Financial Economics
Textbook Exam Questions
Course Introduction
Financial Economics explores the principles and models that underpin financial markets, institutions, and instruments. The course examines how individuals and firms allocate resources over time under conditions of uncertainty, analyzing topics such as asset pricing, portfolio selection, market efficiency, and risk management. It integrates economic theory with practical financial applications, including the valuation of stocks, bonds, and derivatives, as well as the impact of public policy and regulation on financial systems. Through both qualitative insights and quantitative methods, students gain a comprehensive understanding of how financial markets operate and their vital role in the broader economy.
Recommended Textbook
Foundations of Financial Markets and Institutions 4th Edition by Frank J. Fabozzi
Available Study Resources on Quizplus
32 Chapters 1746 Verified Questions
1746 Flashcards
Source URL: https://quizplus.com/study-set/1063 Page 2
Chapter 1: Introduction
Available Study Resources on Quizplus for this Chatper
50 Verified Questions
50 Flashcards
Source URL: https://quizplus.com/quiz/21006
Sample Questions
Q1) The shifting of the financial markets from dominance by retail investors to institutional investors is referred to as the ________ of financial markets.
A) globalization
B) institutionalization
C) securitization
D) diversification
Answer: B
Q2) The two basic types of derivative instruments are ________ and ________.
A) insurance contracts; options contracts
B) futures/forward contracts; indentures
C) futures/forward contracts; legal contracts
D) futures/forward contracts; options contracts
Answer: D
Q3) One economic function of a financial market is to reduce the cost of transacting. There are two costs associated with transacting: search costs and information costs.
A)True
B)False
Answer: True
To view all questions and flashcards with answers, click on the resource link above. Page 3
Chapter 2: Financial Institutions, Financial Intermediaries, and Asset Management Firms
Available Study Resources on Quizplus for this Chatper
51 Verified Questions
51 Flashcards
Source URL: https://quizplus.com/quiz/21007
Sample Questions
Q1) Name three of the five types of funds managed by asset management firms.
Answer: Types of funds managed by asset management firms include:regulated investment companies; insurance company funds; separately managed accounts for individuals and institutional investors; pension funds; and hedge funds.
Q2) Many large manufacturing firms have subsidiaries that provide financing for the parent company's customer. These financial institutions are called captive finance companies.
A)True
B)False
Answer: True
Q3) Some nonfinancial enterprises have subsidiaries that provide financial services. These financial institutions are called ________.
A) free finance companies.
B) captive finance companies.
C) captive investment companies.
D) captive finance shares.
Answer: B
To view all questions and flashcards with answers, click on the resource link above.
Page 4
Chapter 3: Depository Institutions: Activities and Characteristics
Available Study Resources on Quizplus for this Chatper
50 Verified Questions
50 Flashcards
Source URL: https://quizplus.com/quiz/21008
Sample Questions
Q1) The basic motivation behind creation of S&Ls was the providing of funds for financing the purchase of a home.
A)True
B)False
Answer: True
Q2) All banks must maintain a specified percentage of their deposits in a non-interest-bearing account at one of the twelve Federal Reserve Banks. These specified percentages are called required reserves, and the dollar amounts based on them that are required to be kept on deposit at a Federal Reserve Bank are called reserve ratios.
A)True
B)False
Answer: False
Q3) Although S&Ls had a comparative disadvantage in originating mortgage loans, they lacked the expertise to make commercial and corporate loans.
A)True
B)False Answer: False
To view all questions and flashcards with answers, click on the resource link above. Page 5
Chapter 4: The US Federal Reserve and the Creation of Money
Available Study Resources on Quizplus for this Chatper
50 Verified Questions
50 Flashcards
Source URL: https://quizplus.com/quiz/21009
Sample Questions
Q1) The Fed provides ________ to banks and also requires banks to hold, as ________, a portion of the deposits that the public holds at the banks..
A) reserves; loans
B) loans; reserves
C) credits; reserves
D) reserves; reserves
Q2) A bank borrowing from the Fed is said to use the ________, and these loans are backed by the bank's collateral. The rate of interest on these loans is the ________.
A) discount window; LIBOR rate
B) open market operations; discount rate
C) Fed window; discount rate
D) discount window; repo rate
Q3) Drains from the money creation process increase the multiplier effect of any increase in reserves.
