Investment Analysis
Question Bank
Course Introduction
Investment Analysis introduces students to the fundamental concepts and techniques used to evaluate investment opportunities in financial markets. The course explores topics such as risk and return, portfolio theory, asset valuation, security analysis, and market efficiency. Students will learn how to analyze stocks, bonds, and other investment vehicles using both quantitative and qualitative methods, and develop skills in constructing and managing investment portfolios. The course also covers contemporary issues in investment analysis, including behavioral finance and the impact of global economic factors on investment decisions.
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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Sample Questions
Q1) Business entities include nonfinancial and financial enterprises. ________ manufacture products such as cars and computers and/or provide nonfinancial services such as transportation and utilities.
A) Financial enterprises
B) Nonfinancial enterprises
C) Both financial and nonfinancial enterprises
D) None of these
Answer: B
Q2) 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
Q3) The financial asset is referred to as a ________ if the claim is a fixed dollar.
A) debt instrument.
B) common equity instrument.
C) derivative instrument.
D) preferred equity instrument.
Answer: A
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Chapter 2: Financial Institutions, Financial Intermediaries, and Asset Management Firms
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Q1) By the liabilities of a financial institution, we mean the amount and timing of the cash outlays that must be made to satisfy the contractual terms of the obligations issued. The liabilities of any financial institution can be categorized according to four types where the categorization assumes that the entity that must be paid the obligation will not cancel the financial institution's obligation prior to any actual or projected payout date. Using a table format, name and describe these four types.
Answer: \[\begin{array} { l l l }
\text { Liability Type } & \text { Amount of Cash Outlay } & \text { Timing of Cash Outlay } \\
\text { Type I } & \text { Known } & \text { Known } \\
\text { Type II } & \text { Known } & \text { Uncertain } \\
\text { Type III } & \text { Uncertain } & \text { Known } \\
\text { Type IV } & \text { Uncertain } & \text { Uncertain } \end{array}\]
Q2) Risk-arbitrage hedge funds have the broadest mandate of all of the four hedge fund categories.
A)True
B)False
Answer: False
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Chapter 3: Depository Institutions: Activities and Characteristics
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Q1) 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
Q2) A depository institution can accommodate withdrawal and loan demand by attracting additional deposits and raising short-term funds in the money market.
A)True
B)False
Answer: True
Q3) Most global banking activities generate ________ rather than ________.
A) dividend income; interest income
B) fee income; dividend income
C) interest income; fee income
D) fee income; interest income
Answer: D
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Chapter 4: The US Federal Reserve and the Creation of Money
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Q1) The Fed often employs variants of simple open market purchases and sales, and these are called ________.
A) the trading agreements of the Federal Reserve Bank of New York.
B) the repurchase agreement (or repo) and the reverse repo.
C) matched sale or a matched sale-purchase transaction
D) open market operations
Q2) Dramatic evidence of the growing importance of international policy coordination on monetary matters occurred in two meetings of central bankers of the large industrial nations in the mid 1980s.
A)True
B)False
Q3) The most basic monetary aggregate is the fiscal base.
A)True
B)False
Q4) Many deposit accounts pay interest, so holding cash does not impose an opportunity cost.
A)True
B)False
Q5) Describe the four monetary aggregates.
Page 6
Q6) Briefly discuss the nature of a closed economy and an open economy.
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Page 7
Chapter 5: Monetary Policy in the United States
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Q1) Which of the below has occurred during the 21st Century?
A) After the stock market reversed and the bubble began to burst, the Fed increased the Fed funds rate from 2% to 5% beginning in May 2000 to successfully avert a recession induced by the stock market.
B) During June 2004, the Fed began a series of 17 consecutive 0.25% decreases in the Fed funds rate, to decrease the Fed funds rate to 5.25% during June 2006.
C) Bernanke totally reversed Greenspan's policies being viewed as more open with respect to communication about the Fed's policy and open to promoting more open discussion.
D) The urgency about the economy and the financial system continued to intensify and the Fed increased its funds rate between regularly scheduled FOMC meetings in January 2008.
Q2) Keynesians adopt a monetary policy that largely calls for targeting long-term interest rates.
