Question 1

The exchange of a low coupon bond for a high coupon bond, or vice versa, is called a:

Accepted Answer

A)   spread swap
B)   quality swap
C)   trade-off swap
D)   yield pickup swap D

Question 2

All of the following are types of bond swaps EXCEPT:

Accepted Answer

A)   municipal swap
B)   coupon swap
C)   tax swap
D)   spread swap A

Question 3

GOs pay no federal income taxes on interest income.

Accepted Answer

A) True 
 B)False  True

Question 4

Investment securities are held by commercial banks to produce income in the forms of ___________ and ___________.

Accepted Answer

A)   interest and dividends
B)   dividends and capital gains
C)   interest and capital gains
D)   interest and tax credits

Question 5

The investment policy should be written out as a guide to managers in allocating responsibilities, setting investment goals, and evaluating portfolio performance.

Accepted Answer

A) True 
 B)False

Question 6

The most important consideration in succeeding in aggressive yield curve strategies is:

Accepted Answer

A)   high liquidity
B)   accurate market forecasting
C)   taxes
D)   risk aversion

Question 7

Empirical evidence has shown that future implicit rates of interest are _____________ estimates of actual future rates of interest.

Accepted Answer

A)   exact
B)   downward biased
C)   upward biased
D)   none of the above; the two types of rates are totally unrelated to one another.

Question 8

The benefit from the tax exemption of "munis" is maximized when:

Accepted Answer

A)   net operating income is less than municipal interest earned
B)   net income after taxes exceeds municipal interest earned
C)   net operating income exceeds municipal interest earned
D)   b and c
E)   a, b, and c

Question 9

The pretax equivalent rate of return on a 7% municipal bond when the tax rate is 30%, the average cost of funds is 6%, and 100% of interest is nondeductible is:

Accepted Answer

A)   10%
B)   8.2%
C)   9.0%
D)   none of the above

Question 10

Which of the following is NOT a factor that limits the performance of an investment portfolio and constrains maximization?

Accepted Answer

A)   interest rates
B)   regulatory requirements
C)   lending demands
D)   tax laws

Question 11

Playing the yield curve will be successful if all of the following happen EXCEPT:

Accepted Answer

A)   the yield curve stays at the same level
B)   the yield curve is upward sloping
C)   the expectations theory of the yield curve holds true
D)   interest rates stay the same

Question 12

A corporate bond will most likely be called if it was issued when interest rates were _____________ and interest rates have since _____________.

Accepted Answer

A)   high; fallen
B)   high; risen
C)   low; risen
D)   low; fallen

Question 13

The passive portfolio management strategy in which available investment funds are spread equally over a specified number of periods is known as the:

Accepted Answer

A)   split-maturity approach
B)   spaced-maturity approach
C)   barbell approach
D)   spread-maturity approach
E)   none of the above

Question 14

The normal shape of the yield curve is upward sloping.

Accepted Answer

A) True 
 B)False

Question 15

CMOs are ownership claims on conventional mortgages held by Freddie Mac and are issued as twenty-year securities.

Accepted Answer

A) True 
 B)False

Question 16

A "back-end loaded approach" can be used under the spaced-maturity investment strategy.

Accepted Answer

A) True 
 B)False

Question 17

Empirical evidence has repeatedly shown that future implicit interest rates calculated from the equation representing the expectations theory of the yield curve tend to be upwardly biased estimates of actual future rates of interest.

Accepted Answer

A) True 
 B)False

Question 18

The risk associated with NOT being able to sell bonds quickly without loss of principal is called:

Accepted Answer

A)   credit risk
B)   call risk
C)   marketability risk
D)   portfolio risk

Question 19

You wish to forecast the 1-year bond rate 3 years from now. The 4-year spot rate is 10%, and the 3-year spot rate is 9%. Based on the expectations theory, the forecasted 1-year rate 3r4 is:

Accepted Answer

A)   10%
B)   11%
C)   13%
D)   none of the above

Question 20

When interest rates are relatively high, and the expansionary phase of the business cycle is peaking out, banks should take advantage of the yield curve by:

Accepted Answer

A)   buying short-term securities
B)   selling short-term securities
C)   buying long-term securities
D)   selling long-term securities

Exam 7: Investment Management

The exchange of a low coupon bond for a high coupon bond, or vice versa, is called a:

All of the following are types of bond swaps EXCEPT:

GOs pay no federal income taxes on interest income.

Investment securities are held by commercial banks to produce income in the forms of _ and _.

The investment policy should be written out as a guide to managers in allocating responsibilities, setting investment goals, and evaluating portfolio performance.

The most important consideration in succeeding in aggressive yield curve strategies is:

Empirical evidence has shown that future implicit rates of interest are _____________ estimates of actual future rates of interest.

The benefit from the tax exemption of "munis" is maximized when:

The pretax equivalent rate of return on a 7% municipal bond when the tax rate is 30%, the average cost of funds is 6%, and 100% of interest is nondeductible is:

Which of the following is NOT a factor that limits the performance of an investment portfolio and constrains maximization?

Playing the yield curve will be successful if all of the following happen EXCEPT:

A corporate bond will most likely be called if it was issued when interest rates were _ and interest rates have since _.

The passive portfolio management strategy in which available investment funds are spread equally over a specified number of periods is known as the:

The normal shape of the yield curve is upward sloping.

CMOs are ownership claims on conventional mortgages held by Freddie Mac and are issued as twenty-year securities.

A "back-end loaded approach" can be used under the spaced-maturity investment strategy.

Empirical evidence has repeatedly shown that future implicit interest rates calculated from the equation representing the expectations theory of the yield curve tend to be upwardly biased estimates of actual future rates of interest.

The risk associated with NOT being able to sell bonds quickly without loss of principal is called:

You wish to forecast the 1-year bond rate 3 years from now. The 4-year spot rate is 10%, and the 3-year spot rate is 9%. Based on the expectations theory, the forecasted 1-year rate ₃r₄ is:

When interest rates are relatively high, and the expansionary phase of the business cycle is peaking out, banks should take advantage of the yield curve by: