Financial Institutions Management
Textbook Exam Questions
Course Introduction
Financial Institutions Management provides an in-depth exploration of the structure, functions, and management of financial institutions such as commercial banks, investment banks, insurance companies, mutual funds, and non-bank financial intermediaries. The course examines the unique risks these institutions face including credit, market, liquidity, and operational risks and the regulatory environment designed to manage these risks. Through case studies and current events, students learn the principles of asset and liability management, risk measurement and mitigation, and the impact of financial innovation and technology on institutional strategies. This course equips students with analytical tools and practical insights to make informed decisions in the rapidly evolving financial services sector.
Recommended Textbook
Foundations of Financial Markets and Institutions 4th Edition by Frank J. Fabozzi
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Page 2
Chapter 1: Introduction
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Q1) Financial assets have two principal economic functions. Which of the below is ONE of these?
A) A principal economic function is to transfer funds from those who have surplus funds to borrow to those who need funds to invest in intangible assets.
B) A principal economic function is to transfer funds in such a way as to redistribute the avoidable risk associated with the cash flow generated by intangible assets among those seeking and those providing the funds.
C) A principal economic function is to transfer funds in such a way as to redistribute the unavoidable risk associated with the cash flow generated by tangible assets among those seeking and those providing the funds.
D) A principal economic function is to transfer funds from those who have surplus funds to invest to those who need funds to invest in intangible assets.
Answer: C
Q2) Derivative instruments play a critical role in global financial markets.
A)True
B)False
Answer: True
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Chapter 2: Financial Institutions, Financial Intermediaries, and Asset Management Firms
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Q1) In regards to Type-IV Liabilities, there are numerous insurance products and pension obligations that present uncertainty as to both the amount and the timing of the cash outlay.
A)True
B)False
Answer: True
Q2) There are various ways to categorize the different types of hedge funds. Mark Anson uses the four broad categories. Which of the below is NOT one of these?
A) divergence buying
B) market directional
C) corporate restructuring
D) opportunistic
Answer: A
Q3) A financial institution that provides an underwriting service will only on occasion also provide a brokerage and/or dealer service.
A)True
B)False
Answer: False
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Chapter 3: Depository Institutions: Activities and Characteristics
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Q1) Demand deposits pay interest, typically below market interest rates; do not have a specific maturity; and, usually can be withdrawn upon demand.
A)True
B)False
Answer: False
Q2) What is a corporate credit union?
Answer: One might think that a corporate credit union is a credit union set up by employees of a corporation. It is not. Federal and state-chartered credit unions are referred to as "natural person" credit unions because they provide financial services to qualifying members of the general public. In contrast, corporate credit unions provide a variety of investment services, as well as payment systems, only to natural person credit unions. Almost all corporate credit unions are federally insured. The U.S. Central Credit Union acts as the chief liquidity center for corporate credit unions by investing surplus funds from the other corporate credit unions.
Q3) Savings banks are institutions similar to, although much younger than, S&Ls.
A)True
B)False
Answer: False
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Chapter 4: The US Federal Reserve and the Creation of Money
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Q1) Suppose the Fed's required reserve ratio (REQ) is 20%. Further suppose that the Fed buys $100 million of U.S. Treasury securities from a dealer, Mary Jones, who deposits the check, which is drawn on the Fed, in her bank. This deposit increases her bank's reserve account ( R) with the Fed by $100 million as well as its demand deposits, its total reserves, and the overall level of M . What is the money multiplier?
Q2) Which of the following does the central bank of the United Kingdom identify as its role in maintaining financial stability?
A) Risk Assessment
B) Risk Enhancement
C) Oversight of Crisis System
D) Crisis Payment System
Q3) Shifts in the dollar's exchange rates affects which of the below?
A) It affects the prices of domestic and imported goods.
B) It affects the revenues of U.S. companies.
C) It affects the wealth of all investors in the country.
