TREASURY MAMAGEMENT - 30 QUESTIONS

1. Equity capital and redeemable debts are both permanent form of long-
term finance.
A. True
B. False
ANSWER: B
2. Capital market instrument traded on a secondary market can be sold
within a year of holding the security.
A. True
B. False
ANSWER: A

3. The conversion of a convertible security will change the firm’s total

capital because convertible securities have lower risks compared to equity.
A. True
B. False
ANSWER: B
4. In relation to the use of bank loans as a source of finance, which, if any,
of the following statements are correct?

(i) Loan interest is tax deductible and if a company has taxable profits this
will decrease the net cost of loan capital.

(ii) The purchase of an asset financed by a loan will increase financial

leverage of a firm.

(iii) Bank loans being a long term capital should always be used to finance
fixed assets and long term projects.

A. (i) and (ii) only

B. (i) and (iii) only
C. (ii) and (iii) only
D. (i), (ii) and (iii)

ANSWER: A
5. In relation to long-term debt sources of finance which of the following
statements are correct?

(i) Once convertible loan stock has been converted to equity it cannot be
converted back.

(ii) Fixed interest debt finance has the advantage that it commits the
company to known cash flows required to service the debt.

(iii) Loan capital always ranks behind share capital in the event of a
winding-up situation.

A. (i) and (ii) only

B. (i) and (iii) only
C. (ii) and (iii) only
D. (i), (ii) and (iii)

ANSWER: A

6. A major advantage of debt security over equity security to an issuer is

A. Regular cash-flows
B. Marketability
C. Tax shelter
D. Improved revenue

ANSWER: C

7. Which of the following statements is true regarding a corporate bond?

A. A corporate convertible bond has higher market value compared
to non-convertible corporate bond.
B. A corporate indenture is a secured bond.
C. A corporate convertible bond gives the holder the obligation to
exchange the bond for a specified number of the company's
common shares.
D. Holders of corporate bonds have voting rights in the company.
ANSWER: A

8. Which of the following events would make it more likely that a company
would choose to call its outstanding callable bonds?
A. A reduction in market interest rates.
 B. The company’s bonds are downgraded.
C. An increase in the market interest rate.
D. New investors with high risk appetite entering the bond market
for the first time.
ANSWER: A
9. Assume a Bond of N1,000 par value for 10 years remaining until maturity
at 10 % coupon rate. Assume semi-annual interest payments. What is the
value of the bond if the market rate is 10%?
A. N1100.00
B. N1000.00
C. N1532.21
D. N1331.11
ANSWER: B

10. Which of the following statements is/are correct?

1 An increase in the cost of equity leads to a fall in share price

2 Investors faced with increased risk will expect increased return as

compensation

3 The cost of debt is usually lower than the cost of preference shares

A. 2 only
B. 1 and 3 only
C. 2 and 3 only
D. 1, 2 and 3
ANSWER: D
11. Woe Co. is expected to pay a dividend or $4.00 per share out of
earnings of $7.50 per share next year. If the required rate of return on
the stock is 15% and dividends are growing at a constant rate of 10%
per year, calculate the present value (expected price) of the stock

A. $80 ANS
B. $50
C. $30
D. $26

ANSWER: C
12. Investors’ expectation of return from preference share is lower than
expectations from ordinary share in the same firm.
A. True
B. False
ANSWER: A
13. Which of the following statements is NOT true of Treasury bills?
A. The market for Treasury bills is usually liquid.
B. Occasionally, investors find that earnings on T-bills do not
compensate them for changes in purchasing power due to
inflation.
C. Treasury bills often compensate for the lower returns through
less-risk and liquidity.
D. Being a discountable instrument, the yield on treasury bill are
usually less than the quoted rate
ANSWER: D

14. The contract traded over the counter to buy or sell an asset at a future
date at a price agreed now:

A. Future market
B. Futures market
C. Forward market
D. Post spot market

ANSWER: C

15. The benefits of derivative markets include BUT one of the following:

A. Price discovery
B. Risk management
C. Arbitraging
D. Forecasting

ANSWER: D

16. The term used for options when the stock price and the strike price are
about the same is:

A. Price discovery
 an investor would exercise his right when the option is "
in the money"

'at the money' is when an investor exercise price and

B. At the money market price is the same
C. In the money
when the option is not favorable and investor wishes to
D. Out of the money ignore. its called 'out of the money'

ANSWER: B

17. Companies that operate beyond their territorial boundaries are

subject to the unpredictability of foreign exchange rates in the foreign
exchange markets.

A. True

B. False

ANSWER: A

18. What is the hub around which the foreign exchange and
Eurocurrency markets revolve?

A. The hub around which the foreign exchange and Eurocurrency

markets revolve is the networks of commercial banks and other
financial institutions.

