option seller pays a stated amount
to the option buyer, usually the par on the loan or bond, in the event of a default on the underlying credit.

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22. A bank is facing a forecast of rising interest rates. How should it set the repricing and duration gaps? Positive
repricing gap and negative duration gap
23. A bank lender is concerned about the creditworthiness of one of its major borrowers. The bank is considering
using a swap to reduce its credit exposure to this customer. Which type of swap would best meet this need?
Credit default swap
24. A bank with long-term, fixed-rate assets funded with short-term,ratesensitive liabilities could do which of the
following to limit their interest rate risk? 1.I. Buy a cap 2.II. Buy an interest rate swap 3.III. Buy a floor 4.IV.
Sell an interest rate swap I and II only
25. A bank with short-term floating-rate assets funded by long-term fixed-rate liabilities could hedge this risk by
I. buying a T-bond futures contract. II. buying options on a T-bond futures contract. III. entering into a swap
agreement to pay a fixed rate and receive a variable rate. IV. entering into a swap agreement to pay a variable
rate and receive a fixed rate. I, II, and IV only
26. A bankers acceptance is A liability of the importer and the importers bank
27. A best efforts offering is one in which: the investment banker acts only as a distribution agent.
28. A bond investor has a 99% chance of receiving all of her promised payments on a particular bond issue in the
first year of holding the bond, but only a 98% chance in the second year, and a 97% chance in the third year
and beyond. What is the cumulative default probability over the first three years she holds the bond? 5.89%
29. A bond portfolio manager has a $25 million market value bond portfolio with a six-year duration. The manager
believes interest rates may increase 50 basis points. Which of the following could be used to help limit his risk?
I. Sell the bonds forward. II. Buy bond futures contracts. III. Buy call options on the bonds. IV. Buy put options
on the bonds. I and IV only
30. A bond that pays interest annually has a 6 percent promised yield and a price of $1,025. Annual interest rates
are now projected to fall 50 basis points. The bond's duration is six years. What is the predicted new bond price
after the interest rate change? (Watch your rounding.) $1,054.01
31. A bond that pays interest annually has a 6 percent promised yield and a priceof $1.025. Annual interest rates
are now projected to fall 50 basis points. The bond’s duration is six years. What is the predicted new bond price
after the interest rate change? (Do not round on intermediate calculations) None of these choices are correct
32. A bond that you held to maturity had a realized return of 8 percent, but when you bought it, it had an expected
return of 6 percent. If no default occurred, which one of the following must be true? The coupons were reinvested
at a higher rate than expected.
33. A borrower took out a 30-year fixed-rate mortgage of $2,250,000 at a 7.2 percent annual rate. After five years,
he wishes to pay off the remaining balance. Interest rates have by then fallen to 7 percent. How much must he
pay to retire the mortgage (to the nearest dollar)? $2,122,426
34. A Chinese exporter sells $200,000 of toys to a French importer. The Chinese exporter requires the French
importer to obtain a letter of credit. When the bank accepts the draft, the exporter discounts the 90-day note
at a 4 percent discount. What is the exporter's true effective annual financing cost? 4.16 percent
35. A Chinese exporter sells $200,000 of toys to a French importer. The Chinese exporter requires the French
importer to obtain a letter of credit. When the bank accepts the draft, the exporter discounts the 90-day note
at a 4 percent discount. What is the exporter's true effective annual financing cost? 4.22 percent
36. A company due to pay a certain amount of a foreign currency in the future decides to hedge with futures
contracts. Which of the following best describes the advantage of hedging? It leads to a more predictable exchange
rate being paid
37. A company enters into a long futures contract to buy 1,000 units of a commodity for $60 per unit. The initial
margin is $6,000 and the maintenance margin is $4,000. What futures price will allow $2,000 to be withdrawn
from the margin account? $62
38. A company enters into a short futures contract to sell 50,000 units of a commodity for 70 cents per unit. The
initial margin is $4,000 and the maintenance margin is $3,000. What is the futures price per unit above which
there will be a margin call? 72 cents
39. A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on an index is 900.
Futures contracts on $250 times the index can be traded. What trade is necessary to reduce beta to 0.9? Short
48 contracts
40. A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on an index is 900.
Futures contracts on $250 times the index can be traded. What trade is necessary to increase beta to 1.8? Long
96 contracts

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41. A company knows it will have to pay a certain amount of a foreign currency to one of its suppliers in the future.
Which of the following is true A forward contract can be used to lock in the exchange rate
42. A company will buy 1000 units of a certain commodity in one year. It decides to hedge 80% of its exposure
using futures contracts. The spot price and the futures price are currently $100 and $90, respectively. The spot
price and the futures price in one year turn out to be $112 and $110, respectively. What is the average price
paid for the commodity? $96
43. A contract that gives the holder the right to sell a security at a preset price only immediately before contract
expiration is a(n) European call option.
44. A contract wherein the buyer agrees to pay a specified interest rate on a loan that will be originated at some
future time is called a(n) forward rate agreement.
45. A corporate bond has a coupon rate of 10 percent and a required return of 10 percent. This bond's price is
$1,000.00.
46. A corporate bond returns 12 percent of its cost (in PV terms) in the first year, 11 percent in the second year,
10 percent in the third year and the remainder in the fourth year. What is the bond's duration in years? 3.32
years
47. A corporate loan applicant has cash of $40, receivables of $50, and inventory of $20. The applicant also has
current debts of $65. If the bank's policy requires a current ratio of 1.75 or better and an acid test ratio of 1.25
or better, would the applicant receive the loan? No, because although the applicant's acid test ratio is acceptable,
its current ratio is not.
48. A corporation seeking to sell new equity securities to the public for the first time in order to rise cash for capital
investment would most likely Conduct an IPO with the assistance of an investment banker
49. A current account deficit implies that more goods and services are imported than are exported.
50. A Current account deficit implies that The country borrowed from abroad more that it loan and/ or sold off some
of its assets
51. A dealer is quoting a $10,000 face 180-day T-bill quoted at 2.75 bid, 2.65 ask. You could buy this bill at
______________ or sell it at _______________. $9,867.50; $9,862.50
52. A decrease in interest rates will increase the bond's duration.
53. A decrease in reserve requirements could lead to a(n) Both A and B
54. A European investor can earn a 4.75 percent annual interest rate in Europe or 2.75 percent per year in the
United States. If the spot exchange rate is $1.58 per euro, at what one-year forward rate would an investor be
indifferent between the U.S. and Japanese investments? $1.5498
55. A firm is using cumulative voting and four director spots are up for election. There are 3.6 million shares
outstanding. How many shares must a minority owner own or control to ensure that he or she can gain control
of one seat on the board of directors? 720,001
56. A firm will typically attempt to sell shares from a secondary offering at the prevailing market price
57. A firm with a low Z-score has high: insolvency risk.
58. A form of trust that can issue multiple class debt securities without having to pay taxes on the interest paid is
called a: REMIC.
59. A forward contract: has significant default risk.
60. A four-year maturity 0 percent coupon corporate bond with a required rate of return of 12 percent has an
annual duration of _______________ years. 4.00
61. A haircut of 20% means that A bond with a market value of $100 is considered to be worth $80 when used to satisfy
a collateral request
62. A hedger takes a long position in a futures contract on a commodity on November 1, 2012 to hedge an exposure
on March 1, 2013. The initial futures price is $60. On December 31, 2012 the futures price is $61. On March 1,
2013 it is $64. The contract is closed out on March 1, 2013. What gain is recognized in the accounting year
January 1 to December 31, 2013? Each contract is on 1000 units of the commodity. $4,000
63. A higher level of which of the following variables would make a put option on common stock more valuable,
ceteris paribus? I. Stock price II. Stock price volatility III. Interest rate IV. Exercise price II and IV only
64. A holder of Rainbow Funds convertible bonds with a $1,000 par and a $1,100 price can convert the bond to 25
shares of common stock. The stock is currently priced at $36 per share. By what percent does the stock price
have to rise to make conversion potentially attractive? 22.22%
65. A homebuyer bought a house for $245,000. The buyer paid 20 percent down but decided to finance closing costs
of 3 percent of the mortgage amount. If the borrower took out a 30-year fixed-rate mortgage at a 5 percent
annual interest rate, how much interest will the borrower pay over the life of the mortgage? $188,265