D) All of these
Q4) Describe the four monetary aggregates.
Q5) Describe the meaning of the word money.
Q6) Describe the Federal Reserve System and its important feature.
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Chapter 5: Monetary Policy in the United States
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Q1) During the early 1990s, what did the Fed succeed in doing?
A) The Fed successfully reduced rates across the maturity spectrum.
B) The fed funds rate rose to 13%, and the yield on 10-year government bonds was also high, touching 15.72% in December 1993.
C) It succeeded in aiding an economic expansion that unfortunately caused a rising civilian unemployment rate.
D) It spearheaded an economic recession with a falling real GDP.
Q2) The Fed seeks to achieve its goals through a form of chain reaction. Describe the chronology and structure of this chain reaction explaining how operating and intermediate targets are used to achieve the Fed's ultimate goals?
Q3) Identify and briefly describe three of the major goals of Fed policy.
Q4) The goals are numerous, but the Fed's capabilities are limited to the simple menu of (1) trying to raise the rate of growth in the money supply by providing more reserves to banks, and (2) trying to reduce the rate of monetary expansion by reducing the reserves in the banking system.
A)True
B)False
Q5) Discuss two problems that the Fed has in implementing monetary policy.
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Chapter 6: Insurance Companies
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Q1) Among the major types of products distributed to groups are ________.
A) term and whole life insurance, medical insurance, disability insurance, and investment products.
B) automobile insurance, medical insurance, disability insurance, and homeowners insurance.
C) term life insurance, medical insurance, business property insurance, and liability insurance.
D) whole life insurance, property insurance, medical insurance, and investment products insurance.
Q2) Explain how insurance companies are regulated and rated?
Q3) Under what condition can a participating policy pay a higher dividend than the guaranteed minimum?
Q4) Few insurance companies use independent brokers or producer groups to distribute their products rather than their own agents.
A)True
B)False
Q5) Explain the concept of a multiline company.
Q6) Describe and contrast the various types of IRAs.
Q7) Explain survivorship insurance or second-to-die insurance.
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Chapter 7: Investment Companies and Exchange Traded Funds
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Q1) Mutual fund investors can control the size of the capital gains distributions and, as a result, the timing and amount of the taxes paid on their fund holdings is controlled.
A)True
B)False
Q2) The open-end aspect of mutual funds is ________; that is, investors invest funds directly in or withdraw funds from the mutual fund. The open-end aspect of ETFs is ________ in that the investors buy the ETF in a closed-end manner like closed-end funds and then the authorized participant ________ between the ETF and the underlying portfolio, providing the indirect open-end aspect of the ETF.
A) direct; straight; trades
B) direct; straight; arbitrages
C) indirect; direct; trades
D) direct; indirect; arbitrages
Q3) 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.
Q4) Name three alternatives to mutual funds.
Q5) What are variable annuities?
Page 9
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Chapter 8: Pension Funds
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Q1) The purpose of the Pension Funding Equity Act of 2006 was to give U.S. companies some "relief" from burdensome pension contributions.
A)True
B)False
Q2) Qualified pension funds invest in assets that have the advantage of being largely or completely tax exempt.
A)True
B)False
Q3) Which of the below statements is TRUE?
A) An insured plan is always safer than a noninsured plan.
B) A federal agency, the Pension Benefit Guaranty Corporation (PBGC) does not insure the vested benefits of participants.
C) Defined benefit plans that are guaranteed by life insurance products are called insured benefit plans.
D) A plan sponsor establishing a defined-benefit plan cannot use the payments made into the fund to purchase an annuity policy from a life insurance company.
Q4) Explain the "prudent man" concept.
Q5) Describe the essence of a qualified fund.
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Chapter 9: Properties and Pricing of Financial Assets
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Q1) The conversion privilege of a convertible bond is not valued by the market.
A)True
B)False
Q2) The appropriate ________ can often be approximated as the sum of rewards for the various risks an asset poses to its buyer.