B. The hub around which the foreign exchange Eurocurrency

markets revolve is the networks of merchant banks and other
financial institutions.

C. The hub around which the foreign exchange Eurocurrency markets

revolve is the networks of development banks and other financial
institutions.

D. The hub around which the foreign exchange Eurocurrency markets

revolve is the networks of private banks and other financial institutions.

ANSWER: A
19. What are the four main types of forward products/contracts
businesses commonly apply to hedge their foreign exchange cash
flows against the uncertainty created by today’s volatile exchange
rates?

A. They are specific outright forward, flexible forward, long-

dated forward and non-deliverable forward.

B. They are closed outright forward, fixed forward, long-dated

forward and non-deliverable forward.

C. They are closed outright forward, fixed forward, long-dated

forward and non-deliverable forward.

D. They are closed outright forward, variable forward, long-

dated forward and non-deliverable forward.

ANSWER: D

20. ABC & Co Ltd is due to pay a foreign supplier in a couple of months
in the foreign supplier’s currency. But the CFO expresses the concern
that there is a risk that the exchange rate may change.

Which risk does the CFO have in mind?

A. Translation risk balance sheet

B. Transaction risk expenses/ icome statement

C. Economic risk

D. Interest rate risk

ANSWER: B

21. The current Euro/Dollar rate is €1 = $2. XYZ Ltd-a company that
operates in the Eurozone, makes a sale of $2,000 to a customer in the
United States of America. However, by the time the customer pays, the
Euro has strengthened by 25%
 What will be Euro receipt of XYZ Ltd?

A.€1,250.00

B.€1,000.53

C.€800.00

D.€750.00

ANSWER: C

22. What is the risk that the value of foreign currency-denominated

assets and liabilities will change when a company trading
internationally prepares its accounts?

A. Translation risk

B. Interest rate
risk

C. Transaction
risk

D. Economic risk

ANSWER: A

23. What are the key risks in foreign exchange?

A. The key risks in foreign exchange are transaction risk,

translation risk and economic risk.
B. The key risks in foreign exchange are monetary risk, fiscal
risk and reinvestment risk.
C. The key risks in foreign exchange are political risk, default
risk and resource allocation risk.
D. The key risks in foreign exchange are counter-party risk,
translation and economic risk.
ANSWER: A
24. Debt instruments are expected to have higher return than equity
instruments.
A. True
B. False

ANSWER: B
25. A derivative security is a financial contract that derives its
value from the value of something else. The something else could
be a stock price, a commodity price, etc.
A. True
B. False

ANSWER: A

26. What is interest rate swap?

A. Interest rate swap is a contract between two counterparties

who agree to exchange at intervals fixed and floating interest
rates for several periods whilst their contract lasts.
B. Interest rate swap is a contract between two counterparties
who agree to exchange at intervals principal sum, fixed and
floating interest rates for several periods whilst their contract
lasts.
C. Interest rate swap is a contract between two counterparties
who agree to exchange at intervals floating interest rates
for several periods whilst their contract last.
D. Interest rate swap is a contract between two counterparties
who agree to exchange at intervals fixed interest rates for
several periods whilst their contract last.
ANSWER: A

27. Commodity derivatives can ONLY be through organised

exchanges.

A. True
B. False
ANSWER: B

28. The terms of interest rate swap are such that typically that
the present value of the counterparty payments and receipts is
the same.
A. True
 B. False
ANSWER: A

29. Discount factors are a function of --------------- of interest

rates in the future.

A. Demand and supply

B. Investor perceptions

C. Issuer perceptions
D. Economic perceptions
ANSWER: B

30. There are small and inefficient markets for interest rates
swaps.
A. True
B. False
ANSWER: A

WEALTH PLANNING/MAMAGEMENT - 20 QUESTIONS

31. Estate planning involves

A. Considering how your wealth can be most effectively
passed on to heirs.
B. Payment of all back taxes.
C. Dissolution of all privately held corporations.
D. Valuation and auctioning of your valuables.
Answer A

32. Generally, as income rises, the average propensity to consume:

A. Stabilizes
B. Drops to zero
C. Increases
D. Becomes erratic
Answer C

33. Which of these investments vehicles delivers fixed income

A. Bonds
 B. Company Shares
C. Real estate
D. Will
Answer A

34. An asset or item that’s is purchased with the hope that it will
generate
Income or will appreciate in future is referred to as
A. Net worth
B. Annuity
C. Savings
D. Investments
Answer D

35. Which of these will be most appropriate to boost your linear

income?
A. Change jobs for greener pastures
B. Purchase patent rights to Clark’s writings
C. Buy vehicles for use by Uber
D. Reduce your spending
Answer A

