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Question
Explain sovereign debt ratings assigned by ratings agencies.Answer
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When the futures option is exercised:a. The futures price for the futures contract will be set equal to the exercise price.b. The position of the two parties is immediately marked-to-market based on the then current futures price.c. The economic benefits from exercising the option are realized by the option holder.d. a and b only.e. All of the above.
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If the shape of the yield curve is upward sloping and the cost of carry is positive, the futures price will trade at a:a. Discount to the cash price.b. Premium to the cash price.c. Be equal to the cash price.d. Cannot be determined.e. None of the above.
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The theoretical futures price depends on which of the following factors?a. Cash market price.b. Financing cost.c. Cash yield on underlying instrument.d. a and c only.e. All of the above.
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The option of when in the delivery month of a CBT Treasury bond futures contract to deliver is referred to as:a. Quality option.b. Timing option.c. Wild card option.d. Swap option.e. None of the above.
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Derivative instruments that are used to control interest rate risk include:a. Interest rate futures.b. Interest rate options.c. Interest rate forwards.d. a and b only.e. All of the above.
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Discuss the differences between covered bonds and residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), and other asset-backed securities (ABS).
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Outside of the U.S. inflation-indexed bonds are known as:a. TIPS.b. HICPS.c. Indexers.d. Linkers.e. None of the above.
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When making a direct comparison between the yield to maturity on a U.S. fixed-ratebond and a Eurodollar fixed rate bond:a. An adjustment must be made because Eurodollar bonds pay annually rather than semiannually.b. Given the yield on a Eurodollar fixed-rate bond, the bond-equivalent yield will always be lower.c. Given the yield on a U.S. fixed-rate bond, the yield to maturity on an annual basis is always less than the yield to maturity on a bond-equivalent basis.d. a and b only.e. a and c only.
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A dual-currency issue:a. Pays coupon interest in one currency and the principal in a second currency.b. Pays coupon interest in two different currencies.c. Pays the principal in two different currencies.d. Is one that is issued in a different currency than the one the investor pays with.e. None of the above.
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The coupon rate on a floating-rate note may be:a. LIBOR.b. A stated margin.c. The bid on LIBOR.d. A spread over LIBID.e. The arithmetic average of LIBOR and LIBID.
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CMBS can be issued by Ginnie Mae, Fannie Mae, Freddie Mac, and private entities.
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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.
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The most common forms of external credit enhancements are:a. A corporate guarantee.b. A bank letter of credit.c. Bond insurance.d. a and b only.e. All of the above.
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Explain the different types of external and internal credit enhancements.
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What is triangular arbitrage?
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The foreign exchange market is a(n)a. Interbank market.b. Dealer market.c. Over-the-counter market.d. All of the above.e. a and c only.
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In the U.S., currency futures contracts are traded on the:a. New York Stock Exchange.b. Big Board.c. International Monetary Market.d. Chicago Board of Trade.e. None of the above.
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Dealers in the foreign exchange market realize revenue from:a. The bid-ask spread.b. Trading commissions.c. Trading profits.d. All of the above.e. None of the above.
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The risk that a currency's value may change adversely is called:a. Volatility.b. Currency fluctuation.c. Currency risk.d. Price risk.e. None of the above.
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If the Swiss franc price of the dollar increases:a. The Swiss franc appreciated.b. The dollar appreciated.c. The Swiss franc depreciated.d. b and c only.e. None of the above.
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An indirect quote is the:a. Number of units of foreign currency needed to acquire one unit of the local currency.b. Number of units of local currency needed to acquire one unit of the foreign currency.c. Reciprocal of a direct quote.d. a and c only.e. None of the above.
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Explain the reasons for why OTC interest rate options are used by market participants.
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In an interest rate agreement, the predetermined interest rate level is called the:a. Reference rate.b. Strike rate.c. Implied rate.d. Basis rate.e. None of the above.
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The use of an interest rate swap to change the cash flow nature of liabilities is known as:a. Asset swap. b. Liability swap.c. Amortizing swap.d. Bullet swap.e. None of the above.
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In an interest rate swap, the position of the floating-rate payer is equivalent to a:a. Long position in a fixed-rate bond and a short position in a floating rate bond.b. Long position in a floating-rate bond and a short position in a fixed-rate bond.c. Long position in a fixed-rate bond and a long position in a floating rate bond.d. Short position in a fixed rate bond and a long position in a floating rate bond.e. None of the above.
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Commercial banks and investment banks customize for their clients interest rate contracts that are useful for:a. Index arbitrage.b. Controlling risk.c. Taking positions in markets.d. b and c only.e. None of the above.
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Institutional investors look for the mispricing of stock index futures to create arbitrage profits and thereby enhance portfolio returns. This strategy is referred to as:a. Dynamic hedging.b. Index arbitrage.c. Riskless arbitrage.d. Program trading.e. None of the above.
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The Black-Scholes model limits the use in pricing options on interest rate instruments as a result of which of the following assumptions?a. Short-term rates remain constant.b. Homogeneous investors.c. Price volatility is constant over the live of the option.d. a and c only.e. All of the above.
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The market for corporate debt obligations include the:a. Medium-term note market.b. Bank loan market.c. Commercial paper market.d. a and b only.e. All of the above.