Financial Systems
Exam Bank
Course Introduction
Financial Systems explores the structure, functions, and dynamics of financial institutions and markets that facilitate the flow of funds within the economy. The course examines the roles of banks, non-bank financial institutions, central banks, and regulatory bodies, analyzing how they interact to allocate resources, manage risk, and support economic development. Students will study payment systems, capital and money markets, monetary policy, and the impact of technological innovation on modern financial systems. The course also addresses issues of financial stability, globalization, and regulation, providing a comprehensive understanding of the fundamental mechanisms that drive financial markets and institutions.
Recommended Textbook
Foundations of Financial Markets and Institutions 4th Edition by Frank J. Fabozzi
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32 Chapters
1746 Verified Questions
1746 Flashcards
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Chapter 1: Introduction
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Q1) A intangible asset is one whose value depends on particular physical properties such as buildings, land, or machinery. Tangible assets, by contrast, represent legal claims to some future benefit.
A)True
B)False
Answer: False
Q2) From the perspective of a given country, financial markets can be classified as either internal or external. The internal market is composed of two parts: the domestic market and the foreign market. The domestic market is ________.
A) where the securities of issuers not domiciled in the country are sold and traded.
B) where issuers domiciled in a country issue securities and where those securities are subsequently traded.
C) where securities are offered simultaneously to investors in a number of countries.
D) where issuers domiciled in a country issue securities and where those securities are NOT subsequently traded.
Answer: B
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3
Chapter 2: Financial Institutions, Financial Intermediaries, and Asset Management Firms
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Q1) The objective of a ________ is to earn a positive spread between the assets it invests in (what it has sold the money for) and the costs of its funds (what it has purchased the money for).
A) limited partnership
B) corporation
C) life insurance company
D) depository institution
Answer: D
Q2) Because of uncertainty about the timing and/or the amount of the cash outlays, a financial institution must be prepared ________.
A) to have sufficient cash to satisfy its obligations.
B) to have sufficient projects to satisfy its capital budget constraints.
C) to have sufficient risk to satisfy its obligations.
D) to have sufficient risk to satisfy its conservative investors.
Answer: A
Q3) 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.
Page 4
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Chapter 3: Depository Institutions: Activities and Characteristics
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Q1) Which of the below statements is TRUE?
A) A depository institution seeks to earn a positive spread between the assets it invests in (deposits and other sources) and the cost of its funds (loans and securities).
B) Interest rate risk refers to the risk that a borrower will default on a loan obligation to the depository institution or that the issuer of a security that the depository institution holds will default on its obligation
C) Regulatory risk is the risk that regulators will change the rules so as to adversely impact the earnings of the institution.
D) If the spread will be positive, it will cost the depository institution more to finance the government securities than it will earn on the funds invested in those securities.
Answer: C
Q2) By interest rate risk, we refer to the prospect that the selling price of the security will be less than its purchase price, resulting in a loss.
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) ________ is oversight of the main payment and settlement systems in the U.K. that are used for many types of financial transaction - from paying wages and credit card bills to the settlement of transactions between financial institutions.
A) Risk Payment Systems
B) Crisis Oversight
C) Risk Oversight
D) Oversight of Payment Systems
Q2) ________ is that item which serves as a numeraire, or unit of account or the unit that is used to measure wealth.
A) An asset
B) Money
C) A widget
D) A good or service
Q3) Created in 1913, the ________ is the government agency responsible for the management of the U.S. monetary and banking systems.
A) Board of Governors
B) European Central Bank
C) Fed
D) Group of 8
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Chapter 5: Monetary Policy in the United States
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Q1) The Fed, in interaction with banks and other units of the economy, create ________.
A) money and employment
B) employment and credit
C) money and credit
D) employment and debt
Q2) The Fed's policy necessarily represents trade-offs among its various goals, which have different levels of relative importance at different times, depending on the state of the economy.
A)True
B)False
Q3) The standard way of measuring ________ is the change in a major price index.
A) inflation
B) consumer behavior
C) credit
D) investor preference
Q4) During March 2008, there were surprisingly no concerns that a bankruptcy of Bear Stearns was imminent.
A)True
B)False
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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) Until the past decade, the major type of health insurance available was ________ insurance.