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66. A homeowner can obtain a $250,000, 30-year fixed-rate mortgage at a rate of 6.0 percent with zero points or at
a rate of 5.5 percent with 2.25 points. If you will keep the mortgage for 30 years, what is the net present value
of paying the points (to the nearest dollar)? $8,360
67. A homeowner can obtain a $250,000, 30-year fixed-rate mortgage at a rate of 6.0 percent with zero points or at
a rate of 5.5 percent with 2.25 points. How long must the owner stay in the house to make it worthwhile to pay
the points if the payment saving is invested monthly? 7.15 years
68. A homeowner can obtain a $250,000, 30-year fixed-rate mortgage at a rate of 6.0 percent with zero points or at
a rate of 5.5 percent with 2.25 points. How long must the owner stay in the house to make it worthwhile to pay
the points if the payment saving is not invested? 5.90 years
69. A homeowner could take out a 15-year mortgage at a 5.5 percent annual rate on a $195,000 mortgage amount,
or she could finance the purchase with a 30-year mortgage at a 6.1 percent annual rate. How much total interest
over the entire mortgage period could she save by financing her home with the 15-year mortgage (to the nearest
dollar)? $138,612
70. A Japanese investor can earn a 1 percent annual interest rate in Japan or about 3.5 percent per year in the
United States. If the spot exchange rate is 101 yen to the dollar, at what one-year forward rate would an investor
be indifferent between the U.S. and Japanese investments? ¥98.56
71. A Japanese investor can earn a 1 percent annual interest rate in Japan orabout 3.5 percent per year in the
United States. If the spot exchange rate is 101 yen to the dollar, at what one-year forward rate would an investor
be indifferent between the U.S and Japanese investments? yên 103.50
72. A life insurer owes $550,000 in eight years. To fund this outflow, the insurer wishes to buy STRIPS that mature
in eight years. The STRIPS have a $5,000 face value per STRIP and pay a 6 percent APR with semiannual
compounding. How much must the insurer spend now to fully fund the outflow (to the nearest dollar)? $342,742
73. A limit order Is an order that can be executed at a specified price or one more favorable to the investor
74. A loan for borrowers who do not qualify for loans at the usual market rate of interest because of a poor credit
rating or because the loan is larger than justified by their income is: a subprime mortgage
75. A loan that finances a merger or acquisition that results in a high-leverage ratio for the borrower is called a(n):
HLT loan.
76. A MBB differs from a CMO or a pass-through in that . I. The MBB does not result in the removal of mortgages
from the balance sheet. II. A MBB holder has no prepayment risk. III. Cash flows on a MBB are not directly
passed through from mortgages. 1,2 and 3
77. A microhedge is a: hedge of a particular asset or liability.
78. A money market mutual fund's total assets increase from $100 to $105 when the fund has 100 shares
outstanding. Which of the following will happen? The fund will issue a total of five new shares.
79. A naïve hedge is one: in which the hedger attempts to eliminate all of the risk of the underlying spot position.
80. A negotiable CD is a bank-issued time deposit.
81. A negotiable Cd is A marketable bank issued time deposit that specifies the interest rate earned and a fixed maturity
date
82. A negotiated OTC agreement to exchange currencies at a fixed date in the future but at an exchange rate
specified today is a Forward foreign exchange transaction
83. A noncompetitive bid for Treasury bill auction provides all noncompetitive bidders the same price.
84. A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option on the stock with a
strike price of $30 costs $4. Suppose that a trader buys two call options and one put option. The breakeven
stock price above which the trader makes a profit is $35
85. A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option on the stock with a
strike price of $30 costs $4. Suppose that a trader buys two call options and one put option. The breakeven
stock price below which the trader makes a profit is $20
86. A one-year forward contract is an agreement where One side has the obligation to buy an asset for a certain price
in one year's time.
87. A pass-through security is best characterized as: a security with a pro rata claim to the underlying pool of assets.
88. A professional futures trader who buys and sells futures for his own account throughout the day but typically
closes out his positions at the end of the day is called a Day trader
89. A publicly traded company gave its existing shareholders the opportunity to purchase from the new stocks that
it will issue. The existing shareholders can purchase 3 new shares at a price of $10 per share for every 8 shares
held. This is an example of: Rights offering
90. A repo is in essence a collateralized Fed funds loan.

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91. A security has an expected return less than its required return. This security is Selling for more than its PV.
92. A semiannual payment bond with a $1,000 par has a 7 percent quoted coupon rate, a 7 percent promised YTM,
and 10 years to maturity. What is the bond's duration? 7.35 years
93. A shelf registration allows firms the opportunity to avoid the normal ______________ day waiting period by
allowing preregistration of securities for up to ______________ years. 20-; 2
94. A short forward contract on an asset plus a long position in a European call option on the asset with a strike
price equal to the forward price is equivalent to A long position in a put option
95. A short-term unsecured promissory note issued by a company is: commercial paper.
96. A silver mining company has used futures markets to hedge the price it will receive for everything it will
produce over the next 5 years. Which of the following is true? It is liable to experience liquidity problems if the
price of silver rises dramatically
97. A six-year annual payment corporate bond has a required return of 9.5 percent and an 8 percent coupon. Its
market value is $20 over its PV. What is the bond's E(r)? 9.03 percent
98. A six-year maturity bond has a five-year duration. Over the next year, maturity will decline by one year and
duration will decline by: less than one year.
99. A speculator can choose between buying 100 shares of a stock for $40 per share and buying 1000 European call
options on the stock with a strike price of $45 for $4 per option. For second alternative to give a better outcome
at the option maturity, the stock price must be above $50
100. A speculator may write a put option on stock with an exercise price of $15 and earn a $3 premium only if he
thought the stock price would stay above $12
101. A speculator takes a long position in a futures contract on a commodity on November 1, 2012 to hedge an
exposure on March 1, 2013. The initial futures price is $60. On December 31, 2012 the futures price is $61. On
March 1, 2013 it is $64. The contract is closed out on March 1, 2013. What gain is recognized in the accounting
year January 1 to December 31, 2013? Each contract is on 1000 units of the commodity. $3,000
102. A stock has a spot price of $55. Its May options are about to expire. One of its puts is worth $5 and one of its
calls is worth $10. The exercise price of the put must be ______________ and the exercise price of the call must
be ________________. $60; $50
103. A Swiss bank converted 1 million Swiss francs to euros to make a euro loan to a customer when the exchange
rate was 1.85 francs per euro. The borrower agreed to repay the principal plus 3.75 percent interest in one
year. The borrower repaid euros at loan maturity and when the loan was repaid the exchange rate was 1.98
francs per euro. What was the bank's franc rate of return? 11.04%
104. A T-bond with a $10,000 par is quoted at a bid of 92.344 and an ask of 92.531. If you bought the bond and then
immediately sold it at the same quotes, how much money would you gain or lose (ignore commissions)? − $18.70
105. A T-Bond with a $10,000 par is quoted at a bid of 92:11 and an ask of 92:17. If you bought the bond and then
immediately sold it at the same quotes, how much money would you gain or lose (ignore commissions)? -$18.75
106. A T-Bond with a $1000 par is quoted at 97:14 Bid, 97:15 Ask. The clean price for you to buy this bond is
$974.69.
107. A T-Bond with a $1000 par is quoted at a bid of 105:7 and an ask of 105:9. If you sell the bond you will receive
$1,052.19.
108. A three-class CMO has Class A, Class B, and Class C securities outstanding. Which class has the longest
duration? Class C
109. A thrift makes long-term fixed-rate mortgages funded with short-term deposits and then interest rates rise.
Which of the following is true? profitability would decline
110. A time draft payable to a seller of goods, with payment guaranteed by a bank is a banker's acceptance.
111. A trader has a portfolio worth $5 million that mirrors the performance of a stock index. The stock index is
currently 1,250. Futures contracts trade on the index with one contract being on 250 times the index. To remove
market risk from the portfolio the trader should Sell 16 contracts
112. A Treasury security in which periodic coupon interest payments can be separated from each other and from
the principal payment is called a: STRIP.
113. A U.S. bank borrowed dollars, converted them to euros, and invested in euro-denominated CDs to take
advantage of interest rate differentials. To cover the currency risk the investor should Sell Euros forward
114. A U.S. bank converted $1 million to Swiss francs to make a Swiss franc loan to a valued corporate customer
when the exchange rate was 1.2 francs per dollar. The borrower agreed to repay the principal plus 5 percent
interest in one year. The borrower repaid Swiss francs at loan maturity and when the loan was repaid the
exchange rate was 1.3 francs per dollar. What was the bank's dollar rate of return? −3.08 percent

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115. A U.S. bank has £120 million in loans to corporate customers and has £70 million in deposits it owes to
customers with the same maturity. The bank has also sold £20 million pounds forward. The bank's net exposure
is: £30 million.
116. A U.S. exporter sells $150,000 of furniture to a Latin American importer. The exporter requires the importer
to obtain a letter of credit. When the bank accepts the draft, the exporter discounts the 120-day note at a 5.25
percent discount. What is the exporter's true effective annual financing cost?5.52 percent
117. A U.S. firm has £50 million in assets in Britain that they need to repatriate in six months. They could hedge the
exchange rate risk by: both selling pounds forward and borrowing pounds.
118. A U.S. firm has borrowed £50 million from a British firm. The borrower will need to convert dollars to pounds
to repay the loan when it is due. The U.S. firm could hedge the exchange rate risk by... Buying Pounds Forward
119. A U.S. investor has borrowed pounds, converted them to dollars, and invested the dollars in the United States
to take advantage of interest rate differentials. To cover the currency risk, the investor should buy pounds
forward.
120. A(n) _____ is used to help retired people receive monthly income in exchange for thet equity in their
home.Reverse Annuity Mortgage
121. A(n) ___________ fund must hold substantial cash reserves in order to meet fund redemptions from
shareholders. open-end mutual
122. A(n) ___________ plan does not require the employer to guarantee retirement benefits nor to maintain a
minimum level of pension reserves. defined contribution
123. A(n) ___________________ is used to help retired people receive monthly income in exchange for the equity in
their home. RAM
124. A______ placed against mortgaged propety ensures that the propety cannot besold (except by the lender) until
the mortgage is paid off lien
125. According to the liquidity premium theory of interest rates: long-term spot rates are higher than the average of
current and expected future short-term rates.
126. According to the strong form of efficient market hypothesis: Private information is of no help in earning
abnormally high returns
127. According to the UET: unbiased expectation theory The long term spot rate is an average of the current and
expected future short term interest rates
128. account orders are executed elsewhere. IV. Specialists help maintain continuous trading. I and IV only
129. Actively managed funds find it difficult to consistently earn higher risk-adjusted returns than a broad stock
market index. The difference in return between actively managed funds and passively managed index funds
can be explained by which of the following? I. Lower expense ratios for index funds II. Higher turnover ratios
for index funds III. Differences in returns in sectors of the market and the overall market return I and III only
130. Advantages of going global for U.S. banks include all but which one of the following? low fixed costs involved
in international expansion
131. All else equal, mortgage payments are _____ on a 15-year fixed rate mortgage than on a 30-year fixed rate
mortgage. ____ is paid on a 15 year mortgage than on a 30-year mortgage. higher, less interest
132. All else held constant, which one of the following bonds is likely to have the highest required rate of return?
AA-rated callable corporate bond without a sinking fund
133. All is held constant ,the _____the coupon and the ______ the maturity; the______the duration of a bond. None
of these choices are correctct
134. An 18 year T-Bond can be stripped into how many separate securities? 37
135. An adjustable rate mortgage originator is adversely affected by _______ interest rates while the borrower is
adversely affected by _______ interest rates. decreasing;increasing
136. An agreement between two parties to exchange a series of specified periodic cash flows in the future based on
some underlying instrument or price is a(n): swap contract
137. An agreement between two parties to exchange specified periodic cash flows in the future based on some
underlying instrument or price Swap contract
138. An annual payment bond has a 9 percent required return. Interest rates are projected to fall 25 basis points.
The bond's duration is 12 years. What is the predicted price change? 2.75 percent
139. An annual payment bond with a $1,000 par has a 5 percent quoted couponrate, a 6 percent promised YTM,
and six years to maturity. What is the bond's duration? 5.31 years
140. An eight -year ,annual payment,7 percent coupon Treasury bond has a price of$ 1,075. The bond’s annual
expected rate of return must be: 5.80 percent