A)True
B)False
Q4) Describe the meaning of the word money.
Q5) Briefly discuss the nature of a closed economy and an open economy.
Page 6
To view all questions and flashcards with answers, click on the resource link above.
Chapter 5: Monetary Policy in the United States
Available Study Resources on Quizplus for this Chatper
51 Verified Questions
51 Flashcards
Source URL: https://quizplus.com/quiz/21010
Sample Questions
Q1) A "weak" dollar contributes to inflation, as U.S. buyers pay more for the many goods they do import.
A)True
B)False
Q2) Identify and briefly describe three of the major goals of Fed policy.
Q3) During 1997/1998, with strong economic growth and unemployment decreasing, Alan Greenspan and the Fed were faced with a dilemma. What was this dilemma?
A) They had to decide whether to tighten monetary policy to slow economic growth.
B) They had to decide whether or not to tighten monetary policy to rapidly increase economic growth.
C) They had to decide whether or not to loosen monetary policy to slow economic growth.
D) They had to decide whether or not to let the economy continue to grow at a sustainable rate equal to previous standards.
Q4) Discuss two problems that the Fed has in implementing monetary policy.
To view all questions and flashcards with answers, click on the resource link above.
Chapter 6: Insurance Companies
Available Study Resources on Quizplus for this Chatper
57 Verified Questions
57 Flashcards
Source URL: https://quizplus.com/quiz/21011
Sample Questions
Q1) The first major investment-oriented product developed by life insurance companies was the guaranteed investment contract (GIC).
A)True
B)False
Q2) Which of the below is TRUE of whole life insurance?
A) The actuarial cost of pure insurance increases with age, but the premium charged on whole life insurance decreases.
B) Whole life insurance builds up a cash value that can be withdrawn and can also be borrowed against by the owner of the policy.
C) A major disadvantage of whole life insurance is that the inside buildup is subject to taxation.
D) The death benefit of the whole life insurance policy is always subject to estate tax.
Q3) Few insurance companies use independent brokers or producer groups to distribute their products rather than their own agents.
A)True
B)False
Q4) Explain the concept of a multiline company.
To view all questions and flashcards with answers, click on the resource link above. Page 8
Chapter 7: Investment Companies and Exchange Traded Funds
Available Study Resources on Quizplus for this Chatper
62 Verified Questions
62 Flashcards
Source URL: https://quizplus.com/quiz/21012
Sample Questions
Q1) Mutual funds be included in different investment vehicles. Given an example and in your example discuss a nonqualified vehicle and the inclusion of a retirement plan and an education plan.
Q2) Overall, the NAV of a mutual fund will increase or decrease due to an increase or decrease in the prices of the securities in the portfolio.
A)True
B)False
Q3) Some fund families use external managers to manage all or a portion of their internal funds. These external advisers are called subadvisors. Describe two of the reasons why a family of funds would use subadvisors.
Q4) An investment that embodied a combination of the desirable aspects of mutual funds and closed-end funds would require portfolios to be traded like stocks throughout the day at a price equal to the continuously known ________ and would be, in effect, an ________.
A) premium; exchange-traded fund.
B) NAV; exchange-traded fund.
C) NAV; open-end fund.
D) price; mutual fund.
Page 9
To view all questions and flashcards with answers, click on the resource link above.
Chapter 8: Pension Funds
Available Study Resources on Quizplus for this Chatper
43 Verified Questions
43 Flashcards
Source URL: https://quizplus.com/quiz/21013
Sample Questions
Q1) Describe the players chosen by a plan sponsor to manage the defined-benefit pension assets.
Q2) The aggregate asset mix of the 1,000 top defined-benefit and defined-contribution pension plans as of September 30, 2007, indicate that the asset allocations for corporate and public defined-benefit plans are very similar, with approximately ________ of their assets in U.S. stocks and bonds.
A) 65%
B) 60%
C) 55%
D) 50%
Q3) Explain the "prudent man" concept.
Q4) Corporate plan sponsors are inclined to employ as their discount rate for pension liabilities the highest interest rate that will pass muster with ________ (for funding purposes) and also with their external ________ (for accounting purposes).
