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19 Cards in this Set
- Front
- Back
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Duration would be the greatest for which of the following bonds?
A) 5.5% coupon, maturing in 5 years B) 6% coupon, maturing in 10 years C) 6% coupon, maturing in 5 years D) 5.5% coupon, maturing in 10 years |
Answer: D
Duration measures the time in years it takes for a bond to pay for itself. Duration is greatest for bonds with lower coupons and bonds with longer maturities. |
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If a customer attempts to place an order for municipal securities that the registered rep deems completely unsuitable for the customer, the registered rep:
A) must obtain the permission of a municipal securities principal before executing the order. B) must refuse to execute the order. C) may execute the order and mark the order ticket as "unsolicited". D) may execute the order on a not-held basis |
Answer: C
A registered rep may enter any unsolicited order from a customer despite the fact that the rep believes the trade to be unsuitable for the customer. The rep must mark the order ticket "unsolicited". |
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Which of the following types of risk CANNOT be eliminated through diversification under the modern portfolio theory?
A) Interest rate risk B) Business risk C) Liquidity risk D) Systemic risk |
Answer: D
Market risk, sometimes referred to as a systemic or systematic risk, cannot be diversified away. The risk of investing in a single industry or sector can be diversified away by investing in several industries with returns not correlated to each other. A general downturn in the market, however, cannot be eliminated through diversification. |
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Which type of risk is a mortgage-backed security MOST likely to experience?
A) Reinvestment rate risk B) Market risk C) Exchange rate risk D) Business or corporate risk |
Answer: A
A mortgage-backed security, such as a collateralized mortgage obligation (CMO), is most likely to experience reinvestment rate risk. As mortgages pd off early and refinanced in the event of declining interest rates, the interim cash flows received from the obligation must be reinvested in lower yielding securities. This is the practical effect of prepayment risk. |
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The ABCD Corp has a beta coefficient of 1.25. Your client's portfolio contains $20K of ABCD. After a rise in the overall market of 10%, we would expect the value of this client's ABCD to:
A) increase by $2K B) increase by $5K C) decrease by 25% D) increase by $2500 |
Answer: D
A stock with a beta coefficient of 1.25 could be expected to rise in value at a rate 25% greater than the overall market. Since the market has increased by 10%, this stock should increase by 12.5% or $2500 (10% x 1.25 x $20K = $2500) |
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Which of the following bonds is MOST affected by interest rate risk?
A) 7s of '22 yielding 7% B) 7.5s of '24 yielding 7.2% C) 7.8s of '27 yielding 7.3% D) 7.6s of '31 yielding 7.2% |
Answer: D
Interest rate risk is the loss in value due to a rise in interest rates. Since there is little difference in coupon rates, the bond with the longest maturity (highest duration) will experience the greatest fall in a rising interest rate market. |
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Most rating services rate which of the following:
A) Marketability B) Durability C) Quality D) Reinvestment Risk |
Answer: C
The rating services are connected with quality, which is defined as the ability of the issuer or guarantor to pay (default risk).
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The risk of a bond decreasing in value during periods of inflation is known as:
A) Interest rate risk B) Credit risk C) Reinvestment risk D) Marketability risk |
Answer: A
Interest rate risk is the possibility that interest rates might rise, causing bond prices to fall. Periods of inflation are accompanied by rising interest rates. |
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A portfolio manager using index options is trying to reduce which of the following types of risks?