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141. An eight-year corporate bond has a 7 percent coupon rate. What should be the bond's price if the required
return is 6 percent and the bond pays interest semiannually? $1,062.81
142. An FI has long-term fixed-rate assets funded by short-term variable-rate liabilities. To protect the equity value,
the FI may engage in a swap to pay a _____ rate and receive a _____ interest. fixed; variable
143. An FI with DA > kDL could do which of the following to reduce the duration gap? Sell bond futures contracts
144. An FI's balance sheet is characterized by long-term fixed-rate assets funded by short-term variable-rate
securities. Most likely the bank has a: negative repricing gap and a positive duration gap
145. An increase in which of the following would increase the price of a call option on common stock, ceteris paribus?
I. Stock price II. Stock price volatility III. Interest rates IV. Exercise price I, II, and III only
146. An individual actually earned a 4 percent nominal return last year. Prices went up by 3 percent over the year.
Given that the investment income was subject to a federal tax rate of 28 percent and a state and local tax rate
of 6 percent, what was the investor's actual real after-tax rate of return?0.36%
147. 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. increasing; decreasing
148. An insurance company is trying to sell you a retirement annuity. The annuity will give you 20 payments with
the first payment in 12 years (i.e. at the beginning of year 12) when you retire. The insurance firm is asking you
to pay $50,000 today. If this is a fair deal, what must the payment amount be (to the dollar) if the interest rate
is 8 percent? $11,874
149. An interest rate collar is: buying a cap and writing a floor
150. An interest rate floor is designed to protect an institution from: I. falling interest rates. II. falling bond prices.
III. increased credit risk on loans. IV. swap counterparty credit risk. I only
151. An investment pays $400 in one year, X amount of dollars in two years, and $500 in three years. The total
present value of all the cash flows (including X) is equal to $1,500. If i is 6 percent, what is X? $789.70
152. An investor buys a $10,000 par, 4.25 percent annual coupon TIPS security with three years to maturity. If
inflation every six months over the investor's holding period is 2.50 percent, what is the final payment the TIPS
investor will receive? $11,843.37
153. An investor has a 38 percent ordinary income tax rate and a 20 percent long-term capital gains tax rate. The
investor holds stock in a firm that could pay its usual $1 per share dividend or reinvest the cash in the firm.
The stock price is currently $30 per share. If the firm does not pay the dividend, the share price will rise. If it
pays the dividend, the share price will stay the same. By how much must the share price rise if the dividend is
not paid in order to make the investor indifferent between receiving the dividend or not? $0.78
154. An investor has unrealized gains in 100 shares of Amazin stock for which he does not wish to pay taxes.
However, he is now bearish upon the stock for the short term. The stock is at $76 and he buys a put with a
strike of $75 for $300. At expiration the stock is at $68. What is the net gain or loss on the entire stock/option
portfolio? -$400
155. An investor is committed to purchasing 100 shares of World Port Management stock in six months. She is
worried the stock price will rise significantly over the next six months. The stock is at $45 and she buys a six-
month call with a strike of $50 for $250. At expiration the stock is at $54. What is the net economic gain or loss
on the entire stock/option portfolio? -$750
156. An investor is in the 28 percent federal tax bracket and pays a 9 percent state tax rate and 4 percent in local
income taxes. For this investor, a municipal bond paying 6 percent interest is equivalent to a corporate bond
paying _____ interest. 10.17 percent
157. An investor is trying to decide between a muni paying 5.75 percent or an equivalent taxable corporate paying
8.25 percent. What is the minimum marginal tax rate the investor must have to consider buying the municipal
bond? 30.00 percent
158. An investor requires a 3% increase to purchasing power in order to induce them to lend. She expects inflation
to be 2% next year. The nominal rate she much charge is about 5%
159. An investor sells a futures contract an asset when the futures price is $1,500. Each contract is on 100 units of
the asset. The contract is closed out when the futures price is $1,540. Which of the following is true The investor
has made a loss of $4,000
160. An investor starts with $1 million and converts it to 0.75 million pounds, which is then invested for one year.
In a year the investor has 0.7795 million pounds, which she then converts to dollars at an exchange rate of 0.72
pounds per dollar. The U.S. dollar annual rate of return earned was _____. 8.26 percent

8
161. An investor starts with €1 million and converts it to £694,500, which is then invested for one year. In a year the
investor has £736,170, which she then converts back to euros at an exchange rate of 0.68 pounds per euro. The
annual euro rate of return earned was _____. 8.26 percent
162. An investor wants to be able to buy 4 percent more goods and services in the future in order to induce her to
invest today. During the investment period prices are expected to rise by 2 percent. Which statement(s) below
is/are true? I. 4 percent is the desired real risk-free interest rate. II. 6 percent is the approximate nominal rate
of interest required. III. 2 percent is the expected inflation rate over the period. I, II, and III are true.
163. An investor wants to be able to buy 4 percent more goods and services in the future in order to induce her to
invest today. During the investment period, prices are expected to rise by 2 percent. Which statement(s) below
is/are true? 2 percent is the expected inflation rate over the period. I. Covenants on borrowing become more
restrictive. II. The Federal Reserve increases the money supply. III. Total household wealth increases. I
decreases; II decreases; III decreases I, II, and III
164. An MBB differs from a CMO or a pass-through in that I. the MBB does not result in the removal of mortgages
from the balance sheet. II. a MBB holder has no prepayment risk. III. cash flows on a MBB are not directly
passed through from mortgages. I, II, and III
165. An ordinary annuity and an annuity due with the same number of payments have the same future value if r =
10%. Which one has the higher payment? The ordinary annuity has the higher payment.
166. As a business lender, you would prefer that the borrower have stable or growing cash flows resulting from
which part of the statement of cash flows? Operating cash flows
167. As a Majority shareholder would you prefer cumulative voting or straight voting? Straight voting because if they
owned a majority of share (greater than 50%) they could control every board seat with straight voting, but not
necessarily with cumulative voting.
168. As a result of the alleged conflicts of interest between analysts and underwriting, which of the following changes
were implemented? I. Analysts cannot participate in nor attend certain presentations to potential investors
conducted by investment bankers associated with underwriting an issue. II. Analyst compensation can no
longer be tied to the amount of underwriting business a firm generates. III. Securities firms must divest stock
research divisions to ensure independence from their investment banking business. I and II
169. As a small (minority) stockholder would you prefer to have cumulative voting or straight voting?Cumulative
voting because it gives them the ability to have a large influence on board elections
170. As compared to fixed-rate mortgages, ARMs result in which of the following for the lender?vNone of the above
171. As of 2018, the largest holder of U.S. municipal bonds was ________. financial firms
172. As of December 2005, trading licenses are required to conduct trades on the floor of the NYSE. Which of the
following statements about these trading licenses is/are correct? I. Licenses are auctioned off in a special type
of auction called a Dutch auction. II. The NYSE determines the minimum bid price. III. The SEC determines
the maximum bid price. IV. Trading licenses are good for 10 years. I and II only
173. As the economy weakens, one would expect investment in ____________ funds to increase and investment in
_____________ funds to decrease, all else held constant. money market mutual; equity
174. At the beginning of the year the exchange rate between the Brazilian real andthe U.S. dollar was 2.2 reals per
dollar. Over the year, Brazilian inflation was 12 percent and U.S. inflation was 4 percent. If purchasing power
parity holds, at year-end the exchange rate should be approximately………….. dollars per real. 0.4182
175. Bank A has an increase in deposits of 20 million if the fed wishes to stimulate the economy it could 1. Buy the
U.sS government securities through OMO 11. Raise the discount rate 111. Lower reserve requirements1 and
111 only
176. Bank assets tend to have _____________ maturities and _____________ liquidity than/as bank liabilities. longer;
lower
177. Bank’ net foreign exposure is equal to: net foreign assets + net FX bought
178. Banking may be subdivided into at least three categories of banks. Match the definitions with the appropriate
name. I. A bank that specializes in retail or consumer banking in a local market II. A bank that engages in a
complete array of wholesale commercial banking activities and usually also provides retail banking services
III. A bank that is located in a financial center and relies on non-deposit or borrowed sources of funds for a
significant portion of its liabilities Community bank; super-regional bank; money center bank
179. Banks were willing to swap LDC loans for Brady bonds because: the bonds were marketable and the loans were
not
180. Basis risk occurs because it is generally impossible to: exactly match the terms of the hedging instrument with the
terms of the asset or liability at risk.