A) ERISA; cash flow statement
B) the IRS; accounting GAAP
C) PBGC; balance sheet statement
D) the IRS; cash flow statement
Q5) Describe the essence of a qualified fund.
To view all questions and flashcards with answers, click on the resource link above. Page 10
Chapter 9: Properties and Pricing of Financial Assets
Available Study Resources on Quizplus for this Chatper
50 Verified Questions
50 Flashcards
Source URL: https://quizplus.com/quiz/21014
Sample Questions
Q1) Suppose that a bond is granted a favorable tax treatment such that the interest and any capital gain from this bond would not be taxed. Suppose that the marginal tax rate on otherwise equivalent taxable bonds is 25% and the appropriate discount rate is 7%. What is the after-tax discount rate?
A) 5.25%
B) 5.35%
C) 5.65%
D) 5.75%
Q2) Define what we mean by "an appropriate discount rate". Describe four of the six components that make up this rate.
Q3) It is important to be able to measure the price sensitivity of an asset or liability to interest rate changes and the appropriate measure is the modified duration. A)True B)False
Q4) The conversion privilege of a convertible bond is not valued by the market. A)True B)False
To view all questions and flashcards with answers, click on the resource link above.
Chapter 10: The Level and Structure of Interest Rates
Available Study Resources on Quizplus for this Chatper
42 Verified Questions
42 Flashcards
Source URL: https://quizplus.com/quiz/21015
Sample Questions
Q1) Which of the below statements is FALSE?
A) Although an increase in the money supply is an economically expansionary policy, the resultant increase in income depends substantially on the amount of slack in the economy at the time of the Fed's action.
B) In Fisher's terms, the interest rate reflects the interaction of the savers' marginal rate of time preference and borrowers' marginal productivity of capital.
C) Changes in the money supply can affect the level of interest rates through the liquidity effect, the income effect, and the price expectations effect; their relative magnitudes depend upon the level of economic activity at the time of the change in the money supply.
D) Because the price level (and expectations regarding its changes) affects the money demand function, the liquidity effect is an increase in the interest rate.
Q2) Interest is the price paid for the permanent use of resources, and the amount of a loan is its principal.
A)True
B)False
Q3) Explain what is meant by the liquidity effect.
To view all questions and flashcards with answers, click on the resource link above.
Page 12
Chapter 11: The Term Structure of Interest Rates
Available Study Resources on Quizplus for this Chatper
47 Verified Questions
47 Flashcards
Source URL: https://quizplus.com/quiz/21016
Sample Questions
Q1) Which of the below statements is FALSE?
A) To determine the value of each zero-coupon instrument, it is necessary to know the yield on a zero-coupon Treasury with that same maturity this yield is called the forward rate.
B) Each zero-coupon instrument in the package has a maturity equal to its coupon payment date or, in the case of the principal, the maturity date.
C) The value of the bond should equal the value of all the component zero-coupon instruments.
D) the graphical depiction of the relationship between the spot rate and its maturity is called the spot rate curve.
Q2) Which of the below equations give the forward rate (f) for a six-month security if z is the six-month spot rate and z is the one-year spot rate?
A) f = \(\frac{\left(1+z_{2}\right)^{2}}{\left(1+z_{1}\right)}-1\)
B) f = \(\left(1+z_{2}\right)^{2} \times\left(1+z_{1}\right)-1\)
C) f = \(\frac{\left(1+z_{1}\right)^{2}}{\left(1+z_{2}\right)}-1\)
D) f = \(\frac{\left(1+z_{2}\right)}{\left(1+z_{1}\right)^{2}}-1\)
To view all questions and flashcards with answers, click on the resource link above.
13
Chapter 12: Risk/Return and Asset Pricing Models
Available Study Resources on Quizplus for this Chatper
56 Verified Questions
56 Flashcards
Source URL: https://quizplus.com/quiz/21017
Sample Questions
Q1) Stock returns exhibit ________.
A) a normal distribution.
B) symmetry in probability distributions and are not skewed.
C) fat tails or heavy tails where the "tails" of the distribution are where the extreme values occur.
D) periods when there are changes that are not much higher than the normal distribution predicts.
Q2) The two major standards of risk are: ________.
A) total risk and the relative index of systematic or nondiversifiable risk.
B) standard deviation and unsystematic risk.
C) total risk and the standard deviation.
