Final Exam

Topics: Bond, Futures contract, Call option Pages: 8 (1888 words) Published: July 3, 2013
1. Yield spreads represents the difference in yield between issues of different terms to maturity but same risks. a. T
b. F
2. The coupon rate is the interest rate that equates the current purchase price of the bond with the economic value of all anticipated future interest and principal payments. a. T
b. F
3. Zero coupon bonds are sold at an original price that is a substantial premium from their face amount. a. T
b. F
4. Municipal bonds are interest-bearing securities issued by local governments that are typically free of federal income taxes. a. T
b. F
5. A bond bid-ask spread of 1/32 represents a difference of only 31.25 cents per thousand of dollars face amount. a. T
b. F
6. An interesting characteristic of the corporate bond is its relatively low trading volume. a. T
b. F
7. Treasury Inflation-Protected Securities (TIPS) have fixed coupon rates like traditional T-bonds. The difference is that the par value is adjusted semiannually for inflation as measured by the Consumer Price Index (CPI). a. T

b. F
8. The mortgage securitization process is the process by which mortgage-backed securities are pooled and resold in order to decrease lender risk. a. T
b. F
9. The Federal Reserve buys and sells bonds in the Treasury securities market in order to implement monetary policy. If the Fed wishes to increase the money supply, it sells Treasury securities, thereby injecting funds into the financial system and reducing interest rates. a. T

b. F
10. The Federal Reserve buys and sells bonds in the Treasury securities market in order to implement monetary policy. If the Fed wishes to decrease the money supply, it sells Treasury securities, thereby withdrawing funds from the financial system and increasing interest rates. In this manner, the Fed tries to manage growth in the economy and tame the rate of inflation. a. T

b. F
11. Prospect Theory explains how investors tend to frame investment choices in terms of potential gains and losses relative to a specific reference point according the S shaped value function. The function is convex for losses, which means that investors feel bad when they realize an investment loss, but twice as large a loss does not make the typical investor feel twice as bad. a. T

b. F
12. Default risk premiums are a prime source of such yield differentials between government bonds versus corporate bonds. a. T
b. F
13. Macaulay duration is the weighted average time to receipt of all cash flow payments, when the weights are the present values of the payments themselves. a. T
b. F
14. A call option is in the money if the strike price is less than the market price of the underlying security. a. T
b. F
15. A put option is in the money if the strike price is less than the market price of the underlying security. a. T
b. F
16. A call option is out of the money if the strike price is less than the market price of the underlying security. a. T
b. F
17. A put option is out of the money if the strike price is less than the market price of the underlying security. a. T
b. F
18. A hedged position is created when an option contract is purchased or sold in order to increase the risk inherent in some other investment. a. T
b. F
19. A speculative position is created when an option contract is purchased or sold to profit from the inherent risk of some underlying asset. a. T
b. F
20. While there are three ways in which a futures contract can be terminated, most futures contracts are terminated by physical delivery of the underlying asset. a. T
b. F
21. Two types of municipal bonds are general obligation issues and: a. serial bonds
b. revenue bonds
c. debentures
d. income bonds
22. List the following securities by their level of credit risk (list the most risky first): Corporate Bond (rated AA), Corporate Bond...
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