A) medical
B) indemnity
C) reimbursement
D) well-being
Q3) The general account of an insurance company refers to ________.
A) the investment portfolio of the overall company.
B) the liability of the overall company.
C) the fixed annuities of the policy holders.
D) the investment portfolio of the policy holders.
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Chapter 7: Investment Companies and Exchange Traded Funds
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Sample Questions
Q1) Fund companies and distribution companies have developed new outlets for selling mutual funds and expanded their traditional sales channels. The changes that occurred are evident in the rising share of sales through ________.
A) direct sales to investors and intermediaries.
B) third parties and sales through brokers.
C) direct sales to investors and sales through brokers.
D) third parties and intermediaries.
Q2) Organizations such as Morningstar and Lipper provide key performance data on mutual funds in ways that prevent meaningful comparisons among them.
A)True
B)False
Q3) The ________ provides purchasers of new issues of securities with information regarding the issuer and, thus, helps prevent fraud.
A) Investment Company Act of 1940 ("the '40 Act")
B) Investment Advisors Act of 1940
C) Securities Act of 1934 ("the '34 Act")
D) Securities Act of 1933 ("the '33 Act")
Q4) Name three alternatives to mutual funds.
Page 9
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Chapter 8: Pension Funds
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Q1) In a defined-contribution plan, the amount contributed is typically ________.
A) a percentage of the employee's salary.
B) either a percentage of the employee's salary and/or a percentage of the employer's profits.
C) a percentage of the employee's salary,
D) a percentage of the employee's tenure.
Q2) The magnitude of pension ________ suggests that it poses the greatest financial danger facing managers since the S&L crisis.
A) solvency
B) surplus
C) overfunding
D) underfunding
Q3) With respect to the Pension Funding Equity Act of 2004, the act was a boon to companies and solved the serious problems plaguing pension funding.
A)True
B)False
Q4) What is a pension fund? In your answer comment on (a) pension plan sponsors, (b) how they are financed, and (c) the key factor in explaining pension fund growth.
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Chapter 9: Properties and Pricing of Financial Assets
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Q1) An asset's maturity is a factor that affects its price sensitivity to a change in yield. In fact, a bond's price sensitivity to a change in the discount rate is positively related to the bond's maturity. Consider the case of two bonds that have the same coupon rate, and the same required yield but different maturities. If the required rate were to change, the price sensitivity of the bond with the longer maturity would be greater than that of the bond with the shorter maturity. Give an illustration of this.
Q2) Assume the price of a coupon bond is $650. Further assume that if the yield is increased by 50 basis points, then the price would be $620 and if the yield is decreased by 50 basis points, then the price would be $700. What is the duration?
A) about 12.3
B) about 12.8
C) about 13.3
D) about 13.6
Q3) A financial asset has many properties, and each affects the asset's value in a similar and important way.
A)True
B)False
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11
Chapter 10: The Level and Structure of Interest Rates
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Q1) Consider an investor facing a 40% marginal tax rate who purchases a tax-exempt issue with a yield of 3.00%. The equivalent taxable yield is 5.00%.
A)True
B)False
Q2) 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.
Q3) Explain what is meant by the liquidity effect.
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Chapter 11: The Term Structure of Interest Rates
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Q1) Name and comment on two of the three main influences on the shape of the Treasury yield curve as suggested by empirical research.
Q2) More recently market participants have come to realize that the traditionally constructed Treasury yield curve is ________ measure of the relation between required yield and maturity with the key reason is that securities with the same maturity may actually provide ________.
A) an unsatisfactory; different yields
B) an unsatisfactory; very similar yields
C) a satisfactory; different yields
D) a satisfactory; very similar yields
Q3) 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 = \(\frac{\left(1+z_{2}\right)}{\left(1+z_{1}\right)^{2}}-1\)
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Page 13
Chapter 12: Risk/Return and Asset Pricing Models
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Q1) Explain the concept of framing.
Q2) The CAPM can be extended to describe "extra-market" sources of risk referred to as factors, so as to create an extended model called a ________.
A) multifactor CAPM.
B) bifactor CAPM
C) "extra-market" CAPM.
D) extended CAPM.