A) reward premium
B) discount rate
C) risk premium
D) coupon rate
Q3) For financial assets traded with market makers, the most relevant component of round-trip cost is the bid-ask spread. The spread charged by a market maker varies sharply from one financial asset to another, reflecting primarily the amount of risk the market maker is assuming by "making" a market. This market-making risk can be related to two main forces. Describe these two forces or determinants of this risk.
Q4) This measure of price sensitivity is popularly referred to as ________.
A) basis point sensitivity.
B) value sentiment.
C) duration.
D) saturation.
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Chapter 10: The Level and Structure of Interest Rates
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Q1) There are several interesting points about the relationship among the coupon rate, market price, and yield to maturity. Briefly explain these relationships.
Q2) The ________ represents the initial reaction of the interest rate to a change in the money supply.
A) Income effect
B) Price expectation effect
C) Liquidity effect
D) Interest rate effect
Q3) By the ________, we mean the rate that would prevail in the economy if the average prices for goods and services were expected to remain constant during the loan's life.
A) risk-free rate
B) short term
C) real rate
D) long term
Q4) Explain the distinction between the real rate of interest and the nominal rate of interest.
Q5) Explain what is meant by the liquidity effect.
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Page 12
Chapter 11: The Term Structure of Interest Rates
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Q1) If we assume an initially flat term structure followed by economic news that subsequently leads market participants to expect interest rates to rise, which of the below statements is FALSE if the pure expectations theory holds?
A) Market participants interested in a long-term investment would not want to buy long-term bonds because they would expect the yield structure to rise sooner or later, resulting in a price decline for the bonds and a capital loss on the long-term bonds purchased.
B) Any response from borrower or lender would tend either to lower the net demand for, or to increase the supply of, long-maturity bonds, and two responses would increase demand for long-term debt obligations.
C) Speculators expecting rising rates would anticipate a decline in the price of long-term bonds and, therefore, would want to sell any long-term bonds they own and possibly to "short sell" some they do not now own.
D) Borrowers wishing to acquire long-term funds would be pulled toward borrowing now, in the long end of the market, by the expectation that borrowing at a later time would be more expensive.
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Chapter 12: Risk/Return and Asset Pricing Models
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Q1) Returns expected by investors logically should be related to ________ as opposed to total risk
A) unsystematic
B) systematic risk
C) diversifiable
D) the standard deviation
Q2) A security's return in equal to its systematic return plus its unsystematic return where
A) the security return, R, may be expressed as R = Rm + '.
B) the systematic return is proportional to the market return and it can be expressed as the symbol beta (or ) times the market return, Rm.
C) unsystematic return, which is independent of market returns, is usually represented by the symbol epsilon ( ').
D) All of these
Q3) Risk aversion means that investors want to minimize risk for any given level of expected return, or want to maximize return, for any given level of risk.
A)True
B)False
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14
Chapter 13: Primary Markets and the Underwriting of Securities
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Q1) The mechanics of a bought deal are that ________.
A) the lead manager or a group of managers offers a potential issuer of debt securities a firm bid to purchase an undetermined amount of the securities with an interest (coupon) rate and maturity to be announced later.
B) the issuer is given a month or more to accept or reject the bid.
C) if the bid is rejected, the underwriting firm has bought the deal.
D) the underwriter can sell the securities to other investment banking firms for distribution to their clients and/or distribute the securities to its clients.
Q2) ________ are the major investors in private placements.
A) Life insurance companies .
B) Credit Unions.
C) Pension funds.
D) Auto insurance companies.
Q3) A corporation can offer existing shareholders new shares in a preemptive rights offering, and using a standby underwriting arrangement, the corporation can have an investment banking firm agree to distribute any shares not subscribed to.
A)True
B)False
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Chapter 14: Secondary Markets
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Q1) In a call market, the auction may be oral but not written.