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181. Bearer bonds are bonds: with coupons attached that are redeemable by whoever has the bond.
182. Before 2003 the discount window loan rate was set Below the target fed funds rate
183. Business credit-scoring models suffer from several weaknesses. These include which of the following? I. Credit-
score models are not statistically sound tools to use in making a lending decision. II. The appropriate weights
on a credit-score model are likely to change unpredictably over time. III. These models ignore non-quantifiable
behavioral factors, such as a relationship with the bank and reputation. IV. Credit-scoring models discriminate
against minorities. II and III only
184. By convention, a swap buyer on an interest rate swap agrees to periodically pay a fixed rate of interest and receive
a floating rate of interest.
185. By type of fund, there are more ______________ funds than any other. equity
186. Ceteris paribus if the fed was targeting the quantity of money supplied and money demanded dropped the fed
would likely _____. If the fed was instead targeting interest rates and money demand dropped the fed would
likely____ . Do nothing, decrease the money supply
187. Characteristics of loan participations include the following: I. The loan participant is not a primary creditor
on the loan. II. The original lender can change some loan terms without the participant's permission. III.
Participations are without recourse. I and II only
188. Classify each of the following in terms of their effect on interest rates (increase or decrease): ␣ I. Perceived
risk of financial securities increases␣ II. Near term spending needs decrease␣ III. Future profitability of real
investments increases None of the above
189. Classify each of the following in terms of their effect on interest rates 1. convenience on borrowing become
more restrictive 11. the federal reserve increases the money supply 111. total federal reserve increases the
money supply 1 decreases 11 decreases 111 decreases
190. Clearing houses are Always used in futures markets and sometimes used in OTC markets
191. Commercial paper is Short term unsecured promissory note issued by a company to raise funds for a short time
period

192. Common stocks typically have which of the following that bonds do NOT have Voting rights
193. Common stocks typically have which of the following that bonds do not have? I. Voting rights II. Fixed cash
flows III. Set maturity date IV. Tax deductibility of cash flows to investors I only
194. Computerized markets that automatically match orders between buyers and sellers and are used primarily by
institutions traders are called ECNs
195. Convertible bonds are 1. Options attached to bonds that give the bondholder the right to purchase stock at the
present price with out giving up the bond 11. Bonds in which the issue matures (converts) a little each year 111.
Bonds collateralized with certain types of automobiles 1V. Bonds that may be converted to a certain number
of shares of stock determined by the conversion ration1V only
196. Convertible bonds are: I. options attached to bonds that give the bond holder the right to purchase stock at a
preset price without giving up the bond. II. bonds in which the issue matures (converts) a little each year. III.
bonds collateralized with certain types of automobiles. IV. bonds that may be converted to a certain number of
shares of stock determined by the conversion ratio. IV only
197. Convexity arises because: present values are a nonlinear function of interest rates.
198. Convexity in bond prices is caused by the: curvature around the bond price yield relationship.
199. Corporate Bond A returns 5 percent of its cost in PV terms in each of the first five years and 75 percent of its
value in the sixth year. Corporate Bond B returns 8 percent of its cost in PV terms in each of the first five years
and 60 percent of its cost in the sixth year. If A and B have the same required return, which of the following
is/are true? I. Bond A has a bigger coupon than Bond B. II. Bond A has a longer duration than Bond B. III.
Bond A is less price-volatile than Bond B. IV. Bond B has a higher FPV than Bond A. II and IV only
200. Currently the fed sets monetary policy by targeting The fed funds rate
201. Depository Institution include: A and B only
202. Duration is: the weighted average time to maturity of the bond's cash flows.
203. ETFs have several advantages over index funds, including the ability to: I. trade throughout the day at
continuously updated prices. II. purchase ETF shares on margin. III. sell ETF shares short. IV. sell the shares
back to the fund. I, II, and III only
204. Ethanol Lawn Mowers issued 500,000 shares to the public. The gross proceeds were $31,250,000 and the net
proceeds were $30 million. Merrel Bench was the lead underwriter and deal negotiator, but 10 other investment

10
 bankers (one of which was Golden Sax) were also used to put up capital and help sell the issue. Which of the
following statements is/are correct? I. The public paid $62.50 a share. II. Golden Sax was the originating house.
III. The spread per share was $3.50. IV. Merrel Bench is the sole book running manager. V. This offer was a
syndicated deal. I, IV, and V only
205. Eurodollar CDs would include dollars deposited in Caribbean banks and dollars deposited in Europe.
206. European investor can earn a 4.75 percent annual interest rate in Europe or
207. Explain how a drop in the value of the dollar (aka depreciation) could affect the U.S. Imports Hurts imports:
Foreign goods become more expensive in $terms
208. Explain how a drop in the value of the dollar (aka depreciation) could affect the U.S Exports? Helps Exports: $
goods become cheaper for foreign buyers
209. Explain how an increase in the value of the dollar (aka appreciation) could affect the U.S. Imports?Helps
Imports: Foreign goods become cheaper in $terms
210. Explain how an increase in the value of the dollar (aka appreciation) could affect the U.S. Exports?Hurts
Exports: $ goods become more expensive for foreign buyers.
211. Factoring is: purchasing corporate accounts receivables at a discount.
212. Finance companies enjoy several advantages over banks. These include all but which one of the following?
Finance companies have lower funds costs than banks.
213. Finance companies obtain a significant portion of their short-term financing from: issuing commercial paper
214. Financial intermediaries (FIs) can offer savers a safer, more liquid investment than a capital market security,
even though the intermediary invests in risky illiquid instruments because Both a) and b)
215. Firms assume_____ risk when they issue preferred stock than when the issuebonds. The payments of dividends
on preferred stock______be omitted without the firm being forced into bankruptcy less, can
216. For a bank with a positive duration gap, an increase in interest rates will: increase the likelihood of insolvency.
217. For a bond put option, the _____ the exercise price, the greater the cost of the put, and for a bond call option,
the _____ the exercise price, the higher the cost of the call option. higher; lower
218. For a futures contract trading in April 2012, the open interest for a June 2012 contract, when compared to the
open interest for Sept 2012 contracts, is usually Higher
219. For large interest rate declines, duration ___________ the increases in the bond's price, and for large interest
rate decreases, it ____________ the decline in the bond's price. underpredicts; overpredicts
220. For large interest rate increases, duration ________ the fall in security prices, and for large interest rate
decreases, duration ________ the rise in security prices. overpredicts; underpredicts
221. For P&C insurers, if the combined ratio is more than 100 percent, that firm: may have been profitable if
investment returns were high enough.
222. For the purposes for which they are used, money market securities should have which of the following
characteristics? I. Low trading costs II. Little price ris III. High rate of return IV. Life greater than one year
I and II
223. For the purposes of which they are used, money market securities should have which of the following
characteristics 1. low trading costs 11. little price risk 111. high rate of return 1V. life greater than one year 1
and 111 only
224. Foreign exchange trading in 2016 averaged about _____________ per day. $5.09 trillion
225. Foreign exchange trading in 2019 averaged about _____________ per day. $8.3 trillion
226. Fraudulent conveyance proceedings are: charges that a loan was improperly sold according to the conditions of the
original loan agreement.
227. From 1990 to 2013, which one of the following money market securities actually declined in terms of dollar
amount outstanding? banker's acceptances
228. Futures contracts have many advantages over forward contracts except that futures contracts are tailored to the
specific needs of the investor
229. Futures contracts trade with every month as a delivery month. A company is hedging the purchase of the
underlying asset on June 15. Which futures contract should it use? The July contract
230. Hurricane damage in a given area is an example of a ____________________ for which it is difficult to predict
loss exposure. high-severity, low-frequency event
231. Hybrid mutual funds normally invest significant amounts in: both common stock and long-term bonds.
232. i you will get will get: the bond equivalent yield
I. probably has a higher coupon III. will mature more quickly

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233. IBM creates and sells additional stock to the investment banker Morgan Stanley. Morgan Stanley then resells
the issue to the U.S public. This transaction is an example of a(n) Primary Market Transaction
234. If a $10,000 par T-bill has a 3.75 percent discount quote and a 90-day maturity, what is the price of the T-bill
to the nearest dollar? $9,906
235. If a borrower makes a 20 percent down payment on a conventional mortgage, she will be required to obtain
Private mortgage insurance. VA insurance. FHA insurance. GNMA payment guarantees. None of these choices
are correct.
236. If a borrower makes a 20 percent down payment on a conventional mortgage, she will be required to obtain
none of the options.
237. If a firm has more foreign currency assets than liabilities, and no other foreign currency transactions, it has:
positive net exposure.
238. If a firm has more foreign currency assets than liabilities, and no other foreign currency transactions, it has
positive net exposure
239. If a mortgage pass-through experiences smaller prepayments than expected early on in the life of the security,
the result will be that pass-through holders will receive _______ than expected cash flows early on and _______
than expected cash flows later on. less; greater
240. If all preferred dividend payments that have been missed must be paid before any common stock dividend can
be paid, the preferred stock is called ________ preferred stock. cumulative
241. If an asset price declines, the investor with a ….. is exposed to the largestpotential loss.long futures contract
242. If interest rate parity holds and the annual German nominal interest rate is 3 percent and the U.S. annual
nominal rate is 5 percent, and real interest rates are 2 percent in both countries, then inflation in Germany is
about _______________ than in the United States. 2 percent lower
243. If M>1 and you solve the following equation to find i: PV*(1+(i/M))M*N=FV,
244. If the bank wishes to set up a swap to totally hedge the interest rate risk, the bank should: pay a variable rate of
interest and receive a fixed rate of interest.
245. If the dollar appreciates relative to the Euro then: European cars will become less expensive in the United States.
246. If the fed is targeting interest rates and money demand increases an appropriate policy response would be to
Buy U.S treasury securities from government bond dealers
247. If the net proceeds are greater than the gross proceeds in an underwritten offering, then none of the above
248. If we were to design a macrohedge, which of the following positions would help r educe the bank's interest rate
risk? I. Establishing a long position in bond futures contracts II. Buying put options on bonds III. Purchasing
an interest rate cap I only
249. If your firm enters into an overnight reverse repurchase agreement, your firm is none of the options
250. II. Bond A has a longer duration than Bond B. III. Bond A is less price-volatile than Bond B. IV. Bond B has a
higher PV than Bond A. II and IV only
251. Important buyers of loans include all but which one of the following? credit unions
252. In 2007 the NYSE merged with ___________ Euronext
253. In 2015, the U.S. imported goods and services worth about _____________ and exported about _________
leading to a current account ____________. $3.7 trillion; $3.3 trillion; deficit
254. In 2019, the U.S. imported goods and services worth about _____________ and exported about _________
leading to a current account ____________. $2.5 trillion; $1.7 trillion; deficit
255. In a ____________ offering the firm preregisters with the SEC any securities it wishes to sell over the next two
years. Shelf
256. In a ____________ the firm preregisters with the SEC any securities it wishes to sell over the next two years.
shelf registration
257. In a bear market, which option positions make money? I. Buying a call II. Writing a call III. Buying a put IV.
Writing a put II and III only
258. In a loan participation, which of the following is/are true? I. The loan buyer has no part in the original
underlying credit agreement, even after purchase of the loan. II. If the selling bank fails, the loan buyer's claim
against the selling bank may be treated as unsecured. III. In the event the selling bank fails, the original
borrower's deposits may be used to reduce the loan amount without any proceeds going to the loan buyer. I, II,
and III

12
259. In a three-class sequential pay CMO, if we consider Class B holders as having average prepayment risk, then
Class A holders have _____________ prepayment risk and Class C holders have _____________ prepayment
risk. above average; below average
260. In a Treasury auction, preferential bidding status is granted to noncompetitive bidders.
261. In analyzing credit risk for a loan to a major diversified corporation, the bank typically has which of the
following advantages? I. Market-based models to analyze credit risk II. Greater negotiating power due to the
size of the loan required III. Ratings agency measures of default risk I and III only
262. In comparison to small banks, larger banks typically have: more off-balance-sheet activities
263. In concept, the RAROC measure indicates a loan is acceptable if the RAROC is greater than the:lender's ROE
264. In dollars outstanding in 2013, the largest money market security was T-bills.
265. In dollars outstanding in 2016, the largest money market security was Fed funds and repos.
266. In general terms, which one of the following plan types is the riskiest for an employee on a year-to-year basis?
Defined contribution plan invested in equities
267. In property and casualty insurance the combined ratio is equal to ______________________ divided by total
premiums written. the sum of the loss ratio plus the expense ratio
268. In recent years defined contribution plans have grown faster than defined benefit plans in which of the
following areas? I. Fund assets II. Number of funds III. Number of plan participants I, II, and III
269. In selling loans, FIs act as an asset _____ and in creating CMOs, FIs act as an asset _____. broker; transformer
270. In terms of dollar costs, the worst U.S. catastrophe since 2000 was caused by: Hurricane Katrina
271. In terms of volume of trading and market value of firms traded, the _____________ is the largest U.S. stock
market. In terms of number of firms traded, the ___________ is the largest in the United States. . NYSE;
NASDAQ
272. in the area of bank supervision, which of the following are functions of the federal banks 1. Examinations of
state member banks 11. approval of member bank and bank holding company acquisitions 111. deposit
insurance 1 and 11 only
273. In the corn futures contract a number of different types of corn can be delivered (with price adjustments
specified by the exchange) and there are a number of different delivery locations. Which of the following is true
This flexibility tends decrease the futures price.
274. In the T-bill auction process, the competitive bidder is guaranteed a ________ and a noncompetitive bidder is
guaranteed a ________. stop-out price; given quantity.
275. In the T-bill auction process, the competitive bidder is guaranteed a ______________ and a noncompetitive
bidder is guaranteed a _______________. maximum price; given quantity.
276. inflation causes the demand curve for lovable funds to shift to the ____ and causes the supply curve to shift to
the ____ Right; left
277. interest income from treasure securities is ____, and interest income from municipal bonds is always_ ___
Taxable at federal level only; exempt from federal taxes
278. Investment A pays 8 percent simple interest for 10 years. Investment B pays 7.75 percent compound interest
for 10 years. Both require an initial $10,000 investment. The future value of A minus the future value of B is
equal to ______________ (to the nearest penny). -$3,094.67
279. Investment firms that pool money from individuals and/or institutions and invest equity funds in start-up firms
are called: venture capital firms.
280. Investors pay load charges to receive: advice on which fund to buy.
281. LIBOR is generally _____ the fed funds rate because foreign bank deposits are generally ____ than domestic
bank deposits. Greater then; More risky
282. Liquidity risk at a financial intermediary (FI) is the risk that a sudden surge in deposit withdrawals may require
an FI to liquidate assists quickly to
283. Loan sales are likely to continue because: I. they can increase near-term reported earnings. II. they reduce the
amount of capital required. III. more corporate borrowers have access to the commercial paper market. I and
II only
284. Margin accounts have the effect of All of the above
285. Measured by the amount outstanding, the largest type of derivative market in the world is the swap market.
286. Mid-market commercial lending may be typically defined as borrowers: I. with sales revenue between $5
million and $100 million. II. with a recognizable corporate structure. III. with ready access to deep and liquid
capital markets. I and II only

13
287. MONDEX spent $50 million to develop the Smart Card, but tests of prototypes in New York and Canadian
cities revealed very little consumer interest. This is an example of: technological risk
288. Money market securities exhibit which of the following? I. Large denomination II. Maturity greater than one
year III. Low default risk IV. Contractually determined cash flows I, III, and IV
289. Money markets trade securities that : 1. Mature in one year or less 11. Have little chance of loss of principle
111. Must be guaranteed by the federal government 1 and 11 only
290. Mortgage fees paid by the homeowner at, or prior to, closing upon the purchase of a house typically include all
but which one of the following? Prepayment penalty
291. 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. higher; less
interest
292. My bank has a larger number of adjustable-rate mortgage loans outstanding. To protect our interest rate
income on these loans, the bank could: I. enter into a swap to pay fixed and receive variable. II. enter into a
swap to pay variable and receive fixed. III. buy an interest rate floor. IV. buy an interest rate cap. II and III only
293. Nationally chartered banks receive chartering and merger approval from the: Office of Comptroller of the
Currency
294. New futures contracts must be approved by: the CFTC
295. Nonperforming loans are loans that are past due ___________ that are not accruing interest. 90 days
296. NYSE listing has traditionally benefited a firm by A, B, and C
297. NYSE listing has traditionally benefited a firm by: improving the stock’s price, generating increased publicity for
the firm, and providing easier access to primary market capital.
298. Of the following the most likely effect of an increase in income tax rates would be to All of the above
299. Of the following, the most recent derivative security innovations are credit derivatives.
300. Of the following, which is the most likely effect of an increase in income tax rates? All of the above: Increase in
interest rates, decrease in savings rate, decrease in the supply of loanable funds.
301. On July 1, 2012, you purchase a $10,000 par T-note that matures in five years. The coupon rate is 8 percent
and the price quote is 98:6. The last coupon payment was May 1, 2012, and the next payment is November 1,
2012 (184 days total). The accrued interest is $132.61.
302. On March 1 a commodity's spot price is $60 and its August futures price is $59. On July 1 the spot price is $64
and the August futures price is $63.50. A company entered into futures contracts on March 1 to hedge its
purchase of the commodity on July 1. It closed out its position on July 1. What is the effective price (after taking
account of hedging) paid by the company? $59.50
303. On March 1 the price of a commodity is $1,000 and the December futures price is $1,015. On November 1 the
price is $980 and the December futures price is $981. A producer of the commodity entered into a December
futures contracts on March 1 to hedge the sale of the commodity on November 1. It closed out its position on
November 1. What is the effective price (after taking account of hedging) received by the company for the
commodity? $1,014
304. On September 1, 2012 an investor purchases a $10,000 par T-Bond that matures in 12 years. The coupon rate
is 6% and the investor buys the bond 70 days after the last coupon payment (110 days before the next). The ask
yield is 7%. The dirty price of the bond is: $9,313.75.
305. On the NASDAQ system, the inside quotes are the highest bid and lowest ask.
306. One fixed-rate mortgage pool has a 750 PSA and a second fixed-rate pool has a 150 PSA. The pool with the
higher PSA ______________________ than the pool with the lower PSA. I. probably has a higher coupon II.
probably has lower default risk III. will mature more quickly I and III only
307. One futures contract is traded where both the long and short parties are closing out existing positions. What is
the resultant change in the open interest? Decrease by one
308. Plain vanilla interest rate swaps are exchanges of: interest only.
309. Preferred shareholders May not receive a dividend every year
310. Property and casualty insurers hold _____________ short-term assets than life insurers because property and
casualty loss rates are _____________ predictable than life insurance loss rates. more; less
311. Rank mortgages by amount outstanding from largest to smallest home, commercial, multifamily, farm
312. Rank the following types of mortgages by amount outstanding from largest to smallest. I. Home mortgages II.
Multifamily mortgages III. Farm mortgages IV. Commercial mortgages I, IV, II, III
313. Rank the follwing types of mortgages by amount outstanding from largest to smallest. 1. Home 2. Multifamily
3. Farm 4. Commercial 1, 4, 2, 3