Q3) The level of returns expected from any asset (which may be an individual security or a portfolio of securities) is an exponential function of the risk-free rate, the asset's beta, and the returns expected on the market portfolio of risky assets.
A)True
B)False
Q4) Based on numerous experiments, psychologists demonstrated that the actions of decision makers are inconsistent with the assumptions made by ________.
A) sociologists.
B) psychologists.
C) physicists.
D) economists.
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Chapter 13: Primary Markets and the Underwriting of Securities
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Q1) A consequence of ________ is that underwriting firms need to expand their capital so that they can commit greater amounts of funds to such deals.
A) accepting auction deals
B) rejecting bought deals
C) accepting bought deals
D) rejecting auction deals
Q2) Underwriting activities are regulated by the ________.
A) Initial Public Offerings Market (IPOM).
B) Securities and Exchange Commission (SEC).
C) Investment Banking Industry (IBI).
D) Federal Bureau of Investigation (FBI).
Q3) An ________ is a common stock offering issued by companies that have NOT previously issued common stock to the public.
A) initial private issuance (IPI)
B) seasoned equity offering (SEO)
C) initial public offering (IPO)
D) seasoned offering (SO)
Q4) What is the waiting period? What do underwriters do during the waiting period?
Page 15
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Chapter 14: Secondary Markets
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Q1) Name and describe the two different major types of exchange systems.
Q2) In the United States, secondary trading of common stock occurs ________.
A) in a number of trading locations.
B) in Dallas, Texas.
C) in each major city.
D) None of these
Q3) In the United States, secondary trading of common stock occurs in a number of trading locations. Describe these locations.
Q4) In the United States, secondary trading of common shares are traded on major national stock exchanges and regional stock exchanges, which are organized and somewhat regulated markets in specific geographical locations.
A)True
B)False
Q5) This practice of selling securities that are not owned at the time of sale is referred to as ________.
A) buying short.
B) selling short.
C) selling long.
D) buying and selling simultaneously.
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Chapter 15: Treasury and Agency Securities Markets
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Q1) Which of the below statements is FALSE?
A) Government broker-dealers are not required to disclose the bid-ask spread on the Treasury securities that they buy from or sell to customers.
B) In the repo market, the term of the loan and the interest rate that the dealer agrees to pay (called the repo rate) are specified.
C) The advantage to the dealer of using the repo market for borrowing on a short-term basis is that the rate is greater than the cost of bank financing.
D) There is no one repo rate; rates vary from transaction to transaction depending on factors such as the term of the repo and the availability of collateral.
Q2) ________, there is a regular calendar of offering where all winning bidders are awarded securities at the highest yield accepted by the government (i.e., the stop-out yield).
A) In the regular calendar auction/Dutch-style auction system
B) In the regular calendar auction/minimum-price offering system
C) In the ad hoc auction system
D) In a tap system
Q3) Describe two types of government-chartered entities.
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Chapter 16: Municipal Securities Markets
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Q1) Which of the below statements is FALSE?
A) The convention for both corporate and Treasury bonds is to quote prices as a percentage of par value with 100 equal to par.
B) Municipal bonds generally are traded and quoted in terms of yield to maturity but not yield to call.
C) A bond traded and quoted in dollar prices (actually, as a percentage of par value) is called a dollar bond.
D) Actual price and trade information for specific municipal bonds is available on a daily basis at no charge.
Q2) Tax-backed debt includes ________.
A) general obligation debt.
B) appropriation-backed obligations.
C) debt obligations supported by public credit enhancement programs.
D) All of these
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?
Q4) Briefly explain the convention for quoting corporate bonds,Treasury bonds, and municipal bonds.
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Page 18
Chapter 17: Markets for Common Stock: The Basic
Characteristics
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Q1) In regards to types of order, which of the below statements is FALSE?
A) The simplest type of order is the market order, an order to be executed at the best price available in the market.
B) The danger of a market order is that an adverse move may take place between the time the investor places the order and the time the order is executed.
C) A buy limit order indicates that the stock may be purchased only at the designated price or lower, while a sell limit order indicates that the stock may be sold at the designated price or higher.
D) The key advantage of a limit order is that there is no guarantee that it will be executed at all; the designated price may simply not be obtainable.