D) beta and the relative index of systematic or nondiversifiable risk (beta).
Q3) If a security's market price were to deviate from the level justified by the APT factors and the security's price sensitivity to them, investors would engage in arbitrage and drive the market price to an appropriate level.
A)True
B)False
Q4) Describe the multifactor CAPM and how it extends the CAPM.
Q5) Explain the concept of framing.
To view all questions and flashcards with answers, click on the resource link above. Page 14
Chapter 13: Primary Markets and the Underwriting of Securities
Available Study Resources on Quizplus for this Chatper
45 Verified Questions
45 Flashcards
Source URL: https://quizplus.com/quiz/21018
Sample Questions
Q1) The Securities Act of 1933 does not provide specific guidelines to identify what is a ________.
A) private security.
B) public placement.
C) public offering.
D) private offering.
Q2) A red herring is ________.
A) a period of waiting for SEC approval.
B) an amended prospectus.
C) a preliminary prospectus.
D) a prospectus printed fully in red ink.
Q3) In addition to underwriting securities for distribution to the public, securities may be placed with a limited number of institutional investors such as ________.
A) insurance companies.
B) investment companies.
C) pension funds.
D) All of these
Q4) What is the waiting period? What do underwriters do during the waiting period?
Page 15
To view all questions and flashcards with answers, click on the resource link above.
Chapter 14: Secondary Markets
Available Study Resources on Quizplus for this Chatper
55 Verified Questions
55 Flashcards
Source URL: https://quizplus.com/quiz/21019
Sample Questions
Q1) Trace the historical evolution of transaction costs charged by the brokerage industry.
Q2) One indication of the usefulness of secondary markets is that they exist throughout ________.
A) the United States.
B) Europe and Asia.
C) each state.
D) the world.
Q3) In the absence of an effective short-selling mechanism, security prices will tend to be biased toward the ________, causing a market to depart from the standards of a perfect price-setting situation.
A) view of more pessimistic investors
B) view of the market maker
C) view of more optimistic investors
D) view of the market taker
Q4) Investors in financial assets receive ________.
A) illiquidity for their assets.
B) information about the assets' fair or consensus values.
C) increased the costs of searching for likely buyers and sellers of assets.
D) the disadvantage of higher transaction costs.
To view all questions and flashcards with answers, click on the resource link above. Page 16
Chapter 15: Treasury and Agency Securities Markets
Available Study Resources on Quizplus for this Chatper
56 Verified Questions
56 Flashcards
Source URL: https://quizplus.com/quiz/21020
Sample Questions
Q1) The GSEs issue debentures and mortgage-backed securities and these securities are backed by the full faith and credit of the U.S. government.
A)True
B)False
Q2) Most central governments issue fixed-rate coupon bonds just as issued by the U.S. Department of the Treasury. Non-U.S. central governments also offer bonds with other characteristics. For example, the British government, whose bonds are referred to as gilts, offer bonds called ________. These gilts have ________ that give the holder the option to convert into a specified amount of a longer-maturity gilt (or more than one gilt) for a number of years.
A) convertibles; short maturities
B) convertibles; long maturities
C) nonconvertibles; short maturities
D) nonconvertibles; long maturities
Q3) Describe the types of issued by non-U.S. central governments such as the British government and the Canadian government.
Q4) The Chinese bond market is the largest government bond market in the world.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 17
Chapter 16: Municipal Securities Markets
Available Study Resources on Quizplus for this Chatper
65 Verified Questions
65 Flashcards
Source URL: https://quizplus.com/quiz/21021
Sample Questions
Q1) Municipal securities are issued ________.
A) by state and local governments only.
B) by state governments only.
C) by state and local governments and by entities that they establish.
D) by national, state, and local governments.
Q2) Cite two reasons for the exemption afforded municipal securities.
Q3) In the secondary market, ________ are supported by the larger brokerage firms and banks, many of whom have investment banking relationships with these issuers.
A) markets for the bonds of larger issuers
B) markets for local credits
C) markets for specific names
D) markets for the debts of smaller issuers
Q4) In the Treasury but not the corporate bond markets, it is not unusual to find at different times shapes for the yield curve.
