Question 1

Interest rate floors protect the lender from falling interest rates.

Accepted Answer

A) True 
 B)False

Question 2

A buyer of a put option on fixed-income securities is most likely to:

Accepted Answer

A)  exercise the option if interest rates rise.
B)  let the option expire if the interest rates rise.
C)  exercise the option if interest rates fall.
D)  exercise the option if interest rates remain constant.
E)  buy a call option also on the same securities.F) A) and B)
G) A) and C)

Question 3

One advantage of an interest rate swap agreement is that the brokerage fees are very low.

Accepted Answer

A) True 
 B)False

Question 4

In a typical quality swap,a borrower with a positive duration gap is more likely to pay all or part of the other swap party's long-term interest rate.

Accepted Answer

A) True 
 B)False

Question 5

A futures contract is "marked-to-market" weekly to reflect the current market price of the contract.This means that one or the other party has to make a cash payment to the exchange at the end of each week.

Accepted Answer

A) True 
 B)False

Question 6

According to the textbook,the most actively traded futures contract in the world is:

Accepted Answer

A)  Federal Funds futures contracts.
B)  Eurodollar time deposit futures contracts.
C)  U.S.Treasury bond futures contract.
D)  U.S.Treasury bills futures contract.
E)  U.S.Treasury notes futures contract.F) B) and C)
G) A) and E)

Question 7

Interest rate swaps:

Accepted Answer

A)  can change exposure to interest-rate fluctuations.
B)  are one of the oldest interest rate hedging devices.
C)  allows for the exchange of amounts in different currencies by two parties.
D)  are rigid and inflexible.
E)  None of the options are correct.F) C) and D)
G) A) and B)

Question 8

When an investor first purchases or sells a futures contract,she must make a deposit to the exchange.This is called the:

Accepted Answer

A)  initial margin.
B)  variation margin.
C)  premium.
D)  open interest.
E)  margin call.F) C) and D)
G) B) and C)

Question 9

One of the most popular methods of neutralizing duration gap risks is to buy and sell financial futures contracts.

Accepted Answer

A) True 
 B)False

Question 10

One reason that banks use derivatives is to generate ________,the money that does not come from interest earned on loans and securities.

Accepted Answer

The answer of One reason that banks use derivatives is...

Question 11

A(n)_________________________ is a contract where two parties exchange interest payments in order to save money and hedge against interest rate risks.

Accepted Answer

The answer of A(n)_________________________ is a contract where two parties...

Question 12

The category of derivative contracts with the largest use by banks is _________.

Accepted Answer

The answer of The category of derivative contracts with the...

Question 13

Virtually all banks in the U.S.use derivative contracts to hedge their risks.

Accepted Answer

A) True 
 B)False

Question 14

When investors buy or sell a futures contract,they must deposit a(n)_________ when they first enter into the contract.

Accepted Answer

The answer of When investors buy or sell a futures...

Question 15

The person who executes orders in the futures market for the public is called a:

Accepted Answer

A)  day trader.
B)  floor broker.
C)  clearing member.
D)  speculator.
E)  scalper.F) A) and C)
G) C) and D)

Question 16

A bank that goes short in the futures market:

Accepted Answer

A)  has the right to accept delivery of the underlying security at the contract price if they wish.
B)  has the right to make delivery of the underlying security at the contract price if they wish.
C)  is obligated to accept delivery of the underlying security at the contract price.
D)  is obligated to make delivery of the underlying security at the contract price.
E)  is exposed to limited losses and unlimited gains.F) A) and B)
G) A) and C)

Question 17

A currency swap is where two parties agree to exchange interest payments in order to hedge against interest rate risk.

Accepted Answer

A) True 
 B)False

Question 18

A bank wishing to avoid higher borrowing costs is most likely to use:

Accepted Answer

A)  a short position or selling hedge in futures.
B)  a long position or buying hedge in futures.
C)  a long position in call option on futures contracts.
D)  a long position or buying hedge in futures and a long position in call option on futures contracts.
E)  None of the options are correct.F) C) and D)
G) B) and D)

Question 19

A financial institution with a negative gap would like to receive the floating rate in an interest-rate swap.

Accepted Answer

A) True 
 B)False

Question 20

All of the following interest-rate futures contracts are traded on exchanges,except:

Accepted Answer

A)  Eurodollar futures contract.
B)  Treasury bond futures contract.
C)  Eurodollar time deposit futures contract.
D)  Federal funds futures contract.
E)  Corporate bond futures contract.F) A) and B)
G) B) and C)

Exam 14: Investment Banking,Insurance,and Other Sources of Fee Income

One of the most popular methods of neutralizing duration gap risks is to buy and sell financial futures contracts.

Correct AnswerverifiedShow Answer

A(n)_________________________ is a contract where two parties exchange interest payments in order to save money and hedge against interest rate risks.

Correct AnswerverifiedShow Answer

Interest rate floors protect the lender from falling interest rates.

Correct AnswerverifiedShow Answer

The category of derivative contracts with the largest use by banks is _________.

Correct AnswerverifiedShow Answer

A currency swap is where two parties agree to exchange interest payments in order to hedge against interest rate risk.

Correct AnswerverifiedShow Answer

A buyer of a put option on fixed-income securities is most likely to:

Correct AnswerverifiedShow Answer

In a typical quality swap,a borrower with a positive duration gap is more likely to pay all or part of the other swap party's long-term interest rate.

Correct AnswerverifiedShow Answer

A bank wishing to avoid higher borrowing costs is most likely to use:

Correct AnswerverifiedShow Answer

All of the following interest-rate futures contracts are traded on exchanges,except:

Correct AnswerverifiedShow Answer

Virtually all banks in the U.S.use derivative contracts to hedge their risks.

Correct AnswerverifiedShow Answer

One reason that banks use derivatives is to generate ________,the money that does not come from interest earned on loans and securities.

Correct AnswerverifiedShow Answer

A financial institution with a negative gap would like to receive the floating rate in an interest-rate swap.

Correct AnswerverifiedShow Answer

A bank that goes short in the futures market:

Correct AnswerverifiedShow Answer

A futures contract is "marked-to-market" weekly to reflect the current market price of the contract.This means that one or the other party has to make a cash payment to the exchange at the end of each week.

Correct AnswerverifiedShow Answer

According to the textbook,the most actively traded futures contract in the world is:

Correct AnswerverifiedShow Answer

When an investor first purchases or sells a futures contract,she must make a deposit to the exchange.This is called the:

Correct AnswerverifiedShow Answer

Interest rate swaps:

Correct AnswerverifiedShow Answer

When investors buy or sell a futures contract,they must deposit a(n)_________ when they first enter into the contract.

Correct AnswerverifiedShow Answer

One advantage of an interest rate swap agreement is that the brokerage fees are very low.

Correct AnswerverifiedShow Answer

The person who executes orders in the futures market for the public is called a:

Correct AnswerverifiedShow Answer

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