14
314. Rates on federal funds and repurchase agreements are stated on a bond equivalent basis with a 360-day year.
315. Recently oil prices have risen in the U.S, generating concerns that inflation may lead the fed wishes to ensure
that inflation does not get out of hand the fed could: Lower the target money supply growth rate.
316. SEC Rule 144 A does which of the following? Allows privately placed investments to be traded on a limited basis.
317. Secondary markets help support primary markets because secondary markets I. offer primary market
purchasers liquidity for their holdings. II. update the price or value of the primary market claims. III. reduce
the cost of trading the primary market claims. I, II, and III
318. Standard revenue bonds are: collateralized by the earnings from a specific project.
319. Suppose a firm has 10 million shares of common stock outstanding and seven candidates are up for election to
three seats on the board of directors. If the firm uses cumulative voting to elect its board, what is the minimum
number Of votes needed to ensure election to the board? 7.5000.001
320. Suppose that $10 million face value commercial paper with a 270-day maturity is selling for $9.55 million. What
is the BEY on the paper? 6.37 percent
321. Suppose that over the last 10 to 15 years significantly large numbers of investors have been able to earn
abnormal returns from using the firm's publicly available financial information to forecast growth in earnings
and dividends. This would be evidence that the markets are not: I. weak form efficient II. semi-strong form
efficient III. strong form efficient I and II only
322. Suppose that the current one-year treasury bill- rate is 3.15 percent and the expected one year rate 12 months
from now is 4.25. According to the unbiased expectations theory, what should be the current rate for a two year
treasury security? (1.0315)(1.0425)= (1+x)^2 x=3.7
323. Suppose that the standard deviation of monthly changes in the price of commodity A is $2. The standard
deviation of monthly changes in a futures price for a contract on commodity B (which is similar to commodity
A) is $3. The correlation between the futures price and the commodity price is 0.9. What hedge ratio should be
used when hedging a one month exposure to the price of commodity A? 0.60
324. Suppose you can save $2,000 per year for the next ten years in an account earning 7 percent per year. How
much will you have at the end of the tenth year if you make the first deposit today?29,567.20
325. The ___________ the coupon and the ______________ the maturity; the __________ the duration of a bond,
ceteris paribus. E. None of the options presented
326. The ________________ measures the net flows of imports and exports of goods, services, income payments, and
unilateral transfers. Current account
327. The _________________ insures losses of funds deposited with securities firms in the event of failure of a
securities firm. SIPC
328. The act of buying a share in a loan syndication with limited contractual control and rights over the borrower
is called a: loan participation.
329. The age group that holds the most stock is the ____________ group. 45-64
330. The agreement that ended the era of fixed exchange rates for the major economies was called the:Smithsonian
Agreement II.
331. The ask yield on a 6% coupon Treasury bond maturing in 8 years is 5.488%. If the face value is $1000, what
should be the QUOTED cost of the bond today (use semiannual compounding)? 103:9
332. The basis is defined as spot minus futures. A trader is hedging the sale of an asset with a short futures position.
The basis increases unexpectedly. Which of the following is true? The hedger's position improves.
333. The borrower of an amortized mortgage makes most of the payment during the early life of the mortgage:
towards the interest.
334. The concept underlying purchasing power parity is the Law of one price
335. The diagram below is a diagram of the Primary markets.
336. The discount rate is the rate that The federal reserve charges on loans to commercial banks
337. The discount yield on a T-bill differs from the T-bill's bond equivalent yield (BEY) because I. the discount yield
is the return per dollar of face value and the BEY is a return per dollar originally invested. II. a 360-day year
is used on the discount yield and the BEY uses 365 days. III. the discount yield is calculated without
compounding, and the BEY is calculated with compounding. II and III only
338. The electronic-based market for less actively traded U.S. securities is the OTC Bulletin Board
339. The FDIC is concerned about issuance of mortgage-backed bonds (MBBs) because: the process reduces the
amount of assets available to back insured deposits.
340. The fed funds rate is the rate that Banks charge each other on loans of excess reserves

15
341. The fed increases the money supply. The effect of the increase should be to 1. increase consumption spending
11. reduce business investment 111. increase nominal GDP 1 and 111 only
342. The federal reserve does all but which on of the following Insure deposits
343. The FHA charges the homeowner __________________ to insure an FHA mortgage. 0.5% of the loan amount
344. The following formula is used to calculate the _____________ of a money market investment. (pf-p0)/p0 *
(360/n) single-payment yield
345. The frequency with which futures margin accounts are adjusted for gains and losses is Daily
346. The higher the exercise price, the ________________ the value of a put and the _______________ the value of
a call. higher; lower
347. The interest rate used to find the present value of a financial security is the: required rate of return
348. The large U.S. current account deficit implies that: the United States must rely on foreigners to be willing to invest
in the United States.
349. The largest asset category of life insurers is _______________ and the largest liability category is ___________.
bonds; policy reserves
350. The largest asset on the typical broker-dealers’ balance sheet in 2016 was: receivables from other broker-dealers.
351. The largest center for trading in foreign exchange is: London
352. The largest proportion of long-term mutual fund assets is held by ___________________. the household sector
353. The largest single type of holder of common stock is ________ households.
354. The largest two categories of swaps are interest rate and currency swaps.
355. The largest type of municipal bonds outstanding are _______________. general obligation bonds
356. The least used form of mortgage securitization is the ______________________. mortgage-backed bond
357. The levels of foreign currency assets and liabilities at banks have ___________ in recent years, and the level of
foreign currency trading has ____________. increased; increased
358. The main advantage of a profit sharing Keogh plan over a money sharing Keogh plan is that profit sharing
plans: can have contributions that vary from year to year with prof its, while money sharing plan contributions are a
fixed percentage of the employee’s income.
359. The major asset of the federal reserve is U.S Treasury securities
360. The major liability of the federal reserve is Currency outside banks
361. The Major monetary policy making arm of the federal reserve is the The federal open market committee
362. The most active and important participant in the U.S. money market is the Federal Reserve.
363. The most diversified type of depository institutions are Commercial Banks
364. The most liquid of the money market securities are T-bills.
365. The most significant borrower in the U.S. money markets? Is the U.S. Treasury
366. The NASDAQ automatic order execution system for individual traders placing buy or sell orders of 1000 or
fewer shares is called the SOE System
367. The NYSE specialists are charged with I. trading for their own account. II. ensuring public limit orders are
executed. III. facilitating processing public market orders. I, II, and III
368. The PBGC: I. insures participants of defined benefit plans if plan funds are insufficient to meet contractual
pension obligations. II. insures participants of defined contribution plans if investment returns are insufficient
to meet expected pension obligations. III. regulates day-to-day pension fund operations. I only
369. The percentage of the total loan paid back immediately when a mortgage loan is obtained, which lowers the
annual interest rate on the debt, is called: discount points
370. The predominant liabilities for savings institutions are: transaction accounts and small time and savings deposits.
371. The preemptive right is designed to allow existing shareholders to buy shares of the new offering if they desire.
372. The preliminary version of a security offer that is circulated to potential buyers before SEC approval
(registration) is obtained is called a red herring prospectus
373. The price of a bond rises from 98 to par. 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 ______________. short futures
contract; call option
374. The price of a stock on February 1 is $124. A trader sells 200 put options on the stock with a strike price of
$120 when the option price is $5. The options are exercised when the stock price is $110. The trader's net profit
or loss is Loss of $1,000
375. The price of a stock on February 1 is $48. A trader sells 200 put options on the stock with a strike price of $40
when the option price is $2. The options are exercised when the stock price is $39. The trader's net profit or
loss is Gain of $200