A)True
B)False
Q5) There are two types of municipal securities: tax-backed debt and revenue bonds.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 18
Chapter 17: Markets for Common Stock: The Basic
Characteristics
Available Study Resources on Quizplus for this Chatper
64 Verified Questions
64 Flashcards
Source URL: https://quizplus.com/quiz/21022
Sample Questions
Q1) Stock market indicators can be classified into three groups. Describe these two of these three groups.
Q2) What do equity securities represent? Describe the two types of equity securities distinguishing between them.
Q3) What type of trades requires require the execution of a trade of a large number of shares of a given stock?
A) Program trades
B) Pension fund trades
C) Block trades
D) Execution trades
Q4) Equity securities represent ________ interest in a corporation. Holders of equity securities are entitled to the earnings of the corporation when those earnings are distributed in the form of ________. The key distinction between common stock and preferred stock lies in the degree to which they may participate in any distribution of earnings and the priority given to each in the ________.
A) an ownership; dividends; retainment of earnings
B) an ownership; interest; distribution of earnings
C) an ownership; dividends; distribution of earnings
D) a potential; interest; retainment of earnings
19
To view all questions and flashcards with answers, click on the resource link above.
Chapter 18: Markets for Common Stock: Structure and Organization
Available Study Resources on Quizplus for this Chatper
57 Verified Questions
57 Flashcards
Source URL: https://quizplus.com/quiz/21023
Sample Questions
Q1) The OTC market is often called a market for "listed" stock.
A)True
B)False
Q2) The SuperDot system ________.
A) is used for small market orders, limit orders, and basket (or portfolio) trades and program trades.
B) can be used for under 100,000 shares with priority given to orders of 2,100 shares or less.
C) routes NYSE-listed stock orders electronically directly to a specialist on the exchange trading floor, rather than through a broker.
D) All of these
Q3) ________ is often defined as a market where intermediaries meet to deliver and execute customer orders.
A) An exchange
B) A market structure
C) An order driven market
D) A quote driven market
Q4) Describe the tasks of a NYSE specialist.
Page 20
Q5) Contrast the NYSE exchange with Nasdaq
To view all questions and flashcards with answers, click on the resource link above.
Chapter 19: Markets for Corporate Senior Instruments: I
Available Study Resources on Quizplus for this Chatper
43 Verified Questions
43 Flashcards
Source URL: https://quizplus.com/quiz/21024
Sample Questions
Q1) Unlike an assignment, a participation ________, although the holder of the participation has the right to vote on certain legal matters concerning amendments to the loan agreement.
A) does not confer privity of contract on the holder of the participation
B) confers privity of contract on the holder of the participation
C) confers a legally recognized relationship between two parties
D) does not confer privity of contract on the holder of the involvement
Q2) There are two possible ways for the lessor to finance the purchase of the equipment. Describe these two ways.
Q3) The popularity of MTNs as a financing vehicle is due to the ________.
A) flexibility they provide borrowers in designing a structure that satisfies the needs of firms.
B) fact they can be issued at either a fixed- or floating-rate.
C) fact the coupon payments can be denominated in U.S. dollars or in a foreign currency.
D) All of these
Q4) Describe a medium-term note. In your answer comment on its maturity and registration.
To view all questions and flashcards with answers, click on the resource link above. Page 21
Chapter 20: Markets for Corporate Senior Instruments: II
Available Study Resources on Quizplus for this Chatper
50 Verified Questions
50 Flashcards
Source URL: https://quizplus.com/quiz/21025
Sample Questions
Q1) Chapter 11 of the act deals with the reorganization of a company, and Chapter 7 deals with the dividend policy of a company.
A)True
B)False
Q2) The major issuers of adjustable-rate preferred stock (ARPS) have been bank holding companies. There are two reasons bank holding companies have become major issuers of ARPS. Describe these two reasons.
Q3) Historically, there have been issues entitling the preferred stockholder to participate in earnings distribution beyond the specified amount (based on some formula). Preferred stock with this feature is referred to as ________.
A) redeemable preferred stock.
B) convertible preferred stock.
C) cumulative preferred stock.
D) participating preferred stock.
Q4) In reorganizations, the absolute priority rule generally holds, but in liquidations under Chapter 11, it is often violated.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
22
Chapter 21: The Markets for Bank Obligations
Available Study Resources on Quizplus for this Chatper
48 Verified Questions
48 Flashcards
Source URL: https://quizplus.com/quiz/21026
Sample Questions
Q1) Which of the below statements is TRUE?