A)True
B)False
Q3) Identify and briefly describe three of the major goals of Fed policy.
Q4) Discuss two problems that the Fed has in implementing monetary policy.
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Page 8
Chapter 6: Insurance Companies
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Q1) In 1933, Congress passed the Glass-Steagall Act. The act separated ________.
A) deregulation of the financial system, internationalization of the insurance industry, and demutualization.
B) commercial banking, investment banking, and insurance.
C) deregulation of the financial system, commercial banking, and demutualization.
D) commercial banking, investment banking, and deregulation of the financial system.
Q2) Insurance products can be sold to individuals or groups. Describe the groups for which insurance products are typically sold to and the products sold to these groups.
Q3) The third element of an insurance company is the distribution component or the sales force. There are different types of distribution forces. Describe two of these forces.
Q4) Cash value insurance products may be "guaranteed" or "variable"; with fixed or flexible premiums; and, with or without a survivorship feature.
A)True
B)False
Q5) Describe and contrast the various types of IRAs.
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Page 9
Chapter 7: Investment Companies and Exchange Traded Funds
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Q1) A ________ is not active in trading of the bonds in the portfolio, have a fixed termination date, and are common in Europe.
A) closed-end fund
B) opened-end fund
C) whole fund
D) unit trust
Q2) The reasons U.S. and international asset managers have aggressively acquired U.S. funds include ________.
A) the rapidly declining U.S. mutual fund business.
B) the general regulatory framework in Asian countries.
C) the general regulatory framework in European countries.
D) the continuing deregulation of the U.S. asset management business.
Q3) There are important aspects of open-end funds, commonly referred to simply as mutual funds. Describe three of these aspects.
Q4) The Investment Company Institute (ICI) provides data that permit the assessment of investors to the annual expense sales, that is, not including the sales charge or load. Describe how this is done.
Q5) Describe the differences in a front-end load, a back-end load, and a level load fund.
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Chapter 8: Pension Funds
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Q1) A ________ is a fund that is established for the eventual payment of retirement benefits.
A) pension plan
B) benefit plan
C) health plan
D) social security plan
Q2) The Pension Protection Act of 2006 (PPA) contains two major parts. Describe these two parts.
Q3) The Social Security Act of 1935 provided employers with a safe harbor from certain parts of ERISA.
A)True
B)False
Q4) 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
Q5) Explain the "prudent man" concept.
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Chapter 9: Properties and Pricing of Financial Assets
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Q1) Which of the below statements is TRUE?
A) Fifty basis points are equal to one-fifth percentage point, and a yield change from 9% to 9.2% represents a 50 basis point change in yield.
B) One basis point is defined as 0.0001, or equivalently, 0.01%.
C) A yield change from 7% to 7.5% is a 0.50 basis point change.
D) A yield change from 6% to 8.35% is a 2,350 basis point change in yield.
Q2) Which of the below is NOT one of the eleven properties of financial assets?
A) moneyness
B) multiplicity and denomination
C) reversibility
D) cash flow
Q3) When we refer to changes in the required yield, it is convenient to measure a change in yield in terms of what market participants refer to as ________.
A) a basis modification rather than a yield modification.
B) a yield modification rather than in terms of a basis modification.
C) a percentage change rather than a basis point.
D) a basis point rather than in terms of a percentage change.
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Chapter 10: The Level and Structure of Interest Rates
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Q1) Within the corporate market sector, issuers are classified as ________.
A) (1) utilities, (2) industrials, (3) finance, and (4) banks.
B) (1) high-risk, (2) medium-risk, (3) low-risk, and (4) no-risk.
C) (1) foreign, (2) domestic, (3) European, and (4) Asian.
D) (1) intramarket, (2) extramarket, (3) ultramarket, and (4) intermarket.
Q2) The most recently auctioned Treasury issues for each maturity are referred to as
A) off-the-run issues or current coupon issues.
B) minimum interest rate or base interest rate
C) on-the- run or current coupon issues.
D) benchmark interest rate or minimum interest rate.
