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Managing Financial Institutions Pre-Test Questions - 2651 Verified Questions

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Managing Financial Institutions

Pre-Test Questions

Course Introduction

Managing Financial Institutions explores the structure, functions, and operations of banks and other financial intermediaries within the global financial system. The course examines risk management strategies, regulatory frameworks, and the impact of evolving market conditions on financial institutions. Students will analyze topics such as asset-liability management, credit assessment, liquidity management, and capital adequacy. Emphasis is placed on understanding how financial institutions balance profitability, stability, and compliance with regulatory requirements, as well as the challenges posed by technological innovation, globalization, and changing customer expectations.

Recommended Textbook

Financial Institutions Management A Risk Management Approach 7th Edition by Anthony Saunders

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26 Chapters

2651 Verified Questions

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Page 2

Chapter 1: Why Are Financial Institutions Special

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Sample Questions

Q1) 1-93 When a DI makes a shift from an "originate-to-hold" banking model to an "originate-to-sell" model,the change is likely to result in

A)increased operating costs.

B)increased interest rate risk.

C)increased liquidity risk.

D)decreased monitoring costs.

E)decreased fee income.

Answer: D

Q2) 1-2 As of 2009,U.S.FIs held assets totaling over $35 trillion

A)True

B)False

Answer: True

Q3) 1-79 The charter values of FIs will be higher if regulators

A)increase the cost of entry by requiring more capital.

B)restrict the number of activities permitted by FIs,thereby increasing potential profits.

C)restrict the number of FIs that can operate in a given market.

D)Answers A and B.

E)Answers A and C.

Answer: E

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Page 3

Chapter 2: Financial Services: Depository Institutions

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Sample Questions

Q1) 2-55 A significant advantage for credit unions in competing with commercial banks is the tax-exempt status that has been granted to credit unions.

A)True

B)False

Answer: True

Q2) 2-23 The growth in off-balance-sheet activities during the decade of the 1990s was due,in large part,to the use of derivative contracts.

A)True

B)False

Answer: True

Q3) 2-5 Currently,federal standards do not allow investment banks to covert to a bank holding company structure.

A)True

B)False

Answer: False

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Chapter 3: Financial Services: Insurance

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Sample Questions

Q1) 3-87 Which account refers to the reserve set-aside that contains the portion of a premium that has been paid before insurance coverage has been provided.

A)Unearned premiums.

B)Prepaid premiums.

C)Premium reserves.

D)Policy reserves.

E)Outstanding premiums.

Answer: A

Q2) 3-57 An insurance policy that allows both the premium amount and the maturity of the life contract to be changed by the insured is called A)term life.

B)universal life.

C)whole life.

D)endowment life.

E)variable life.

Answer: B

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Chapter 4: Financial Services: Securities Brokerage and Investment Banking

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Sample Questions

Q1) 4-96 How much money does NetChoice,Inc.receive?

A)$ 139,500,500.

B)$ 137,812,500.

C)$ 155,000,000.

D)$ 153,125,000.

E)$ 105,000,000.

Q2) 4-64 Program trading involves

A)online trading services provided to customers by electronic trading securities firms. B)computer-driven buying or selling of baskets of 15 or more stocks by institutional traders.

C)purchase and sale of assets that are potentially but not necessarily equivalent. D)buying blocks of securities in anticipation of some information release.

E)providing a platform for customers to trade without the use of a broker.

Q3) 4-12 The objective of funds management is to allocate assets so that they outperform relative risk-return tradeoffs.

A)True

B)False

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Page 6

Chapter 5: Financial Services: Mutual Funds and Hedge Funds

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Sample Questions

Q1) 5-49 Regarding the relative asset size and asset growth rate of mutual fund sectors,

A)long-term funds had more assets at the end of 2009,but short-term funds had grown at a faster rate since 1980.

B)long-term funds had more assets at the end of 2009,and long-term funds had grown at a faster rate since 1980.

C)short-term funds had more assets at the end of 2009,but long-term funds had grown at a faster rate since 1980.

D)short-term funds had more assets at the end of 2009,and short-term funds had grown at a faster rate since 1980.