A)True
B)False
Q2) Call auctions provide for fixed price auctions (that is, all the transaction or exchanges occur at the same "fixed" price) at specific times during the day and are appropriate for less liquid bonds such as corporate bonds and municipal bonds.
A)True
B)False
Q3) A perfect market results when all buyers and sellers are ________, and the market price is determined where there is ________.
A) price-takers; equality of supply and demand.
B) price-makers; equality of supply and demand.
C) price-takers; inequality of supply and demand.
D) price-makers; inequality of supply and demand.
Q4) A dealer acts as an auctioneer in all market structures, thereby providing order and fairness in the operations of the market.
A)True
B)False
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Chapter 15: Treasury and Agency Securities Markets
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Q1) The Chinese bond market is the largest government bond market in the world.
A)True
B)False
Q2) There are four methods that have been used in distributing new securities of central governments. Which of the below is NOT one of these?
A) One of these is the regular calendar auction/Dutch-style system.
B) One of these is the ad hoc auction system.
C) One of these is the top system/maximum-price offering system.
D) One of these is the regular calendar auction/minimum-price offering system.
Q3) Which of the following statements about TIPs is TRUE?
A) TIPs refer to Treasury inflation protection securities.
B) TIPs adjust for inflation.
C) The Treasury has issued TIPS that are notes and bonds.
D) All of these
Q4) A type of government-chartered entities is ________.
A) Fannie Mae.
B) the Mississippi Valley Authority.
C) the U.S. Postal Service.
D) the Federal Home Loan Banks.
Q5) Illustrate the process of stripping.
Page 17
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Chapter 16: Municipal Securities Markets
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Q1) Municipal securities are issued for various purposes including ________.
A) short-term notes sold to cover permanent imbalances between outlays for expenditures and tax inflows.
B) short-term notes sold to cover seasonal imbalances between outlays for expenditures and tax inflows.
C) short-term notes to finance capital projects such as the construction of schools, bridges, roads, and airport.
D) long-term notes sold to cover seasonal imbalances between outlays for expenditures and tax inflows.
Q2) In the secondary market, ________ are maintained by regional brokerage firms, local banks, and by some of the larger Wall Street firms.
A) markets for the bonds of larger issuers
B) markets for regional credits
C) markets for general names
D) markets for the debts of smaller issuers
Q3) Give two reasons why a municipality would want to issue a taxable municipal bond and thereby have to pay a higher yield than if it issued a tax-exempt municipal bond?
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Chapter 17: Markets for Common Stock: The Basic
Characteristics
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Q1) When an investor is calculating the return from holding common stock from the date of purchase to a given point in time and has sold the common stock, the return reflects an unrealized capital gain or unrealized capital loss.
A)True
B)False
Q2) For common stock investors, the return realized by holding this investment comes from ________.
A) dividend payments
B) decrease in the price of the common stock
C) decrease in the price of the common stock.
D) All of these
Q3) ________ are orders requiring the execution of trades in a large number of different stocks at as near the same time as possible.
A) Retail trades
B) Program trades
C) Mutual fund trades
D) Block trades
Q4) Name and describe the three different forms of pricing efficiency.
Page 19
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Chapter 18: Markets for Common Stock: Structure and Organization
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Q1) The OTC market is often called a market for "listed" stock.
A)True
B)False
Q2) Among the advantages of dark pools are less or no visibility and no price discovery.
A)True
B)False
Q3) The OTCBB is a regulated electronic quotation service that displays real-time quotes, last sale prices, and volume information in the OTC equity securities.
A)True
B)False
Q4) One outcome of ________ (also called consolidators) is that customer order flow is "less sticky"; that is, the order flow will switch from one execution service to another quickly based on short-term, quantitative information.
A) sticky order routers
B) consolidator orders
C) consolidator routers
D) smart order routers
Q5) Contrast the NYSE exchange with Nasdaq
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Chapter 19: Markets for Corporate Senior Instruments: I
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Q1) A structured note is a medium-term note in which the issuer couples its offering with a position in a derivative instrument in order to create instruments with more interesting risk/return characteristics.