Q3) The relationship between inflation and interest rates is the well-known Fisher's Law, which can be expressed this way: (1 + i) = (1 + r) × (1 + i) where ________.
A) r is the nominal rate.
B) i is the real rate.
C) p is the expected percentage change in the price level of goods and services over the loan's life.
D) the nominal rate, p, reflects both the real rate and expected inflation.
Q4) 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) Ilmanen argues that the ________ is the least well known of the three main influences.
A) duration impact
B) basis point influence
C) maturity premium impact
D) convexity bias influence
Q2) To determine the value of each zero-coupon instrument, it is necessary to know the yield on a corporate bond with that same maturity.
A)True
B)False
Q3) According to the ________, the forward rates exclusively represent the expected future rates.
A) preferred habitat theory
B) pure expectations theory
C) market segmentation theory
D) pure liquidity theory
Q4) Name and comment on two of the three main influences on the shape of the Treasury yield curve as suggested by empirical research.
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Chapter 12: Risk/Return and Asset Pricing Models
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Q1) The first behavioral finance theme involves the concept of heuristics. This term means a rule-of-thumb strategy or good guide to follow in order to shorten the time it takes to make a decision.
A)True
B)False
Q2) The arbitrage pricing theory (or APT) model postulates that a security's return is a function of several factors and the security's sensitivity to changes in each of them.
A)True
B)False
Q3) The multifactor CAPM approach entails that a security's return has ________.
A) an alpha like sensitivity to each factor.
B) a riskless performance for each factor.
C) a standard deviation type performance for each factor.
D) a beta like sensitivity to each factor.
Q4) The use of variance of returns in standard portfolio theory depends on whether the return distribution is symmetric with fat-tails.
A)True
B)False
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Chapter 13: Primary Markets and the Underwriting of Securities
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Q1) An offering of a new security cannot be made by means of an auction process.
A)True
B)False
Q2) When all bidders buy the amount allocated to them, then the auction is referred to
A) as a multiple-price auction or a Dutch auction.
B) as a single-price auction or a German auction.
C) as a single-price auction or a Dutch auction.
D) as a multiple-price auction or a German auction.
Q3) Congress specifies the conditions that must be satisfied to qualify for a private placement.
A)True
B)False
Q4) The Securities Acts allow three exemptions from federal registration. Describe two of these three exemptions.
Q5) Investment bankers will typically work with issuers in the design of a security for a private placement and line up the potential investors.
A)True
B)False
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Chapter 14: Secondary Markets
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Q1) ________, orders are grouped together for simultaneous execution at the same price.
A) In a bull market
B) In an efficient market
C) In a call market
D) In a bear market
Q2) What is a broker and how can a broker act on behalf of an investor.
Q3) What can investors expect to obtain in an operationally efficient market? Does this efficiency vary throughout the world?
Q4) In ________, investors can obtain transaction services as cheaply as possible, given the costs associated with furnishing those services.
A) an internally inefficient market
B) an externally efficient market
C) a pricing efficient market
D) an operationally efficient market
Q5) Some markets conduct the day's initial trades with a call method and most other trades in a continuous way.
A)True
B)False
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Chapter 15: Treasury and Agency Securities Markets
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Q1) 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.
Q2) A significant depreciation of the local currency relative to a foreign currency in which a debt obligation is denominated will impair a national government's ability to satisfy such obligation.
A)True
B)False
Q3) The process of separating each coupon payment, as well as the principal (called the corpus), and selling securities against them is referred to as coupon separating.
A)True
B)False
Q4) Sovereign debt is the obligation of a country's central government.
A)True
B)False
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Chapter 16: Municipal Securities Markets
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Q1) Municipal notes are issued for periods up to two years and represent temporary borrowings by states, local governments, and special jurisdictions.
A)True
B)False
Q2) An unlimited tax general obligation debt ________.
A) has revenue sources that include corporate and individual income taxes, sales taxes, and property taxes.
B) is the weaker form of general obligation pledge because it is secured by the issuer's unlimited taxing power.
C) is said to be secured by the full faith and credit of the government.
D) is a constrained tax pledge because for such debt there is a statutory boundary on tax rates that the issuer may levy to service the debt.