A) A small amount of interest is earned on federal funds.
B) Typically, larger banks have excess reserves, while money center banks find themselves short of reserves and must make up the shortfall.
C) Most transactions involving fed funds last for only one night; that is, a bank with insufficient reserves that borrows excess reserves from another financial institution will typically do so for the period of one full day.
D) The repo, which consists of the sale of a security, will provide funds for a long period of time.
Q2) For a ________, the initial depositor must wait until the maturity date of the CD to obtain the funds.
A) negotiable CD
B) nonnegotiable CD
C) nondepositable CD
D) depositable CD
Q3) Some federal funds transactions require the use of a broker.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
Chapter 22: The Residential Mortgage Market
Available Study Resources on Quizplus for this Chatper
58 Verified Questions
58 Flashcards
Source URL: https://quizplus.com/quiz/21027
Sample Questions
Q1) The original mortgage balance (MB ) is $350,000; and, the number of months of the mortgage loan (n) is 360. What is the monthly mortgage payment (MP) if the initial note rate (i) is 7.50%?
A) $842.15
B) $1,447.75
C) $2,378.95
D) $2,447.25
Q2) A mortgage ________.
A) is a collection of markets, which includes a primary (or origination) market and a secondary market where mortgages trade.
B) refers to real estate.
C) is a pledge of property to secure payment of a debt.
D) gives the borrower right to foreclose the loan and seize the property in order to ensure that it is repaid.
Q3) Prepayment risk can be reduced if the mortgage is insured by a government agency or a private insurance company.
A)True
B)False
Q4) Is prepayment risk like that faced by a bond investor? Discuss.
To view all questions and flashcards with answers, click on the resource link above. Page 24
Chapter 23: Mortgage-Backed Securities Market
Available Study Resources on Quizplus for this Chatper
61 Verified Questions
61 Flashcards
Source URL: https://quizplus.com/quiz/21028
Sample Questions
Q1) The securitization of subprime loans works by dividing pools of credit into classes, or tranches, separated by the amount of risk each class represents.
A)True
B)False
Q2) Securitization has decreased the supply of credit to homeowners and increased the cost of borrowing.
A)True
B)False
Q3) Agency pass-through securities are issued by ________.
A) Ginnie Mae
B) Fannie Mae
C) Freddie Mac
D) All of these
Q4) Nonagency MBS are issued by conduits of ________.
A) commercial banks.
B) investment banking firms.
C) entities not associated with either commercial banks or investment banking firms.
D) All of these
To view all questions and flashcards with answers, click on the resource link above. Page 25
Chapter 24: Market for Commercial Mortgage Loans and Commercial Mortgage-Backed Securities
Available Study Resources on Quizplus for this Chatper
42 Verified Questions
42 Flashcards
Source URL: https://quizplus.com/quiz/21029
Sample Questions
Q1) Regardless of the property type, the two measures that have been found to be key indicators of the potential credit performance are the ________.
A) debt-to-equity leverage ratio and the loan-to-value ratio.
B) debt-to-service coverage ratio and the loan-to-value ratio.
C) debt-to-service coverage ratio and the value-to-loan ratio.
D) debt-to-equity leverage ratio and the value-to-loan ratio.
Q2) One of the three major differences in the structures of a CMBS transaction and a nonagency RMBS transaction include: ________.
A) Residential mortgages impose prepayment penalties or restrictions on prepayments.
B) The role of the buyers when the structure is being created is different.
C) With residential mortgages, the loan can be transferred by the servicer to the special servicer when the borrower is in default, imminent default, or in violation of covenants.
D) All of these
Q3) The most prevalent form of deal backed by commercial mortgage loans to multiple borrowers is the conduit deal. Describe the nature of this "conduit deal"?
Q4) Are CMBS and nonagency RMBS structures similar or different? Discuss.
To view all questions and flashcards with answers, click on the resource link above.
Page 26
Chapter 25: Market for Asset-Backed Securities
Available Study Resources on Quizplus for this Chatper
59 Verified Questions
59 Flashcards
Source URL: https://quizplus.com/quiz/21030
Sample Questions
Q1) Securitization allows for the creation of tradable securities with better liquidity making it feasible for investors to invest in residential mortgage loans, automobile loans, or credit card receivables. By making these financial assets tradable, what does securitization achieve? What concerns are created with the financial disintermediating impact of securitization?
