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15 Cards in this Set

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Suppose that an FI has a positive net exposure position in a particular foreign currency. This implies that the FI would welcome a depreciation of that foreign currency
F
GNMA pass-through bondholders are more concerned with volatile interest rates than with the credit risk of the originating borrowers.
T
One advantage of asset securitization to a bank is the ability to originate new assets before the original assets have matured.
T
Net asset value is the value determined by the marking-to-market process.
T
The use of an exchange rate forward contract assures the FI of the opportunity to buy (or sell) the foreign currency at a future time at a known price.
T
The spot foreign exchange market is where forward and futures contracts and swap agreements are transacted
F
When the NAV of a closed-end mutual fund is less than its market price, the fund is trading at a premium.
T
Suppose, in regards to the term structure of interest rates, you believe in the Unbiased Expectations Hypothesis. Also suppose that you see the following yields in the market-place for zero-coupon treasury instruments, in Nov. 2006:

one year: 4.50%; two year: 5.00%; three year: 5.25%; four year: 6.00%, five year: 6.25%.

What rate do you expect three-year securities to yield, two years from now (Nov. 2008)?
a. 7.25% < x <= 8.00%
b. 6.50% < x <= 7.25%
c. x <= 5.75%
d. 5.75% < x <= 6.50%
e. Not enough information provided.
b. 6.50% < x <= 7.25%
1.0625^5 = (1.05^2)*(1 + x)^3

x = 7.09%
A bank purchases a 1-year, $1 million Eurodollar deposit at an annual interest rate of 6.0 percent. It invests the funds in a one-year Swedish krone bond paying 7.5 percent per year. The current spot rate is SK5.00 / $US.

The one-year forward rate on the Swedish krone is being quoted at SK5.20 / $US.

Suppose that the bank covers its foreign exchange exposure using the forward market. How much profit (“P”) will the bank make on this transaction? Include the change in value of the assets and liabilities as well as interest income and interest expense.
a. 0 <= P < $20K
b. - $20K <= P < $0K
c. P <= - $60K
d. - $60K <= P < - $40K
e. - $40K <= P < - $20K
e. - $40K <= P < - $20K
Interest plus principal expense on 1-year CD = $1m x (1 + 0.060) = $1,060,000

Principal of Swedish bond = $1,000,000*5.00 = SK5M

Interest and principle = SK5M * (1 + 0.075) = SK 5.375M

Interest and principle in dollars if hedged:
SK 5,375,000 / [SK5.20 / $US1.00] = $1,033,654

Profit = $1,033,654 - $1,060,000 = -$26,346
Suppose you participate in a Dutch auction, of the type we discussed in class. You value the auction item at a price of V. Which of the following is the best pricing strategy?
a. Bid V.
b. Bid slightly lower than V.
c. Bid slightly higher than V.
d. Expend some time and effort to get a feel for what other participants will bid. If they are going to bid high, then bid slightly higher than V. If they are going to bid low, then bid slightly lower than V.
a. Bid V.
Which of the following is not a reform resulting from the $1.4b research analyst settlement with the SEC?
a. Research analysts at investment banking firms will be kept separate from investment banking departments.
b. Research analysts will not be allowed to promote IPO companies upon which they do research.
c. $400M of the settlement will be devoted to paying for independent research.
d. Research analysts will no longer be able to meet with the CEOs of the firms they rate.
e. All of the above are reforms resulting from the research analyst settlement.
d. Research analysts will no longer be able to meet with the CEOs of the firms they rate.
Immunizing the balance sheet of an FI against interest rate risk requires that the leverage adjusted duration gap (DA-k*DL) should be set to zero.
T
The yen “carry trade,” that we discussed in class, refers to the practice of borrowing short-term in Japanese yen and then investing in long-term Japanese bonds, also denominated in yen.
F
The yen carry trade is the borrowing of short-term funds in yen, then investing in higher yielding securities outside of Japan. The carry trade opens these FIs to the risk that the Japanese yen could strengthen.
For a given maturity fixed-income asset, duration decreases as the market yield increases.
T
The Securities Investor Protection Corporation (SIPC) protects investors against losses of up to $500,000 on securities firm failures.
T