E)More than one of the above is correct.

Q2) 5-63 Money market mutual funds are subject to

A)market risk.

B)foreign exchange risk.

C)interest rate risk.

D)credit risk.

E)All of the above.

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Page 7

Chapter 6: Financial Services: Finance Companies

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Sample Questions

Q1) 6-2 Finance companies have been among the slowest growing FI groups in recent years.

A)True

B)False

Q2) 6-12 Securitized mortgage assets are used as collateral backing secondary market securities.

A)True

B)False

Q3) 6-42 Finance companies charge different rates than do commercial banks which

A)tend to be higher than bank rates.

B)often reflect a more risky borrower.

C)causes some finance companies to be classified as subprime lenders.

D)must meet state usury law guidelines.

E)All of the above.

Q4) 6-7 Over the last 30 years finance companies have replaced real estate loans and other assets with increasing amounts of consumer and business loans.

A)True

B)False

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Page 8

Chapter 7: Risks of Financial Institutions

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Sample Questions

Q1) 7-28 Contingent claims are assets and liabilities that will come into existence at a future time often at the insistence of a customer or second party.

A)True

B)False

Q2) 7-47 Unanticipated withdrawals by liability holders are a major part of liquidity risk.

A)True

B)False

Q3) 7-17 Historically credit card loans have had very low rates of default or credit risk when compared to other assets that an FI may hold.

A)True

B)False

Q4) 7-23 Firm-specific credit risk can be eliminated by diversification. A)True B)False

Q5) 7-34 Employee fraud is a type of operational risk to a financial institution. A)True

B)False

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Chapter 8: Interest Rate Risk I

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Sample Questions

Q1) 8-4 The maturity gap model estimates the difference between interest earned and interest during a given period of time.

A)True

B)False

Q2) 8-85 What is the weighted average maturity of liabilities?

A)5.50 years.

B)6.40 years.

C)1.44 years.

D)1.30 years.

E)1.10 years.

Q3) 8-52 An increase in interest rates

A)increases the market value of the FI's financial assets and liabilities.

B)decreases the market value of the FI's financial assets and liabilities.

C)decreases the book value of the FI's financial assets and liabilities.

D)increases the book value of the FI's financial assets and liabilities.

E)has no impact on the market value of the FI's financial assets and liabilities.

Q4) 8-3 The repricing gap model is a book value accounting based model.

A)True

B)False

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Chapter 9: Interest Rate Risk Ii

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Sample Questions

Q1) 9-72 What is the duration of a 5-year par value zero coupon bond yielding 10 percent annually?

A)0.50 years.

B)2.00 years.

C)4.40 years.

D)5.00 years.

E)4.05 years.

Q2) 9-104 Calculate the percentage change in this bond's price if interest rates on comparable risk securities increase to 11 percent.Use the duration valuation equation.

A)+4.25 percent.

B)-4.25 percent.

C)+8.58 percent.

D)-3.93 percent.

E)-3.84 percent.

Q3) 9-46 As the investment horizon approaches,the duration of an unrebalanced portfolio that originally was immunized will be less than the time remaining to the investment horizon.

A)True

B)False

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Page 11

Chapter 10: Market Risk

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Sample Questions

Q1) 10-44 Using the MRM to identify the potential return per unit of risk in different areas by comparing returns to market risk in areas of trading so more capital and resources can be directed to these areas is considered to be which of the following?

A)Regulation.

B)Resource allocation.

C)Management information.

D)Setting limits.

E)Performance evaluation.

Q2) 10-28 Banks in the countries that are members of the BIS must use the standardized framework to measure market risk exposures.

A)True

B)False

Q3) 10-47 In calculating the VAR of fixed-income securities in the RiskMetrics model

A)the VAR is related in a linear manner to the DEAR.

B)the price volatility is the product of the modified duration and the adverse yield change.

C)the yield changes are assumed to be normally distributed.

D)All of the above.

E)Answers B and C only.

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Page 12

Chapter 11: Credit Risk: Individual Loan Risk

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Sample Questions

Q1) 11-25 Adjusting interest rates,fees,and other terms upward for increasing amounts of default risk is a way to attempt to realize the expected return on the loan.