Q3) Because a ________ requires legislative approval to appropriate the funds, it is classified as an appropriation-backed obligation.
A) general obligation debt
B) moral obligation bond
C) approved obligation bond
D) unlimited tax obligation debt
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19
Chapter 17: Markets for Common Stock: The Basic
Characteristics
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Q1) A transaction in which an investor borrows to buy shares using the shares themselves as collateral is called ________.
A) buying on margin.
B) selling on margin.
C) buying on loan.
D) selling on loan.
Q2) The brokerage firm can also choose to execute the trade on an agency basis. In this case, the dealer would commit its own capital to buy or sell the portfolio and complete the investor's transaction immediately.
A)True
B)False
Q3) 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
Q4) From a dealer's perspective, program trades can be conducted in two ways. Name and describe these two ways.
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Chapter 18: Markets for Common Stock: Structure and Organization
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Q1) Overall, after demutualization, the market participants and market owners were the same via memberships, seats, or access privileges.
A)True
B)False
Q2) What is a dark pool? Describe two of the sponsors of dark pools.
Q3) A structural change that has occurred in exchanges is their evolution from publicly owned electronically traded (that is, no trading floor) organizations to membership-owned, floor-traded organizations.
A)True
B)False
Q4) Since options exchanges are registered with the SEC, they too can initiate and operate stock exchanges. During 2007, two options exchanges, the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE), began stock exchanges, called the ISE Stock Exchange and the Chicago Board Options Stock Exchange, respectively. Describe the two components of the ISE stock market.
Q5) The OTC market is often called a market for "listed" stock.
A)True
B)False
Page 21
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Chapter 19: Markets for Corporate Senior Instruments: I
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Q1) The market for lease financing is a segment of the larger market for ________.
A) equipment managing.
B) gear financing.
C) equipment financing.
D) None of these
Q2) 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
Q3) Unlike investing in a U.S. Treasury security, an investor who lends funds to a corporation by purchasing its debt obligation is exposed to ________.
A) liquidity risk.
B) maturity risk.
C) credit risk.
D) nonmarket risk.
Q4) There are two possible ways for the lessor to finance the purchase of the equipment.
Describe these two ways.
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Chapter 20: Markets for Corporate Senior Instruments: II
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Q1) The warrants on Eurobonds are varied: some are equity warrants, others are debt warrants, and still others may be currency warrants. Describe these three types of warrants on Eurobonds.
Q2) Can failure to make preferred stock dividend payments force a firm into bankruptcy? Explain.
Q3) High-yield bonds ________.
A) are issues with a credit rating above triple B.
B) are issues with a credit rating below triple B.
C) have been rated investment grade at the time of issuance and cannot be downgraded subsequently to noninvestment grade.
D) cannot be rated noninvestment grade at the time of issuance (e.g., rated as original-issue, high- yield bonds).
Q4) In essence, the high-yield bond market shifts the risk from commercial banks to the investing public in general. There are four advantages to such a shift. Describe two of these advantages.
Q5) The law governing bankruptcy in the United States is the Bankruptcy Reform Act of 1978. One purpose of the act is to set forth the rules for a corporation to be liquidated or reorganized. Distinguish between a liquidation and a reorganization.
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Chapter 21: The Markets for Bank Obligations
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Q1) Simply put, a ________ is a vehicle created to facilitate commercial trade transactions.
A) bankers acceptance
B) repo
C) bankers receptance facilitator
D) vehicle transaction
Q2) A bank may sell its bankers acceptances directly to investors, or may sell all or part to dealers.
A)True
B)False
Q3) The yields on ________ play an important role in the world financial markets because they are viewed globally as the cost of bank borrowing since they are effectively the rates at which major international banks offer to pay each other to borrow money by issuing a ________ with given maturities.
A) Eurodollar CDs; floating-rate CD
B) floating-rate CD; Eurodollar (CD)
C) Eurodollar CDs; Eurodollar (CD)
D) Negotiable CDs; Negotiable CDs
Q4) Why might some federal funds transactions require the use of a broker?