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376. The price of a stock on February 1 is $84. A trader buys 200 put options on the stock with a strike price of $90
when the option price is $10. The options are exercised when the stock price is $85. The trader's net profit or
loss is Loss of $1,000
377. The price of a stock on July 1 is $57. A trader buys 100 call options on the stock with a strike price of $60 when
the option price is $2. The options are exercised when the stock price is $65. The trader's net profit is $300
378. The primary policy tool used by the fed to meet its monetary policy goals is Open Market Operations
379. The primary regulator of insurance firms is the: state insurance regulator.
380. The process of allocating shares of hot IPO issues to directors and/or executives of potential investment banking
clients in exchange of subsequent investment banking business is called Spinning
381. The process of packaging and/or selling mortgages that are then used to back publicly traded debt securities is
called securitization
382. The profits on a derivatives position are fixed when a bond's price falls below a certain point, but above that
point the profits fall when the bond price rises. This profit profile fits which of the following positions? Written
call option
383. The quoted ask yield on a 14 year $1000 par T-Bond with a 7% semiannual payment coupon and a price quote
of 98:15 is 7.18%.
384. The quoted ask yield on a 30-year $1000 par T-Bond with a 6.25% coupon and a price quote of 106:16 is
___________ (use semiannual compounding). 5.79%
385. The rate of return on a repo is Both C and D
386. The rate of return on a repo is: strongly affected by the current Fed funds rate at the time of the repo and is
determined at the time of the repo.
387. The relationship between maturity and yield to maturity is called the ____ Term Structure
388. The required rate of return on a bond is the interest rate that a bond issuer must offer in order to get investors
interested. None of the options.
389. 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: liquidity risk
390. The riskiest capital market security is Corporate bond
391. The safest way to hedge a bond liability with options is to: purchase a call option on the bond.
392. The schedule showing how monthly mortgage payments are split into principle and interest is called a(n)
amortization schedule
393. The Securities Exchange Commission (SEC) does NOT Decide whether a public issue is fairly priced
394. The spot rate for the Argentine peso is $0.3600 per peso. Over the year, inflation in Argentina is 10 percent and
U.S. inflation is 4 percent. If purchasing power parity holds, at year-end the exchange rate should be
approximately ______________ dollars per real. 0.3384
395. The stamp on a prospectus accompanying a new issue that indicates the issue has not yet been approved for
sale by the SEC is called the red herring
396. 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: CMO investors can choose their degree of prepayment protection.
397. The term structure of interest rates is upward sloping for all bond types. A certain AAA-rated, noncallable 10-
year corporate bond has been issued at a 6.15 percent promised yield. Which one of the following bonds
probably has a higher promised yield? A callable, AAA-rated corporate bond with a 15-year maturity.
398. The type of swap most closely linked to the subprime mortgage crisis is the ____________. credit default swap
399. The value of the British pound changed from $1.23 to $1.32. We can say that the pound has ________ and the
dollar has ________. appreciated; depreciated
400. The value of the British pound changed from $1.40 to $1.15. We can say that the pound has ________ and the
dollar has ________. depreciated; appreciated
401. The value of the Euro changed from $1.15 to $1.25. We can say that the dollar has ________ and the euro has
________. depreciated; appreciated
402. The value of the Euro changed from $1.20 to $1.14. We can say that the dollar has ________ and the euro has
________. appreciated; depreciated
403. Today Stock A is worth $20 and has 1000 shares outstanding. Stock B costs $30 and has 500 shares outstanding.
Stock C is priced at $50 per share and has 1200 shares outstanding. If tomorrow Stock A is priced at $22, Stock
B at $35, and Stock C is worth $48, what would the value-weighted index amount equal? (The index has a base
period value of 100.) 102.21
404. Two competing fully electronic derivatives markets in the United States are CME Globex and Eurex.

17
405. Under ERISA, pension fund managers are required to invest fund assets as wisely as if they were investing
their own money. This requirement is called the: prudent person rule
406. Upon graduating from college this year, you expect to earn $25,000 per year. If you get your MBA, in one year
you can expect to start at $35,000 per year. Over the year, inflation is expected to be 5 percent. In today's
dollars, how much additional (less) money will you make from getting your MBA (to the nearest dollar) in your
first year? 8,333
407. Vesting refers to: how long until an employee owns any employer contributions to the employee's pension plan.
408. Weaknesses of the repricing model include the fact that: I. it ignores changes in present values caused by
changes in interest rates. II. it ignores different cash flow sensitivities within a maturity bucket. III. it fails to
account for runoffs and prepayments. I, II, and III
409. What factors are encouraging financial institutions to offer over lapping financial services as banking,
investment banking, brokerage, etc. I. regulatory changes allowing institutions to offer more services II.
Technological imprivements reducing the cost of providing financial services III. Increasing competition from
full service global financial institutions IV. Reduction in the need to manage risk at financial institutions I, II,
and III only
410. What of the following is true? Futures contracts require an initial margin requirement be paid.
411. When an investment banker purchases an offering from a bond issuer and then resells it to the public, this is
known as a: firm commitment
412. Which entity in the United States takes primary responsibility for regulating futures market?Commodities
Futures Trading Commission (CFTC)
413. Which of the following are cash settled Futures on stock indices
414. Which of the following are likely to lead to an appreciation of the U.S. dollar (all else held constant)? I. Higher
real U.S. interest rates II. Lower U.S. inflation III. Higher nominal U.S. interest rates I and II only
415. Which of the following are likely to lead to an appreciation of the U.S. dollar (ceteris paribus)? I and II only
416. Which of the following are money market interments? 6-Month CDs
417. Which of the following are potentially subject to risk-based capital requirements? Swaps and forwards
418. Which of the following are true of mortgages? Only 1 and 2 are true of mortgages
419. Which of the following best describes "stack and roll"? Creates long-term hedges from short term futures contracts
420. Which of the following best describes a central counterparty It stands between two parties in the over-the-counter
market
421. Which of the following best describes central clearing parties Perform a similar function to exchange clearing
houses
422. Which of the following best describes the capital asset pricing model? Relates the return on an asset to the return
on a stock index
423. Which of the following best describes the term "spot price" The price for immediate delivery
424. Which of the following bond option positions increase in value when interest rates increase? Long put and written
call
425. Which of the following bond terms are generally positively related to bond price volatility? I. Coupon rate II.
Maturity III. YTM IV. Payment frequency II only
426. which of the following bond types pays interest that is exempt from federal taxation Municipal bonds
427. Which of the following conditions may lead to a decline in the value of acountry’s currency? I. Low interest
rates II. High inflation III. Large current account deficit II and III only
428. Which of the following describes European options? Exercisable only at maturity
429. Which of the following describes tailing the hedge? None of the above
430. Which of the following descriptions does not apply to money market securities? Long maturity
431. Which of the following does NOT describe beta? Measures correlation between futures prices and spot prices for a
commodity
432. Which of the following increases basis risk? Dissimilarity between the underlying asset of the futures contract and
the hedger's exposure
433. Which of the following indices are value-weighted? I. NYSE Composite II. S&P500 III. NASDAQ Composite
IV. Dow Jones Industrial Average I, II, and III only
434. Which of the following information is NOT usually found in a Wall Street Journal stock quote? Stock rating
435. Which of the following is a reason for hedging a portfolio with an index futures? The investor believes the stocks
in the portfolio will perform better than the market but is uncertain about the future performance of the market

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436. Which of the following is approximately true when size is measured in terms of the underlying principal
amounts or value of the underlying assets The over-the-counter market is ten times as big as the exchange-traded
market.
437. Which of the following is necessary for tailing a hedge? Comparing the value of the position being hedged with the
value of one futures contract
438. Which of the following is NOT true about call and put options: The price of a call option increases as the strike
price increases
439. Which of the following is NOT true Futures contracts nearly always last longer than forward contracts
440. Which of the following is NOT true The holder of a call or put option must exercise the right to sell or buy an asset
441. Which of the following is NOT true When a CBOE call option on IBM is exercised, IBM issues more stock
442. Which of the following is not true with respect to preferred stock? 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
443. Which of the following is the major monetary policy making body of the U.S federal reserve systemFOMC
444. Which of the following is true about a long forward contract The contract becomes more valuable as the price of
the asset rises
445. Which of the following is true Futures contracts are traded on exchanges, but forward contracts are not.
446. Which of the following is true of mortgage interest rates? Only 1 and 2 are true
447. Which of the following is true? Futures contracts require an initial margin requirement be paid.
448. Which of the following is true? If all companies in an industry do not hedge, a company is liable increase its risk by
hedging
449. Which of the following is true? The hedging strategies of a gold producer should depend on whether it shareholders
want exposure to the price of gold
450. Which of the following is true? The optimal hedge ratio is the slope of the best fit line when the change in the spot
price (on the y-axis) is regressed against the change in the futures price (on the x-axis).
451. Which of the following is/are capital market instruments All of the above
452. Which of the following is/are true about a Roth IRA? I. Contributions are tax deductible. II. Qualified
withdrawals after retirement are not taxed. III. You must begin withdrawals at age 70½. IV. Employers match
contributions. V. They are only available to individuals earning less than $50,000, or households earning less
than $90,000. II only
453. Which of the following is/are true about callable bonds? I. Must always be called at par II. Will normally be
called after interest rates drop III. Can be called by either the bondholder or the bond issuer IV. Have higher
required returns than non-callable bonds II and IV only
454. Which of the following is/are true about callable bonds? II and IV only
455. Which of the following is/are true about specialists? I. Investment banks generally cannot be specialists II.
Specialists are used by the NASDAQ system III. Market and limit orders are transacted at specialist posts, but
the specialist's own account orders are executed elsewhere IV. Specialists help maintain continuous trading I
and IV only
456. Which of the following requires daily cash flow settlements between the parties? Futures contract
457. Which of the following situations would require an increase in the coupon rate for a bond selling at par? The
addition of a call provision
458. Which of the following statements about 401(k) plans are true? I. They are defined benefit plans. II. They allow
employer and employee contributions. III. Earnings accrue tax-free during the employee's working years. IV.
They allow employee discretion in asset allocation. V. They always have minimum guaranteed rates of return.
II, III, and IV only
459. Which of the following statements about Eurobonds is/are true? I. The issuer chooses the currency of
denomination. II. Spreads on firm commitment offers are lower for Eurobonds than for U.S. bonds. III.
Eurobonds typically have denomination of $5,000 and $10,000. IV. Eurobonds are bearer bonds. I, III, and IV
only
460. 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, HUD’s Office of Indian and
Public Housing, and USDA Rural Development loans. IV. GNMA requires that all mortgages in the pool have
the same interest rate. I, III, and IV only
461. Which of the following statements about mortgage markets is/are true? I. Mortgage companies service more
mortgages than they originate. IV. The government is involved in the residential mortgage markets.