A)True

B)False

Q2) 11-109 If the fee income on this loan is 0.4 percent and the spread over the cost of funds to the bank is 1 percent,what is the expected income on this loan for the current year?

A)$40,000.

B)$100,000.

C)$140,000.

D)$180,000.

E)$280,000.

Q3) 11-112 What is the current market value of the loan?

A)$160,000.

B)$188,041.

C)$200,000.

D)$188,352.

E)$178,571.

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13

Chapter 12: Credit Risk: Loan Portfolio and Concentration

Risk

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Sample Questions

Q1) 12-24 A weakness of migration analysis to evaluate credit concentration risk is that the

A)information obtained for this analysis is usually ex-post (i.e.after the fact).

B)information obtained for this analysis is ex-ante (i.e.before the fact).

C)analysis makes use of historical data classified only by industries.

D)analysis makes use of historical data classified by individual firms.

E)migration of firms may only be temporary.

Q2) 12-31 A study by Citibank of 831 defaulted corporate loans and 89 asset-based loans found that,on average,an FI can expect to recover approximately

A)36 percent of the loan.

B)63 percent of the loan.

C)80 percent of the loan.

D)90 percent of the loan.

E)only the market value of collateral securing the loan.

Q3) 12-19 Recent Federal Reserve policy for measuring credit concentration risk favors technical models over subjective analysis.

A)True

B)False

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Chapter 13: Off-Balance-Sheet Risk

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Sample Questions

Q1) 13-48 Settlement risk on wire transfers involves intraday credit risk.

A)True

B)False

Q2) 13-46 Funds transferred on Fedwire are settled at the end of the day.

A)True

B)False

Q3) 13-86 Which of the following is true of the delta of an option?

A)It lies between 0 and 0.5.

B)It is always negative.

C)It lies between 0 and 1.

D)It is greater than 1.

E)It is always equal to 1.

Q4) 13-28 Commercial letters of credit are guarantees that are issued to cover contingencies that are potentially more severe and less predictable than those covered by standby letters of credit.

A)True

B)False

Q5) 13-2balance-sheet activities are an important source of fee income for many FIs.

A)True

B)False

15

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Chapter 14: Foreign Exchange Risk

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Sample Questions

Q1) 14-52 In which of the following FX trading activities does the FI not assume FX risk?

A)The purchase and sale of foreign currencies for the purpose of profiting from forecasting or anticipating future movements in FX rates.

B)The purchase and sale of foreign currencies to allow customers to partake in and complete international commercial trade transactions.

C)The purchase and sale of foreign currencies for the purpose of offsetting customer exposure in any given currency.

D)The purchase and sale of foreign currencies to allow customers to take positions in foreign real and financial investments.

E)Answers B and D only.

Q2) 14-23 The reason an FI receives a fee when purchasing foreign currencies to allow customers to complete international transactions is because the FI assumes some FX risk.

A)True

B)False

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Page 16

Chapter 15: Sovereign Risk

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Sample Questions

Q1) 15-50 Making a lending decision to a party residing in a foreign country is a two-step decision.What are the two steps involved in such a decision?

A)Assessing credit quality of the borrower and sovereign risk quality of the borrower's country.

B)Assessing political economy risk and exogenous risks.

C)Assessing sovereign risk quality of the borrower's country and other country risks.

D)Rescheduling of existing loans and deciding on the terms for new loans.

E)Assessing the foreign exchange risk involved and the security that can be provided by the borrower.

Q2) 15-21 A positive relationship is considered to exist between domestic money supply growth and the probability of rescheduling debt.

A)True

B)False

Q3) 15-8 Sovereign risk involves restrictions placed on borrowers and investors regarding the movement of funds into and out of a foreign country.

A)True

B)False

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Chapter 16: Technology and Other Operational Risks

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Sample Questions

Q1) 16-9 The initial steps of cross selling financial products can easily occur with computer technology.

A)True

B)False

Q2) 16-91 Using encryption technology to assist in the electronic transaction of business between customers and businesses.

A)Account reconciliation.