Q2) Explicit trading costs include impact costs, timing costs, and opportunity costs. A)True B)False
Q3) From a dealer's perspective, program trades can be conducted in two ways. Name and describe these two ways.
Q4) Name and describe the three different forms of pricing efficiency.
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Page 19
Chapter 18: Markets for Common Stock: Structure and Organization
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Q1) Trading in stocks listed on the NYSE is conducted as a ________ at a designated physical location on the trading floor, called a ________, with brokers representing their customers' buy and sell orders.
A) decentralized discontinuous auction market; post B) centralized continuous auction market; post
C) decentralized discontinuous auction market; seat D) centralized continuous auction market; seat
Q2) ________ permit intermediaries to provide liquidity. Intermediaries may be brokers (who are agents for the naturals); dealers or market-makers (who are principals in the trade); and specialists, as on the New York Stock Exchange (who act as both agents and principals). Dealers are independent, profit-making participants in the process.
A) A limit-driven market
B) An auction market
C) A dealer-driven market
D) A quote-driven market
Q3) Contrast the differences between exchanges and publicly owned equity-based organization.
Q4) Describe the tasks of a NYSE specialist.
Q5) What is a dark pool? Describe two of the sponsors of dark pools.
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Chapter 19: Markets for Corporate Senior Instruments: I
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Q1) Sourcing alternatives for a corporation include ________.
A) a subsidiary of a domestic bank that has been established in a country where the corporation does business and a domestic bank in the corporation's home country.
B) a subsidiary of a foreign bank that is established in the corporation's home country and a domestic bank in the corporation's home country.
C) a foreign bank domiciled in a country where the corporation does business and a domestic bank in the corporation's home country.
D) All of these
Q2) There are two possible ways for the lessor to finance the purchase of the equipment. Describe these two ways.
Q3) Describe a medium-term note. In your answer comment on its maturity and registration.
Q4) 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
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21
Chapter 20: Markets for Corporate Senior Instruments: II
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Q1) The preferred stock ________.
A) is a large part of the financial system in terms of a source of new financing.
B) has historically been issued largely by utilities, accounting for more than half of each year's issuance.
C) has been primarily issued by young growth companies.
D) All of these
Q2) In regards to adjustable-rate preferred stock, which of the below statements are FALSE?
A) The dividend rate on an adjustable-rate preferred stock is fixed quarterly.
B) The predetermined spread on an adjustable-rate preferred stock is called the dividend reset spread.
C) The popularity of adjustable-rate preferred stock declined when instruments began to trade below their par value- because the dividend reset rate is determined at the time of issuance, not by market forces.
D) In the case of adjustable-rate preferred stock, the dividend rate is determined periodically by a remarketing agent who resets the dividend rate so that any preferred stock can be tendered at par and be resold (remarketed) at the original offering price.
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Chapter 21: The Markets for Bank Obligations
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Q1) A LIBOR loan is a vehicle created to facilitate commercial trade transactions where in a bank accepts the ultimate responsibility to repay a loan to its holder.
A)True
B)False
Q2) ________ are foreign banks with U.S. branches.
A) Yankee banks
B) German banks
C) Japanese banks
D) Mexican banks
Q3) Eligible bankers acceptances held in a bank's portfolio cannot used as collateral for a loan at the discount window of the Federal Reserve.
A)True
B)False
Q4) Borrowing in the federal funds market is an alternative to borrowing in the repo market.
A)True
B)False
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) ________ calculate income ratios such as the PTI to assess the applicant's ability to pay. These ratios compare the ________ that the applicant would have to pay if the loan is granted to the applicant's monthly income.
A) Borrowers; monthly payment
B) Lenders; annual payment
C) Lenders; monthly payment
D) Borrowers; annual payment
Q2) The loan applications being processed and the commitments made by a mortgage originator together are called its pipeline. Pipeline risk refers to the risks associated with originating mortgages. This risk has two components. Name and describe the two components.
Q3) The ________ of a mortgage loan indicates the loan's seniority in the event of the forced liquidation of the property due to default by the obligor.
A) lien status
B) interest rate type
C) loan balances
D) credit classification
Q4) Can a borrower face penalties if a loan is prepaid? Discuss.
Q5) What does the lien status of a mortgage loan indicate?