Q2) Few securitization transactions that employ internal credit enhancements follow a predetermined schedule that prioritizes the manner in which principal and interest generated by the underlying collateral must be used.
A)True
B)False
Q3) In considering the structure, the rating agencies will consider ________.
A) how losses will be allocated among the bond classes in the structure.
B) the prepayment allocation (i.e., the prepayment waterfall).
C) the interest rate spread between the interest earned on the collateral and the interest paid to the bond classes minus the servicing fee.
D) the potential for a trigger event to occur that will cause a late amortization of a deal.
Q4) What is the key benefit of securitization to financial markets?
To view all questions and flashcards with answers, click on the resource link above.
Chapter 26: Financial Futures Markets
Available Study Resources on Quizplus for this Chatper
62 Verified Questions
62 Flashcards
Source URL: https://quizplus.com/quiz/21031
Sample Questions
Q1) Most financial futures contracts have settlement dates in the months of ________.
A) January, April, July, October
B) March, June, September, or December.
C) February, May, August, November
D) All of these
Q2) One alternative in liquidating a futures contract position is to wait until the ________. At that time the party ________ a futures contract accepts delivery of the underlying; the party that ________ a futures contract liquidates the position by delivering the underlying at the agreed-upon price.
A) settlement date; purchasing; sells
B) liquidation date; purchasing; sells
C) settlement date; selling; purchases
D) liquidation date; selling; purchases
Q3) The General Accounting Office (GAO) study pointed out the concern that major banks and end-users have adequate risk-management systems in place.
A)True
B)False
Q4) What is a forward contract? How does it differ from a futures contract?
To view all questions and flashcards with answers, click on the resource link above. Page 28
Chapter 27: Options Markets
Available Study Resources on Quizplus for this Chatper
65 Verified Questions
65 Flashcards
Source URL: https://quizplus.com/quiz/21032
Sample Questions
Q1) The date after which an option is void is called the ________.
A) termination date.
B) maturity date.
C) cessation date.
D) expiration period.
Q2) The Options Clearing Corporation has established standard strike price guidelines for listed options. For stocks ________.
A) with a price above $100, option strike prices are set at $10 intervals.
B) with a price below $100 and above $30, strike prices are set at $4 intervals.
C) priced between $10 and $30 the interval is $2.
D) with stock splits, the strike price is not adjusted.
Q3) Do futures contracts allow investors to hedge the risks associated with adverse price movements? Explain.
Q4) In the case of a ________, both buyer and seller are obligated to perform.
A) call option contract
B) put option contract
C) futures contract
D) All of these
Q5) Differentiate between a call option and a put option.
Q6) Describe and summarize the meaning of the four option positions.
Page 29
To view all questions and flashcards with answers, click on the resource link above.
Chapter 28: Pricing of Futures and Options Contracts
Available Study Resources on Quizplus for this Chatper
58 Verified Questions
58 Flashcards
Source URL: https://quizplus.com/quiz/21033
Sample Questions
Q1) You borrow $5,000 at 8% per year and proceed to buy Asset XYZ for $5,000 in the cash market. This asset pays $100 quarterly. You then immediately sell a futures contract at $5,500 requiring delivery of asset XYZ in three months. Which of the below statements is TRUE?
A) At the end of three month, the settlement of the futures contract generates a total proceeds of $5,600.
B) At the end of three month, the cost of the loan generates a total outlay of $5,100
C) Your strategy of selling the futures contract after borrowing money to buy the asset produces a net profit of $500.
D) All of these
Q2) The strength of the binomial model based on yields is that it satisfies the put-call parity relationship by taking into consideration the yield curve, thereby allowing arbitrage opportunities.
A)True
B)False
Q3) Describe an option when (i) in the money and (ii) out of the money.
Q4) What do we assume when we illustrate arbitrage strategies?
Q5) What is the time premium of an option?
To view all questions and flashcards with answers, click on the resource link above. Page 30
Chapter 29: The Applications of Futures and Options Contracts
Available Study Resources on Quizplus for this Chatper
47 Verified Questions
47 Flashcards
Source URL: https://quizplus.com/quiz/21034
Sample Questions
Q1) In a ________, the objective is to alter a current or anticipated stock portfolio position so that its ________ is zero.