B)Assisting small business entries into e-commerce.

C)Check deposit services.

D)Controlled disbursement accounts.

E)Electronic billing.

F)Electronic data interchange.

G)Electronic funds transfer.

H)Electronic initiation of letters of credit.

I)Electronic lockbox.

J)Facilitating business-to-business e-commerce.

K)Funds concentration.

L)Treasury management software.

M)Verifying identities.

N)Wholesale lockbox.

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Page 18

Chapter 17: Liquidity Risk

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Sample Questions

Q1) 17-7 Demand deposits pose a liquidity risk for FIs because funds may be withdrawn at any time.

A)True B)False

Q2) 17-38 Surrender value is the amount of cash a life insurance policy holder can receive by turning in the policy before it expires or matures.

A)True B)False

Q3) 17-70 Which of the following is NOT a primary source of liquidity?

A)Excess cash reserves over and above regulatory reserve requirements.

B)Borrowings in the money market.

C)Borrowings in the purchased funds market.

D)Capital notes and other long-term financing alternatives.

E)Cash-type assets that can be sold with little price risk and low transaction costs.

Q4) 17-45 Liquidation of a mutual fund causes assets to be liquidated and funds received to the dispersed to shareholders on a first come,first served basis.

A)True

B)False

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Page 19

Chapter 18: Liability and Liquidity Management

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Sample Questions

Q1) 18-71 The concept of constrained optimization facing an FI manager involving the minimum amount of liquid reserve assets required by regulators may

A)penalize the FI if the minimum amount is less than the amount warranted by the actual withdrawal risk.

B)benefit the FI if the minimum amount is more than is warranted by actual withdrawal risk.

C)lead to increased withdrawals by depositors that do not meet the minimum requirement.

D)assist the FI manager by providing an optimal target amount of reserves that will exactly match withdrawal expectations.

E)None of the above.

Q2) 18-17 Under contemporaneous reserve accounting,there is a seven day reserve maintenance period.

A)True

B)False

Q3) 18-42 Passbook savings accounts are less liquid than demand deposit accounts.

A)True

B)False

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Chapter 19: Deposit Insurance and Other Liability

Guarantees

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Sample Questions

Q1) 19-31 Statistical credit scoring models have been suggested for use in measuring the risk of DIs for the purpose of assigning deposit insurance premiums.

A)True

B)False

Q2) 19-44 The FIRREA prohibited all insured financial institutions from accepting brokered deposits or paying interest rates that are significantly higher than existing market rates.

A)True

B)False

Q3) 19-1 Contagious runs on bank deposits are directed at FIs,whether they are failing or healthy.

A)True

B)False

Q4) 19-50 The discount window at the Federal Reserve is a suitable substitute for deposit insurance and a possible method of preventing bank runs.

A)True

B)False

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Page 21

Chapter 20: Capital Adequacy

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Sample Questions

Q1) 20-145 What is the credit equivalent amount of the off-balance-sheet interest rate swaps if it is in- the-money by $1 million?

A)$1.0 million.

B)$2.0 million.

C)$3.0 million.

D)$4.0 million.

E)$5.0 million.

Q2) 20-138 What is the amount of risk-adjusted assets?

A)$1,000 million.

B)$720 million.

C)$900 million.

D)$600 million.

E)$700 million.

Q3) 20-56 Basel II guidelines for determining credit risk-adjusted on-balance-sheet assets relies more heavily on credit agency ratings than did Basel I.

A)True B)False

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Chapter 21: Product and Geographic Expansion

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Sample Questions

Q1) 21-135 Which of the following items is an advantage of international expansion for an FI?

A)An FI faces the political risk that a change in government may lead to the nationalization of fixed assets.

B)A global FI must master the rules and regulations of each market in which it operates.

C)The fixed costs of establishing overseas organizations may be very high in certain markets.

D)International expansions allow an FI to maintain contact with and provide service to the needs of domestic multinational corporations.

E)The absolute level of risk exposure in certain markets can be very high.

Q2) 21-131 Which of the following was not an operating characteristic of foreign banks operating in the U.S.prior to the International Banking Act of 1978?

