FIN 306 Final Exam Questions and Answers
Page 1 of 48
,Question 1
Three government agencies or government-sponsored enterprises are directly
involved in the creation of mortgage-backed pass-through securities
Correct Answer
Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).
1. costs are a function of volume, not time
= Variable
2. The firm’s-------- is the level of sales necessary to cover all operating costs.
= Operating break-even point
3. Which of the following is NOT a variable cost?
= Rent
Question 1
Because of convexity, the duration model of interest rate risk is less accurate
when
Correct Answer
The interest rate shock is large
Question 2
What is the duration of a 2-year bond that pays an annual coupon of 10% and
whose current yield to maturity is 12%? Use $1000 as the face value
Correct Answer
1.91 years
Page 2 of 48
,Question 3
A bank has three assets. It has $75 million invested in consumer loans with a 3-
year duration, $39 million invested in T-Bonds with a 16-year duration, and $39
million in 6-month maturity T-Bills with a 0.5- year duration. What is the
duration of the bank's asset portfolio?
Correct Answer
5.7 years
Question 4
Writing a call is riskier than buying a put
Correct Answer
True
Question 5
Firms typically use ____ positions in futures contracts to hedge an asset that
declines in value as interest rates rise
Correct Answer
Short
Question 6
A macrohedge is a
Correct Answer
Hedge of an entire balance sheet
Question 7
A forward hedge is different from a futures hedge in that:
Correct Answer
Forwards contracts can involve nonstandardized amounts whereas futures are
standardized
Page 3 of 48
, Question 8
You have taken a long position in a call option on ABC common stock. The
option has an exercise price of $100 and the stock is currently trading at $110.
The option premium is $8. What is your net profit on the option if ABC's stock
price increases to $111 at expiration?
Correct Answer
$3
Question 9
In a plain vanilla swap
Correct Answer
One participant pays a fixed rate of interest and the other party pays a
variable rate of interest.`
Question 10
Advantages of securitization typically all but which one of the following
Correct Answer
Increase in net interest income
Question 11
Which one of the following forms of securitization is usually double
securitization
Correct Answer
Collateralized mortgage obligations
Question 12
The FDIC is concerned about issuance of mortgage-backed bonds (MBBs)
because:
Correct Answer
The agency is concerned about investors prepayment risk
Page 4 of 48
Page 1 of 48
,Question 1
Three government agencies or government-sponsored enterprises are directly
involved in the creation of mortgage-backed pass-through securities
Correct Answer
Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).
1. costs are a function of volume, not time
= Variable
2. The firm’s-------- is the level of sales necessary to cover all operating costs.
= Operating break-even point
3. Which of the following is NOT a variable cost?
= Rent
Question 1
Because of convexity, the duration model of interest rate risk is less accurate
when
Correct Answer
The interest rate shock is large
Question 2
What is the duration of a 2-year bond that pays an annual coupon of 10% and
whose current yield to maturity is 12%? Use $1000 as the face value
Correct Answer
1.91 years
Page 2 of 48
,Question 3
A bank has three assets. It has $75 million invested in consumer loans with a 3-
year duration, $39 million invested in T-Bonds with a 16-year duration, and $39
million in 6-month maturity T-Bills with a 0.5- year duration. What is the
duration of the bank's asset portfolio?
Correct Answer
5.7 years
Question 4
Writing a call is riskier than buying a put
Correct Answer
True
Question 5
Firms typically use ____ positions in futures contracts to hedge an asset that
declines in value as interest rates rise
Correct Answer
Short
Question 6
A macrohedge is a
Correct Answer
Hedge of an entire balance sheet
Question 7
A forward hedge is different from a futures hedge in that:
Correct Answer
Forwards contracts can involve nonstandardized amounts whereas futures are
standardized
Page 3 of 48
, Question 8
You have taken a long position in a call option on ABC common stock. The
option has an exercise price of $100 and the stock is currently trading at $110.
The option premium is $8. What is your net profit on the option if ABC's stock
price increases to $111 at expiration?
Correct Answer
$3
Question 9
In a plain vanilla swap
Correct Answer
One participant pays a fixed rate of interest and the other party pays a
variable rate of interest.`
Question 10
Advantages of securitization typically all but which one of the following
Correct Answer
Increase in net interest income
Question 11
Which one of the following forms of securitization is usually double
securitization
Correct Answer
Collateralized mortgage obligations
Question 12
The FDIC is concerned about issuance of mortgage-backed bonds (MBBs)
because:
Correct Answer
The agency is concerned about investors prepayment risk
Page 4 of 48