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Chapter 22: The Residential Mortgage Market
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Q1) The difference between the purchase price of the property and the amount borrowed is the borrower's ________. The LTV is the ratio of the amount of the loan to the market (or appraised) value of the ________. The ________, the greater the protection for the lender if the applicant defaults on the payments and the lender must repossess and sell the property.
A) upfront; loan; lower this ratio
B) down payment; property; lower this ratio
C) down payment; property; higher this ratio
D) upfront payment; loan; higher this ratio
Q2) 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
Q3) The amount of the payment made in excess of the monthly mortgage payment is called a prepayment.
A)True
B)False
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Chapter 23: Mortgage-Backed Securities Market
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Q1) The securitization of subprime loans works by dividing pools of credit into classes, or tranches, separated by the amount of risk each class represents.
A)True
B)False
Q2) Just like a support bond, a CMO reduces the uncertainty concerning the maturity of a tranche, thereby providing a risk/return pattern not available with typical mortgage pass-through securities.
A)True
B)False
Q3) Which of the below are NOT two forms of credit enhancement?
A) junior-subordinate structure and monoline insurance
B) multiline insurance and overcollateralization
C) undercollateralization and excess spread
D) None of these
Q4) 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
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Chapter 24: Market for Commercial Mortgage Loans and Commercial Mortgage-Backed Securities
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Q1) Fusion or hybrid deals are multiple borrower CMBS deals that combine loans that are included in conduit deals with a large or "mega" loan.
A)True
B)False
Q2) In regards to commercial mortgage loans, which of the below statements is FALSE?
A) Commercial mortgage loans are typically balloon loans requiring substantial principal payment before the end of the balloon term.
B) If the borrower fails to make the balloon payment, the borrower is in default.
C) The lender may extend the loan and in so doing will typically modify the original loan terms.
D) Balloon risk is the risk that a borrower will not be able to make the balloon payment because the borrower either cannot arrange for refinancing at the balloon payment date or cannot sell the property to generate sufficient funds to pay off the balloon balance.
Q3) Are CMBS and nonagency RMBS structures similar or different? Discuss.
Q4) Balloon risk is something that has to be dealt with in structuring an RMBS.
A)True
B)False
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Chapter 25: Market for Asset-Backed Securities
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Q1) Credit card payable-backed securities are backed by the cash flow of a pool of credit card receivables and the cash flow consists of finance charges collected, fees, and principal.
A)True
B)False
Q2) In regards to credit card receivable-backed securities, which of the below statements is FALSE?
A) Credit card receivable-backed securities are backed by the cash flow of a pool of credit card receivables.
B) The cash flow consists of finance charges collected, fees, and principal.
C) Finance charges collected represent the periodic interest the credit card borrower is charged based on the unpaid balance after the grace period but these fees do not include late payment fees and any annual membership fees.
D) Interest to the bond classes is paid periodically (e.g., monthly, quarterly, or semiannually) and may be fixed or floating.
Q3) The SPV is the issuer of the ABS.
A)True
B)False
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Chapter 26: Financial Futures Markets
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Q1) In regards to single stock futures contracts, which of the below statements is FALSE?
A) Single stock futures are equity futures in which the underlying is the stock of an individual company.
B) Single stock futures are traded on two exchanges: OneChicago and Nasdaq Liffe Markets (NQLX).
C) Single stock futures of only actively traded New York Stock Exchange and Nasdaq stocks are traded.
D) Futures exchanges have found that there are investors who want to take long and short positions in the futures market for a group of stocks and do so by paying for several trades.
Q2) Without financial futures, investors would have only one trading location to alter portfolio positions when they get new information that is expected to influence the value of assets and that is the ________.
A) commodity market.
B) derivatives market.
C) noncash market.
D) cash market.
Q3) 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) Simple OTC options are called exotic options.
A)True
B)False
Q2) Which of the below statements is TRUE?
A) A put option can be used to protect against a rise in the price of the underlying instrument while maintaining the opportunity to benefit from a decline in the price of the underlying instrument.
B) Hedging with options never differ from hedging with futures.
C) Hedging with futures involves trading off the benefits of a favorable price movement for protection against an adverse price movement.
D) None of these
Q3) Differentiate between a call option and a put option.