A)True
B)False
Q2) A unique characteristic of medium-term notes is that they are continuously offered to investors over a period of time by an agent of the issuer.
A)True
B)False
Q3) Unlike corporate bonds, medium-term notes are typically issued on a ________ rather than underwritten by an investment banker.
A) competitive basis
B) best efforts basis
C) come-first basis
D) come-last basis
Q4) Senior loans cannot be distributed by participation.
A)True
B)False
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21
Chapter 20: Markets for Corporate Senior Instruments: II
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Q1) One of the four general classifications used by bond information includes the class called "utilities," which can be further broken down into ________.
A) electric power companies, gas distribution companies, water companies, and communication companies.
B) airlines, railroads, and trucking companies.
C) manufacturing, merchandising, and service companies.
D) depository institutions, non-life insurance companies, and mutual funds.
Q2) Which of the below statements is FALSE?
A) Warrants may be attached as part of a bond issue with each warrant granting the holder the right to purchase a designated security at a specified price from the issuer of the bond.
B) The conversion provision in a corporate bond issue grants the bondholder the right to convert the bond to a predetermined number of shares of common stock of the issuer.
C) A callable bond grants the bondholder the right to sell the issue back to the issuer at par value on designated dates.
D) Zero-coupon bonds are bonds without coupon payments or a stated interest rate.
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22
Chapter 21: The Markets for Bank Obligations
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Q1) The rate determined in the ________ is the major factor that influences the rates paid on all the other money market instruments.
A) Federal Reserve market
B) Eurodollar market
C) LIBOR market
D) federal funds market
Q2) A depository institution that keeps federal funds in excess of the amount required incurs ________, which is the loss of interest income that could be earned on the excess reserves.
A) a federal funds cost
B) an interest income cost
C) an opportunity cost
D) None of these
Q3) The fed funds rate often shows a low level of volatility over short periods of time.
A)True
B)False
Q4) What are the four types of CDs, according to the issuing institution.
Q5) The yields posted on CDs vary depending on three factors. Name these three factors.
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Chapter 22: The Residential Mortgage Market
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Q1) The principal originators of residential mortgage loans are ________.
A) thrifts, commercial banks, and the government.
B) thrifts, commercial banks, and mortgage bankers.
C) thrifts, pension funds, and mortgage bankers.
D) the secondary market, commercial banks, and mortgage bankers.
Q2) Which of the below statements is FALSE?
A) The mortgage originator cannot hold the mortgage in its investment portfolio.
B) Mortgage banking refers to the activity of originating mortgages.
C) These mortgage bankers, unlike banks and thrifts, typically do not invest in the mortgages that they originate, but derive their income from the origination fees.
D) Someone who wants to borrow funds to purchase a home will apply for a loan from a mortgage originator.
Q3) The principal investors in mortgage loans include ________.
A) and commercial banks.
B) thrifts and commercial banks.
C) life insurance companies and thrifts.
D) life insurance companies and pension funds.
Q4) What is the mission of Freddie Mac and Fannie Mae? What does their federal charter allow for?
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Chapter 23: Mortgage-Backed Securities Market
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Q1) In regards to Ginnie Mae, which of the below statements is FALSE?
A) Ginnie Mae, like Fannie Mae and Freddie Mac, was created by Congress to increase the supply of capital to the residential mortgage market and to provide support for an active secondary market.
B) When Ginnie Mae guarantees securities issued by approved lenders, Ginnie Mae permits these lenders to convert illiquid individual loans into liquid securities backed by the U.S. government.
C) Ginnie Mae is a federally related institution and, as a result, the pass-through securities that it guarantees carry the full faith and credit of the U.S. government.
D) Pass-through securities that carry Ginnie Mae's guarantee and bear its name are issued by lenders approved by the federal government and these lenders do not include thrifts.