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Chapter 23: Mortgage-Backed Securities Market
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Q1) Which of the below statements is TRUE?
A) There is very little variability of the average life for the tranches.
B) The distribution of principal effectively protects a shorter-term tranche against extension risk; this protection comes from the other tranches.
C) There is very little or no protection provided for each tranche against prepayment risk.
D) None of these
Q2) The three major types of pass-through securities are guaranteed by either Freddie Mac (a federally related entity), Fannie Mae (a government-sponsored enterprise), or Ginnie Mae (a government-sponsored enterprise), and are referred to as agency pass-through securities.
A)True
B)False
Q3) An investor in a mortgage pass-through security is exposed to prepayment risk, which is the same as one type of risk: extension risk.
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) What is a yield maintenance charge?
Q2) The largest sector of the CMBS market is constituted by ________.
A) securities backed by Ginnie Mae.
B) securities issued by private entities.
C) securities backed by Freddie Mac.
D) securities issued by the two government-sponsored enterprises.
Q3) Commercial mortgage loans are for mortgage loans for ________.
A) mortgage-producing properties.
B) income-manufacturing mortgages.
C) income-producing properties.
D) mortgage-manufacturing properties.
Q4) In regards to commercial mortgage loans, name four of the major property types that have been securitized.
Q5) What is a prepayment lockout?
Q6) A commercial mortgage loan is originated either to ________.
A) finance a commercial purchase or to refinance a prior mortgage obligation.
B) finance a residential purchase or to refinance a prior mortgage obligation.
C) finance a commercial purchase or to refinance a subsequent mortgage obligation.
D) None of these
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Chapter 25: Market for Asset-Backed Securities
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Q1) There are benefits of securitization causing no concerns about its impact.
A)True
B)False
Q2) Two of the five of largest sectors within the ABS market that are NOT backed by real estate mortgage loans include: ________.
A) rate reduction stocks and student loan-backed securities.
B) large business administration loan-backed securities and credit card receivable-backed securities .
C) rate reduction bonds and senior citizen loan-backed securities.
D) credit card receivable-backed securities and auto loan-backed securities.
Q3) There are four principal reasons why a corporation may elect to raise funds via a securitization rather than a corporate bond. One of these reasons includes ________.
A) the potential for increasing funding costs.
B) to decelerate earnings for financial reporting purposes.
C) to diversify funding sources.
D) potential relief from capital requirements for unregulated entities.
Q4) What is the key benefit of securitization to financial markets?
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Chapter 26: Financial Futures Markets
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Q1) The futures price for the S&P 500 is 2000 and the multiple is $100. What is the dollar value of the stock index futures contract?
A) $200
B) $20,000
C) $120,000
D) None of these
Q2) Little of what we say about futures contracts applies equally to forward contracts.
A)True
B)False
Q3) Credit risk is maximal in the case of futures contracts because the clearinghouse associated with the exchange does not guarantee the other side of any transaction.
A)True
B)False
Q4) Describe a Eurodollar futures contract. Illustrate the minimum price fluctuation for this contract.
Q5) Futures contracts are leveraged instruments that can be used to control risk.
A)True
B)False
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Page 28
Chapter 27: Options Markets
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Q1) There are options that may be exercised at any time up to and including the expiration date. Such options are referred to as ________ options. Other options may be exercised only at the expiration date; these are called ________ options.
A) European; American
B) American; Asian
C) Asian; European
D) American; European
Q2) If the buyer of the futures option exercises, the futures price for the futures contract will be set equal to the exercise price, but the position of the two parties is then immediately marked to market based on the then-current futures price.
A)True
B)False
Q3) Like a futures contract, only one party to an option contract is obligated to transact at a later date: the option writer.
A)True
B)False
Q4) Describe an outperformance option and illustrate with an example.
Q5) Comment on the differences between futures and options contracts.
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Chapter 28: Pricing of Futures and Options Contracts
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Q1) To determine the value of the ________, H, we must know C and Cd. These two values are equal to the difference between the price of the asset and the strike price in the two possible states.