19
462. Which of the following statements about mortgage markets is/are true? I. Mortgage companies service more
mortgages than they originate. II. Servicing fees typically range from 2 percent to 4 percent. III. Most mortgage
sales are with recourse. IV. The government is involved in the residential mortgage markets. I and IV only
463. Which of the following statements about mortgage markets is/are true? I. Mortgage companies service more
mortgages than they originate II.Servicing fees typically range from 2 percent to 4 percent III.Most mortgage
sales are with recourse IV.The govement is involved in the residential mortgage markets I and IV only
464. Which of the following statements are true about a traditional IRA? I. Subject to an income limit, in 2019 a
single person could contribute up to $6,000 per year ($7,000 if over 50 years old) of pretax income to an IRA.
II. All withdrawals are tax-free. III. Earnings on the IRA account are not taxed until withdrawn. IV. You must
begin withdrawals at age 59½. V. Withdrawal(s) can be a lump sum or installments. I, III, and V
465. Which of the following would normally be expected to result in an increase in the supply of funds, all else equal?
I. The perceived riskiness of all investments decreases. II. Expected inflation increases. III. Current income
and wealth levels increase. IV. Near term spending needs of households increase as energy costs rise. I and III
only
466. Which one of the following bonds is likely to have the highest required rate of return, ceteris paribus? AA-rated
callable corporate bond without a sinking fund
467. Which one of the following contracts requires no cash to change hands wheninitiated?long forward contract
468. Which one of the following entities is an actual government agency dealing with mortgages? GNMA
469. Which one of the following entities is an actual government-owned enterprise dealing with mortgages? GNMA
470. Which one of the following forms of securitization is usually "double securitization"? CMO
471. Which one of the following fund types is likely to have the lowest annual expense ratio? index funds
472. Which one of the following has the highest concentration of mortgage-related assets on the balance sheet?
cSavings institutions
473. Which one of the following securities firms' activities is normally the most risky? Firm commitment offering
474. Which one of the following statements about commercial paper is not true? Commercial paper issued in the
United States carries an interest rate above the prime rate.
475. Which one of the following statements about commercial paper is NOT true? carries an interest rate above the
prime rate.
476. Which one of the following types of mortgages is likely to become more popular as the average age of the U.S.
population increases? RAM
477. Which one of the following types of transactions leaves the assets on the balance sheet? Mortgage-backed bonds
issued
478. Which type of borrowers were 'least' likely to default in their mortgage at the beginning of the financial crisis?
Those with fixed-rate mortgages who made large down payments.
479. Who initiates delivery in a corn futures contract The party with the short position
480. With ____________ voting, all directors up for election are voted on by the shareholders at the same time in
one general election. Cumulative
481. with a fixed rate mortgage the_____ bears the interest rate risk and with an ARM the_____ bears the interest
rate risk Lender; borrowe
482. With a GNMA pass-through, the investor bears ________ of the prepayment risk; with a noncallable mortgage-
backed bond, the investor bears _________ of the prepayment risk; and with a CMO, the investor bears
______________ of the prepayment risk. all; none; some
483. With a six-month maturity bucket, a nine-month fixed-rate loan would be considered a ________________
asset and a 30-year mortgage with a rate adjustment in three months would be classified as a _______________
asset. fixed-rate; rate-sensitive
484. With bilateral clearing, the number of agreements between four dealers, who trade with each other, is 6
485. With respect to private placements of bonds, which of the following is correct? I. Issuers of privately placed
bonds tend to be less well known than public bond issuers. II. Interest rates on privately placed debt tend to be
higher than for similar public issues. III. Purchasers of privately placed debt have assets of at least $1 million.
IV. Once bonds have been privately placed, the original buyers must hold the bonds until maturity. I, II, and III
only
486. You buy a $10,000 par Treasury bill at $9,575 and sell it 60 days later for $9,675. What was your EAR? 6.52
percent
487. You buy a car for $38,000. You agree to a 60-month loan with a monthly interest rate of 0.55 percent. What is
your required monthly payment? 745.29

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488. You buy a principal STRIP maturing in 5 years. The price quote per hundred of par for the strip is 75.75%.
Using semiannual compounding what is the promised yield to maturity on the STRIP?5.632%
489. You buy a stock for $30 per share and sell it for $33 after holding it for slightly over a year and collecting a
$0.75 per share dividend. Your ordinary income tax rate is 28% and your capital gains tax rate is 20%. Your
after-tax rate of return is ___________________. 9.80%
490. You buy a stock for $34 per share and sell it for $36 after you collect a $1.00 per share dividend. Your pretax
capital gain yield is ________ and your pretax dividend yield is ________. 5.88 percent; 2.94 percent
491. You buy euros in New York from Deutsche Bank and simultaneously sell them in London to Barclays for a
gain. This is an example of: pure arbitrage.
492. You can buy or sell the £ spot at $1.98 to the pound. You can buy or sell the pound one-year forward at $2.01
to the pound. If U.S. annual interest rates are 5 percent, what must be the approximate one-year British interest
rate if interest rate parity holds? 3.45 percent
493. You can buy or sell the yen spot at ¥102 to the dollar. You can buy or sell the yen one-year forward at ¥104 to
the dollar. If U.S. annual interest rates are 4 percent, what must be the approximate one-year Japanese interest
rate if interest rate parity holds? 6.04 percent
494. You can buy or sell the yen spot at Y102 to the dollar. You can buy or sell the yen one-year forward at Y 104
to the dollar. If U.S. annual interest rates are 4 percent, what must be the approximate one-year Japanese
interest rate if interest rate parity holds? 6.04
495. You find the following current quote for the March T-bond contract: $100,000; Points 32 nd, of 100 percent.
Open High Low Settle Open Interest 89-12 89-24 88-22 89-22 55,210
496. You go to the Wall Street Journal and notice that yields on almost all corporate and Treasury bonds have
decreased. The yield decreases may be explained by which of the following . None of the above
497. You go to the Wall Street Journal and notice that yields on almost all corporate and Treasury bonds have
decreased. The yield decreases may be explained by which one of the following? A decrease in U.S. inflationary
expectations.
498. You have agreed to deliver the underlying commodity on a futures contract in 90 days. Today the underlying
commodity price rises and you get a margin call. You must have: a short position in a futures contract
499. You have taken a stock option position and, if the stock's price drops, you will get a level gain no matter how
far prices fall, but you could go bankrupt if the stock's price rises. You
have________________________________. Written a call option.
500. You have taken a stock option position and, if the stock's price increases, you could lose a fixed small amount
of money, but if the stock's price decreases, your gain increases. You must have ________. bought a put option
501. You have taken a stock option position and, if the stock's price drops, you will get a level gain no matter how
far prices fall, but you could go bankrupt if the stock's price rises. you have written a call option
502. You have taken a stock option position and, if the stocks price increases. you could lose a fixed small amount
of money, but if the stock's price decreases, your gain increases. You must have bought a put option
503. You obtain a $265,000, 15-year fixed-rate mortgage. The annual interest rate is 6.25 percent. In addition to the
principal and interest paid, you must pay $275 a month into an escrow account for insurance and taxes. What
is the total monthly payment (to the nearest dollar)? $2,547
504. You own a mortgage-backed security and you will receive fixed semiannual interest payments and no princip
al payments as long as prepayments remain within a given range. If prepayments move outside the range, cash
flows will vary. You must be holding a ______________________. PAC CMO
505. You purchase a $1,000 face value convertible bond for $975. The bond can be converted into 150 shares of
stock. The stock is currently priced at $5.25. At what minimum stock price would you be willing to convert?
$6.50
506. You purchase a $255,000 house and you pay 20% down.You obtain a fixed-rate mortgage where the annual
interest rate is 5.85% and there are 360 monthly payments. What is the monthly payment? 1203.48
507. You purchase a $325,000 town home and you pay 25 percent down. You obtain a 30-year fixed-rate mortgage
with an annual interest rate of 5.75 percent. After five years you refinance the mortgage for 25 years at a 5.1
percent annual interest rate. After you refinance, what is the new monthly payment (to the nearest dollar)?
$1,335
508. You purchased a five-year annual payment 6 percent coupon bond for $1,000 and you planned on holding it to
maturity. However, right after you bought the bond, it was called at $1,043.29 when all interest rates fell to 5
percent and remained there for the full five years. You reinvested the money for the full five years. What was
your annual compound rate of return off your original investment? 5.89%

21
509. You sell one December futures contracts when the futures price is $1,010 per unit. Each contract is on 100 units
and the initial margin per contract that you provide is $2,000. The maintenance margin per contract is $1,500.
During the next day the futures price rises to $1,012 per unit. What is the balance of your margin account at
the end of the day? $1,800
510. You want to buy a $250,000 house and you will use a conventional mortgage. What is the minimum down
payment you have to make to avoid having to purchase mortgage insurance? 50,000
511. You want to have $5 million when you retire in 40 years. You believe you can earn 9% per year on your
investment. How much must you invest each year to achieve your goal when you retire? $14,798
512. You went long in the contract at the open. Which of the following is/are true? I. At the end of the day, your
margin account would be increased. II. 55,210 contracts were traded that day. III. You agreed to deliver
$100,000 face value T-bonds in March in exchange for $89,120. IV. You agreed to purchase $100,000 face value
T-bonds in March in exchange for $89,375. I and IV only
513. You would want to purchase a security if P ____ PV or E(r) ____ r. ≤; ≥ less more
514. You would want to purchase a security if the price is ________ the present value or if the expected return is
________ the required rate of return. less than or equal to; greater than or equal to
515. Your firm enters into a swap agreement with a notional principal of $40 million wherein the firm pays a fixed
rate of interest of 5.50 percent and receives a variable rate of interest equal to LIBOR plus 150 basis points. If
LIBOR is currently 3.75 percent, the NET amount your firm will receive (+) or pay (-) on the next transaction
date is -$100,000.

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