A) hedging strategy; beta
B) speculative strategy; standard deviation
C) diversified strategy; beta
D) nondiversified strategy; standard deviation
Q2) Suppose that a money manager knows that bonds are maturing in the near future and expects interest rates to fall. ________ can be purchased in this situation.
A) Call options
B) Put options
C) Dividend paying stocks
D) Growth firms
Q3) When a futures contract is used to hedge a position where either the portfolio or the individual financial instrument is not identical to the instrument underlying the futures, it is called ________.
A) perfect hedging.
B) a cross instrument.
C) cross hedging.
D) an hedged instrument.
To view all questions and flashcards with answers, click on the resource link above.
Chapter 30: OTC Interest Rate Derivatives: Forward Rate
Agreements, Swaps, Caps, and Floors
Available Study Resources on Quizplus for this Chatper
64 Verified Questions
64 Flashcards
Source URL: https://quizplus.com/quiz/21035
Sample Questions
Q1) Suppose that for the next five years party X agrees to pay party Y 10% per year, while party Y agrees to pay party X six-month LIBOR (London Interbank Offered Rate). Party X is a fixed-rate payer / ________, while party Y is a floating-rate payer / ________.
A) fixed-rate receiver; fixed-rate receiver.
B) floating-rate receiver; fixed-rate receiver.
C) floating-rate receiver; floating-rate receiver.
D) floating-rate payer; fixed-rate payer.
Q2) The value of an interest rate swap will fluctuate with ________.
A) standard deviations.
B) beta.
C) market interest rates.
D) coupon rates.
Q3) The reference rates that are commonly used for the floating rate in an interest rate swap are those on various money market instruments such as ________.
A) Treasury bills, prime rate, and the London Interbank Offered Rate.
B) LIBOR and commercial paper.
C) bankers acceptances, certificates of deposit, and federal funds rate.
D) All of these
To view all questions and flashcards with answers, click on the resource link above. Page 32
Chapter 31: Market for Credit Risk Transfer Vehicles: Credit
Derivatives and Collateralized Debt Obligations
Available Study Resources on Quizplus for this Chatper
76 Verified Questions
76 Flashcards
Source URL: https://quizplus.com/quiz/21036
Sample Questions
Q1) In the case of a financial institution that seeks to make a market in the new CRT vehicles, there is a concern that in selling more complex products, such as synthetic CDOs, they may not be properly hedging their position and therefore ________.
A) maintaining the institution's risk.
B) decreasing the institution's risk.
C) increasing the institution's risk.
D) All of these
Q2) In determining whether or not to create a CDO, dealers will look to see if there is a potential return available to the equity tranche of ________.
A) a minimum amount.
B) a maximum amount.
C) an interest-free amount.
D) a perfect amount.
Q3) What can a CRT vehicle result in? Explain by commenting on the concern with the banking system.
Q4) By whom and for what reasons are credit derivatives used? Give an example.
Q5) Describe a structured finance operating company (SFOC). Does an SFOC seek a true arbitrage?
Page 33
To view all questions and flashcards with answers, click on the resource link above.
Chapter 32: The Market for Foreign Exchange and Risk
Control Instruments
Available Study Resources on Quizplus for this Chatper
62 Verified Questions
62 Flashcards
Source URL: https://quizplus.com/quiz/21037
Sample Questions
Q1) Which of the below statements is FALSE?
A) The Eurocurrency market is the name of the unregulated and informal market for bank deposits and bank loans denominated in a currency other than that of the country where the bank initiating the transaction is located.
B) Just like a forward or futures contract, an option gives the option buyer the opportunity to benefit from favorable exchange rate movements but establishes a maximum loss.
C) Foreign-exchange futures contracts for the major currencies are traded on the International Monetary Market (IMM), a division of the Chicago Mercantile Exchange.
D) The two types of foreign currency options are options on the foreign currency and futures options.
Q2) To qualify as a participating country in the EMU requires that a country satisfy certain economic standards. Describe these standards. Have they been achieved?
Q3) The foreign exchange market can best be described as an interbank over-the-counter market.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
Page 34