A) put option
B) call option
C) hedge ratio
D) payoff ratio
Q2) You borrow $1,000 at 16% per year and proceed to buy Asset XYZ for $1,000 in the cash market. This asset pays $10 quarterly. You then immediately sell a futures contract at $1,025 requiring delivery of asset XYZ in three months. What is the net profit or loss from your strategy of selling the futures contract after borrowing money to buy the asset ?
A) $50.
B) $10.
C) -$5.
D) -$10.
Q3) The value of an option is greater than the cost of creating a replicating hedge portfolio.
A)True
B)False
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Chapter 29: The Applications of Futures and Options Contracts
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Q1) Suppose that a pension fund manager knows that bonds must be liquidated in 40 days to make a $5 million payment to the beneficiaries of the pension fund. If interest rates rise in 40 days, more bonds will have to be liquidated to realize $5 million. The hedger will buy put options thus following ________.
A) an unprotected call buying strategy.
B) a protective put buying strategy.
C) a protective put selling strategy.
D) an unprotected put buying strategy.
Q2) ________ monitor the cash and futures market to see when the differences between the theoretical futures price and actual futures price are sufficiently large to generate an ________.
A) Money managers and advisors; advising profit
B) Money managers and arbitrageurs; arbitrage profit
C) Portfolio managers and arbitrageurs; risk-adjusted profit
D) Money managers and advisors; risk-adjusted profit
Q3) Market participants can use interest rate futures in various ways. Name three of these ways.
Q4) Explain how a "protective put buying strategy" works.
Page 31
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Chapter 30: OTC Interest Rate Derivatives: Forward Rate
Agreements, Swaps, Caps, and Floors
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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), which is 7.5%.. Party X is a fixed-rate payer / floating-rate receiver, while party Y is a floating-rate payer / fixed-rate receiver. Assume that the notional principal amount is $100 million, and that payments are exchanged every six months for the next five years. What will party Y pay party X every six month?
A) $3,750,000
B) $4,250,000
C) $4,750,000
D) $5,000,000
Q2) If at the settlement date the settlement rate is ________ the contract rate, the FRA buyer ________ because the buyer can borrow funds at a below-market rate.
A) equal to; suffers
B) greater than; suffers
C) less than; benefits
D) greater than; benefits
Q3) Illustrate an interest rate / equity swap.
Q4) What is forward start swap?
Q5) Describe an interest rate cap and an interest rate floor.
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Chapter 31: Market for Credit Risk Transfer Vehicles: Credit
Derivatives and Collateralized Debt Obligations
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Q1) The reference entity ________.
A) is the issuer of the debt instrument and hence is also referred to as the reference issuer.
B) is the particular debt issue for which the credit protection is being sought.
C) could not be Ford Motor Credit Company.
D) could be Ford Motor Credit Company bond issue
Q2) In regards to a CDO structure, at least an A rating is typically sought for the ________ at least a B rating is sought for the ________.
A) mezzanine tranches; subordinate/equity tranches
B) subordinate/equity tranches; mezzanine tranches
C) senior tranches; mezzanine tranches
D) senior tranches; subordinate/equity tranches
Q3) Like a CDO, the manager of an SFOC can increase or decrease its leverage based on its expectation about factors that impact the return on its portfolio.
A)True
B)False
Q4) What can a CRT vehicle result in? Explain by commenting on the concern with the banking system.
Q5) By whom and for what reasons are credit derivatives used? Give an example.
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Chapter 32: The Market for Foreign Exchange and Risk
Control Instruments
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Q1) The three currency pairs (and their abbreviations) that are most commonly traded are ________.
A) Euro against U.S. dollar (GBP/USD).
B) U.S. dollar against Japanese yen (USD/JPY).
C) British pound against mexican peso (GBP/MP).
D) Swiss franc against U.S. dollar (SF/USD).
Q2) The countries of the European Union electing to be members of the Economic and Monetary Union (EMU) are subject to a ________ conversion rate against their national currencies and relative to the euro, but the value of the euro against all other currencies ________ according to market conditions.
A) flexible oscillates
B) fixed fluctuates
C) flexible is fixed
D) fixed is stationary
Q3) From the perspective of a U.S. investor, the cash flows of assets denominated in a foreign currency offer the investor to certainty as to the actual level of the cash flow measured in U.S. dollars.
A)True
B)False
Page 34
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