Q2) Describe "excess spread" as a from of credit enhancement.
Q3) Tranche types that have been included in a CMO structure are sequential-pay bonds, accrual bonds (or Z-bonds), PAC bonds, and support bonds.
A)True
B)False
Q4) What is a PO?
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Chapter 24: Market for Commercial Mortgage Loans and Commercial Mortgage-Backed Securities
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Q1) Residential mortgage loans are nonrecourse loans for the purchase of income-producing properties, the major ones being apartment buildings, office buildings, industrial properties, shopping centers, hotels, and health care facilities. A)True
B)False
Q2) In regards to commercial mortgage loans, name four of the major property types that have been securitized.
Q3) Which of the below statements is TRUE?
A) The debt-to-service coverage ratio (DSC ratio) is the ratio of a property's net operating income (NOI) multiplied by the debt service.
B) The higher the DSC ratio, the more likely it is that the borrower will be able to meet debt servicing from the property's cash flow.
C) The NOI is defined as the rental income plus cash operating expenses (adjusted for a replacement reserve).
D) A ratio less than 1 for DSC means that the cash flow from the property is sufficient to cover debt servicing.
Q4) What is a yield maintenance charge?
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Chapter 25: Market for Asset-Backed Securities
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Q1) 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.
Q2) Which of the below statements is TRUE?
A) The Small Business Association (SBA) is not an agency of the U.S. government empowered to guarantee loans made by approved SBA lenders to qualified borrowers.
B) Most SBA loans make monthly payments consisting only of interest payments.
C) Student loans are made to cover college costs (undergraduate, graduate, and professional programs such as medical and law school) and tuition for a wide range of vocational and trade schools.
D) The cash flow for senior citizen loans involve three periods with respect to the borrower's payments: deferment period, grace period, and loan repayment period.
Q3) What is the key benefit of securitization to financial markets?
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Chapter 26: Financial Futures Markets
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Q1) Parties to a futures contract must satisfy margin requirements (initial, maintenance, and variation), and futures contracts are marked to market at the beginning of each trading day.
A)True
B)False
Q2) A futures contract is an agreement between a buyer and a seller in which the buyer agrees to take delivery of something at the futures price at the settlement date and the seller agrees to make delivery.
A)True
B)False
Q3) The basic economic function of futures markets is to provide a chance for market participants ________.
A) to leverage their portfolios to take advantage of known opportunities.
B) to diversify their investment portfolios.
C) to hedge against the risk of adverse price movements.
D) to speculate on price movements so as to realize high returns.
Q4) What is the maintenance margin? What is the variation margin and how does it differ from the maintenance margin?
Q5) What is a forward contract? How does it differ from a futures contract?
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Chapter 27: Options Markets
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Q1) An American option, also referred to as an Atlantic option, can be exercised only on specified dates.
A)True
B)False
Q2) There are four basic option positions. Which of the below is ONE of these four positions?
A) Buying a call option (short a call option)
B) Selling a call option (long a call option)
C) Buying a put option (short a put option)
D) Selling a put option (short a put option)
Q3) The maximum amount that an option buyer can lose is the ________ price. The maximum profit that the option writer (seller) can realize is the ________ price.
A) option; exercise
B) call; option
C) option; option
D) call; put
Q4) There are three reasons why futures options on fixed-income securities have largely supplanted options on physicals as the options vehicle used by institutional investors. Describe two of these three reasons.
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Chapter 28: Pricing of Futures and Options Contracts
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Source URL: https://quizplus.com/quiz/21033
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Q1) The ________ is the sum of the option's intrinsic value and a premium over intrinsic value that is often referred to as the ________.
A) option price time value or time premium.
B) forward value time value or time discount.
C) futures value time value or time premium.
D) option price time value or time discount.
Q2) Consider the "cash and carry trade" where you sell (or take a short position in) the futures contract, purchase Asset XYZ, and borrow at a rate of r until the settlement date. In computing the value "from settlement of the futures contract," which of the below statements is FALSE?