A) Purchasing power B) Selection C) Systematic D) Financial |
Answer: C
Systematic risk (sometimes called systemic risk) refers to the impact the overall market has on an equity portfolio's value. Index options help insure portfolios against systematic risk. The purchase of index puts to protect a portfolio is termed portfolio insurance. |
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A customer's portfolio has a beta coefficient of 1.1. If the overall market increases by 10%, the portfolio's value is likely to:
A) increase by 10% B) decrease by 10% C) decrease by 11% D) increase by 11% |
Answer: D
A beta of 1.1 means the portfolio is considered to be 1.1 times more volatile than the overall market. If the market is up 10%, the portfolio with a beta of 1.1 is likely to be up 11% |
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A bond's duration is:
A) longer for a 10 yr bond with a 5% coupon than it is for a 10 yr bond with a 10% coupon B) identical to its maturity for an interest bearing bond C) an indication of a bond's yield that ignores its price volatility D) expressed as a percentage |
Answer: A
Duration measures a bond's price volatility by weighing the length of time it takes for a bond's cash flow to pay for itself. If 2 bonds with differing coup rates have identical maturities, the one with the lower coup has the longer duration. The cash flow from an interest bearing bond makes its duration shorter than its maturity. Bonds with longer duration carry greater price volatility. Duration is expressed in years (time), rather than in percentage. |
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Which of the following are likely to have low beta?
A) Aerospace stocks B) Software stocks C) Public utility stocks D) Technology stocks |
Answer: C
Public utility stocks tend to have low betas as do other defensive stocks. Technology, aerospace and software stocks tend to have high beta. |
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Which of the following statements regarding NONsystematic risk are true?
1. It is the risk that an individual stock will not perform well. 2. It is the same as market risk. 3. Diversification reduces it. 4. Diversification does not reduce it. |
Answer: 1&3
Nonsystematic risk is company risk, the risk that an individual investment will perform poorly. Diversification can reduce most nonsystematic risks. |
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In a rising market, which of the following is LEAST volatile?
A) stock with a beta of 2.0 B) stock with an alpha of 2.0 C) stock with an alpha of 0.5 D) stock with a beta of 0.5 |
Answer: D
Beta is a measure of a stock's volatility relative to the overall market, as measured by the S&P 500. A stock with a beta of 2.0 will move twice as fast as the overall market, while a stock with a beta of 0.5 will move half as fast as the overall market. |
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A wealthy client owns a large percentage of a thinly traded common stock. When this client wants to sell a major portion of his securities, he will immediately face:
A) Interest rate risk B) Credit risk C) Marketability risk D) Market risk |
Answer: C
It is difficult to sell a large block of securities in a thinly traded stock without a substantial discount to market price. This is known as liquidity or marketability risk. |
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An investor's portfolio has a beta coefficient of .85. If the overall market declined by 10% over the course of a year, the portfolio's value has likely:
A) decreased by 11.76% B) decreased by 8.5% C) increased by 8.5% D) increased by 10.85% |
A beta coefficient of .85 means that the portfolio is considered to be .85 times as volatile as the overall market. Therefore, if the market declines by 10%, the portfolio with a beta of .85 is likely to decline by only 8.5% (.10 x .85). |
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ABC stock has a beta of 1.2. If the OEX index increases by 6%, ABC would be expected to:
A) increase by 7.2% B) increase by 6.0% C) decrease by 7.2% D) decrease by 6.0% |
Answer: A
1.2 x 6 = 7.2 |
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When interest rates are changing, an investor might expect which of the following to be the MOST volatile?
A) Corporate bond with 20 yrs to maturity B) Treasury STRIPS with 20 yrs to maturity C) Treasury bill with 5 months to maturity D) Treasury note with 5 yrs to maturity |
Answer: B
When interest rates are changing, bonds with more years remaining to maturity will have greater volatility. Because zero-coupon bonds, such as treasury receipts and STRIPS, do not make interest pmts, but are priced at a deep discount to par, they are more volatile than coupon-bearing bonds. |
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John purchased stock of a company in the business of making yachts. 2 years ago, his securities lost most of their value as a result of a congressionally imposed luxury tax on purchases over $30K. John's investment suffered a loss due to:
A) volatility B) regulatory (legislative) risk C) interest rate risk D) business risk Please fill in the "C |
Answer: B
John's investment suffered a loss as a result of regulatory (legislative) risk. In other words, the rules of the game (i.e. tax treatment) changed after John purchased the security. |