A)They had no access to the Federal Reserve's discount window.

B)They were not subject to the Federal Reserve's audits and exams.

C)They had special rates on FDIC deposit insurance.

D)They could not use the Fedwire or the fed funds market.

E)They were not subject to the Glass-Steagall Act.

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Page 23

Chapter 22: Futures and Forwards

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Sample Questions

Q1) 22-14 Delivery of the underlying asset almost always occurs in the futures market.

A)True

B)False

Q2) 22-127 What is the end-of-year profit or loss on the bank's cash position if in one year both Canadian bond rates increase to 7.5 percent and the exchange rate falls to US$0.765 per Canadian dollar (Assume no change in U.S.interest rates.)

A)Loss of US$12,000.

B)Loss of US$75,000.

C)Profit of C$9,000.

D)Profit of US$50,000.

E)Loss of C$119,000.

Q3) 22-20 An FI with a negative duration gap is exposed to interest rate declines and could hedge its interest rate risk by buying forward contracts.

A)True

B)False

Q4) 22-6 A forward contract specifies immediate delivery for immediate payment.

A)True

B)False

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Page 24

Chapter 23: Options,caps,floors,and Collars

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Q1) 23-73 What is the advantage of a futures hedge over an options hedge?

A)The futures hedge has lower credit risk exposure.

B)The futures hedge reduces volatility in profit gains on both sides.

C)The futures hedge is marked to market less frequently.

D)The futures hedge offers the least downside risk protection.

E)The futures hedge completely offsets losses but only partly offsets gains.

Q2) 23-51 Giving the purchaser the right to sell the underlying security at a prespecified price is a

A)put option.

B)call option.

C)naked option.

D)futures option.

E)credit spread call option.

Q3) 23-71 Which of the following is a good strategy to adopt when interest rates are expected to rise?

A)Buying a call option on a bond.

B)Writing a call option on a bond.

C)Writing a put option on a bond.

D)Buying bond futures.

E)All of the above.

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Chapter 24: Swaps

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Q1) 24-22 At the end of 2009,the world-wide notational value of swap agreements was less than $400 trillion.

A)True

B)False

Q2) 24-41 In the derivatives markets,the highest transactions costs are highest for A)options.

B)futures.

C)forwards.

D)swaps.

E)currencies.

Q3) 24-63 Swaps create value if A)relative prices differ across markets.

B)there are barriers to entry in some markets.

C)information is costly.

D)All of the above.

E)None of the above.

Q4) 24-16 The fastest growing group of swaps in recent years has been those designed to help FIs manage interest rate risk.

A)True

B)False

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Chapter 25: Loan Sales

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Q1) 25-87 What will be the amount of equity on the balance sheet of Good Bank after the sale of the loans?

A)$1,200.

B)$232.

C)$132.

D)$68.

E)$0.

Q2) 25-65 Which observation is true of vulture funds?

A)Their decisions based on developing and maintaining long-term relationships.

B)Their sole agenda is to helping the distressed firm to survive.

C)Their investments are always passive.

D)They are relationship based,not transaction driven.

E)In a restructuring,they are looking for a return on capital invested.

Q3) 25-22 Closed-end bank loan mutual funds are restricted to investing in loans only through the loan resale or secondary market.

A)True

B)False

Q4) 25-23 The primary sellers of domestic loans are medium-sized regional banks.

A)True

B)False

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Chapter 26: Securitization

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Q1) 26-52 The discount effect and the prepayment effect are negatively correlated in their impact on the value of a principal-only (PO)mortgage-backed strip security.

A)True

B)False

Q2) 23-13 FNMA does not hold the mortgages it purchases on its balance sheet,thereby transferring credit and default risk to investors purchasing its securities.

A)True

B)False

Q3) 26-38 Mortgage pools that are assumed to prepay at a rate of speed that is more rapid than the PSA model would indicate,are said to prepay at less than 100 percent PSA behavior because the mortgage life and balance will exist for a longer time.

A)True

B)False

Q4) 26-36 Prepayment models are attempts by professional mortgage portfolio managers to estimate the rate of prepayment on given mortgage pools.

A)True

B)False

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