Q4) An option cannot be used to alter the risk/reward relationship from that of a position in the underlying.
A)True
B)False
Q5) Do call options allow investors to protect or hedge against a rise in the price of the underlying instrument? Explain using an illustration to show the hedge outcome.
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Chapter 28: Pricing of Futures and Options Contracts
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Sample Questions
Q1) The ________ of an option, at any time, is its economic value if it is exercised immediately. If no positive economic value would result from exercising immediately,
A) extrinsic value; extrinsic value is zero.
B) intrinsic value; intrinsic value is zero.
C) extrinsic value; intrinsic value is negative.
D) intrinsic value; intrinsic value is positive.
Q2) You lend $1,000 at 10% per year for three months and proceed to short sell Asset XYZ for $1,000 in the cash market. You are required to pay $75 to the lender of Asset XYZ (which is the proceeds the lender would have received). You then immediately buy a futures contract at $950 for delivery of asset XYZ in three months (this will cover your short position). What is the net profit or loss from your strategy of lending money, short selling, and buying the futures contract?
A) $50
B) $25
C) $0
D) -$25
Q3) To determine the value of the hedge ratio, H, what two values must we know? What are these values equal to?
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Chapter 29: The Applications of Futures and Options
Contracts
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Sample Questions
Q1) A long hedge is used to protect against a decline in the cash price of a financial instrument or portfolio.
A)True
B)False
Q2) A short hedge is undertaken to protect against an increase in the price of a financial instrument or portfolio to be purchased in the cash market at some future time.
A)True
B)False
Q3) Institutional investors can use stock index futures for seven distinct investment strategies. These include ________.
A) speculating on the movement of the bond market.
B) hedging against adverse stock price movements.
C) controlling indexed portfolios.
D) index allocation.
Q4) The purchase of a call option can be used to guarantee that the maximum price that will be paid in the future is the strike price plus the option price.
A)True
B)False
Page 32
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Chapter 30: OTC Interest Rate Derivatives: Forward Rate
Agreements, Swaps, Caps, and Floors
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Q1) Which of the below statements is FALSE?
A) In a basis rate swap, both parties exchange floating-rate payments based on a different reference rate.
B) A nonconstant maturity swap tied to the CMT is called a Constant Maturity Treasury swap.
C) There are options on interest rate swaps: these swap structures are called swaptions and grant the option buyer the right to enter into an interest rate swap at a future date.
D) There are two types of swaptions -a payer swaption and a receiver swaption.
Q2) A ________ involves the sale of the swap to the original counterparty.
A) buy-back
B) close-out sale
C) cancellation
D) All of these
Q3) For swaps with maturities of less than five years, the swap spread is driven by rates in the Eurodollar CD futures market, but for swaps with maturities greater than five years, the spread is determined primarily by the credit spreads in the corporate bond market.
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 in the normal course of activities to more efficiently ________.
A) control the market risk of a portfolio.
B) control the balance sheet of a financial institution.
C) transact than by avoiding the cash market.
D) deleverage an exposure in the credit market.
Q2) In determining whether or not to create a CDO, dealers will look to see if there is a potential return available to the equity tranche of ________.
A) a minimum amount.
B) a maximum amount.
C) an interest-free amount.
D) a perfect amount.
Q3) Credit derivatives can be used to create credit risk transfer products. The two most common products employing credit default swaps are ________.
A) synthetic CDOs and credit-linked notes.
B) synthetic CDOs and credit-linked CDOs.
C) synthetic notes and credit-linked notes.
D) nonsynthetic notes and credit-linked CDOs.
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Chapter 32: The Market for Foreign Exchange and Risk
Control Instruments
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Q1) Foreign-exchange risk ________.
A) is the risk that a currency's value may change adversely.
B) is an unimportant consideration for all participants in the international financial markets.
C) cannot affect an international investor's return after adjusting for changes in the exchange rate.
D) cannot affect issues denominated in a foreign currency (e.g., in terms of the effective value of the cash payments owed to investors).
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) Exchange rate quotations may be either direct or indirect. Distinguish between a direct and an indirect quote.
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