A) F = proceeds from sale of Asset XYZ to settle the futures contract
B) yP = payment received from investing in Asset XYZ
C) F - yP = total proceeds
D) All of these
Q3) The equilibrium or theoretical futures price can be determined through arbitrage arguments.
A)True
B)False
Q4) What is the time premium of an option?
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Chapter 29: The Applications of Futures and Options
Contracts
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Source URL: https://quizplus.com/quiz/21034
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Q1) Investors can use stock index futures to speculate on stock prices, control a portfolio's price risk exposure, hedge against adverse stock price movements, construct indexed portfolios, engage in index arbitrage, and create a synthetic put option.
A)True
B)False
Q2) Buying a futures contract decreases a market participant's exposure to a market; selling a futures contract decreases a market participant's exposure to a market.
A)True B)False
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 cross hedging. Cross hedging is common in asset/liability and portfolio management and in hedging a corporate bond issuance. Answer the below questions.
(a) Why is cross hedging common?
(b) What does it introduce?
(c) What two factors determine the effectiveness of a cross hedge?
Q4) Explain how a "protective put buying strategy" works.
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Chapter 30: OTC Interest Rate Derivatives: Forward Rate
Agreements, Swaps, Caps, and Floors
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Q1) An interest rate floor can be used by a depository institution to lock in an interest rate spread over its cost of funds but maintain the opportunity to benefit if rates decline.
A)True
B)False
Q2) An future rate swap is an agreement whereby two counterparties agree to exchange periodic interest payments based on a notional principal amount.
A)True
B)False
Q3) Buying a ________ is equivalent to buying a package of puts on a fixed- income instrument and buying a ________ is equivalent to buying a package of calls on a fixed-income instrument.
A) floor (long cap); floor (long floor)
B) cap (long cap); floor (long floor)
C) cap (long cap); cap (long floor)
D) cap (short cap); floor (long floor)
Q4) Swaps can be used by investment bankers to create a security.
A)True
B)False
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Chapter 31: Market for Credit Risk Transfer Vehicles: Credit
Derivatives and Collateralized Debt Obligations
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Q1) Credit derivatives are used by institutional portfolio managers to more efficiently control the credit risk of a portfolio rather than the balance sheet of a financial institution.
A)True
B)False
Q2) The introduction of ________ vehicles, such as cash CDOs and credit derivatives that are employed to create synthetic CDOs, has elicited the same cautious response from overseers of the global banking system.
A) old credit risk transfer
B) new default risk transport
C) new cask risk transfer
D) new credit risk transfer
Q3) A credit-linked note (CLN) is a security issued by an investment banking firm or another issuer (typically a special purpose vehicle), which has credit risk to a second issuer (called the reference issuer), and the return is linked to the credit performance of the reference issuer.
A)True B)False
Q4) What is credit-linked note (CLN)? Can it be complicated?
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Chapter 32: The Market for Foreign Exchange and Risk
Control Instruments
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Q1) Given a direct quote, we can obtain an indirect quote (which is simply the reciprocal of the direct quote), and vice versa. For example, on March 9, 2009, a U.S. investor is given a direct quote of 1.2674 U.S. dollars for one euro. That is, the price of a euro is $1.2674. What would be the indirect quote for the U.S. investor; that is, one U.S. dollar can be exchanged for how many euros (which is the euro price of a U.S. dollar)?
A) 1.2674
B) 1.0000
C) 0.8988
D) 0.7889
Q2) Four instruments are available to borrowers and investors to protect against adverse foreign-exchange rate movements including ________.
A) currency forward contracts and currency futures contracts.
B) currency forward contracts but not currency swaps.
C) currency futures contracts but not currency options.
D) currency options but not currency swaps.
Q3) Exchange rate quotations may be either direct or indirect. Distinguish between a direct and an indirect quote.
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