36. The key features of retirement planning include all except

A. It is long term
B. It is responsibility is solely vested in the Pension
companies
C. It is vulnerable to inflationary trends
D. Returns on investments must match inflation.
Answer B

37. The balance of personal assets and liabilities is referred to as

A. Credit Score
B. Personal Assets
C. Personal Net worth
D. Long term value
Answer C

38. Towards choosing an investment outlet all of these criteria are

fundamental for analysis except
A. Yield
B. Liquidity
 C. Safety
D. Name
Answer D

39. As you get advised to spread the risk inherent in living life, which
of the following will you ensure you put in place for yourself and
your assets?
A. House and Car
B. Savings and Investment
C. Life Assurance and Insurance
D. Oil and Gas Job
Answer C

40. Which of the following situations is a person who is insolvent?

A. Assets N56,000; annual expenses N60,000
B. Assets N68,000; net worth N22,000
C. Liabilities N45,000; net worth N6,000
D. Assets N60,000; liabilities N76,000
Answer D

41. During the last month, Mary Jane had expenses of N5,000 and
an increase in net worth of N700.This means Mary Jane's income
for the month was:
A. N5,700
B. N4,300
C. N5,000
D. N700
Answer A

42. With annual inflation at 18.8%, which of the following

investments will be most suitable
A. Investments in equity that has annual capital
appreciation of 10% and Dividend to price ratio ratio
of 0.07 : 1
B. Investments in equity with constant dividend policy of
dividend to price ratio of 0.1 : 1
C. Investments in Equity with no dividend payments but
capital appreciation of 23%
D. Investment in Government Bond with coupon rate of
17%
 Answer C

43. If a Personal loan is to be used towards purchase of an asset,

which of these will be most appropriate in managing the debt
A. Ensure the asset is of the highest available quality
B. Ensure your cash inflow can meet the repayment
schedule of the loan
C. Ensure the vendor has an after sales service
D. Opt for an asset with warranty
Answer B

44. Personal financial crisis because of debt overload is a key

reason for
A. Low salary
B. Penal Interest for default and compound interest on
unpaid balance
C. Greed of the lender
D. Increase in Gratuity Payment
Answer B

45. If the economy experiences galloping inflation, what will be

the most appropriate hedge for your investments against the
inflationary trend?
A. Invest in liquid assets that can easily be converted to
cash
B. Invest with CBN certified asset managers only
C. Invest in government risk free financial assets only
D. Invest in assets whose annual growth exceeds the
inflation rate
Answer D

46. The most important attribute that ensures successful

implementation of your financial budget is
A. Discipline
B. Increased linear income
C. Increased passive income
D. Societal Conformity
Answer A
47. What is the impact of compounded interest on savings and
investments?
A. It leads to losses
B. It complicates the liquidity of the assets
C. It helps value of financial assets grow in geometric
progression
D. It makes debt repayments difficult and overwhelming
Answer C

48. The concepts that individuals seek to smooth consumption

over the course of a lifetime is referred to as

A. Pre -Retirement Planning

B. Life Cycle theory
C. Personal Financial Planning
D. Retirement Planning
Answer B

49. According to the Life cycle theory people make consumption

decision as result of which of the following
A. Resources available to them over their lifetime
B. The level of prosperity of their Country
C. The standard of living of their colleagues and
neighbours
D. According to United nations index on consumption
Answer A

50. The amount of risk an individual or firm is willing to take on is

referred to as
A. Risk Taking
B. Risk profiling
C. Risk appetite
D. Risk avoidance
Answer C

51. With regard to the term ‘Covariance’, which, (if any) of the
following statements are correct?
 (i) Covariance measures the average distance between two
bond portfolios.

(ii) Covariance is applied in the Capital Asset Pricing Model.

(iii) Covariance measures the degree to which two variables

move together.

A. (i) and (ii) only

B. (i) and (iii) only
C. (ii) and (iii) only
D. (i), (ii) and (iii)
ANSWER: C

52. In Coefficient of Variation the decision rule is based on:

A. The higher the ratio the more attractive it is to the

investor
B. The higher the ratio the less attractive it is to the
investor
C. The lower the ratio the more indifferent it is to the
investor
D. The lower the ratio the more indifferent it is to the
investor
ANSWER: B

53. An investor has two share portfolios Portfolio A and Portfolio B.

The following information is given on returns and probabilities.

Portfolio A Portfolio B

Returns (€) Probability Returns (€) Probability

1,000 20% 3,500 20%

2,500 30% 3,600 40%

4,000 20% 3,900 20%

5,000 20% 4,200 10%

 6,500 10% 4,400 10%

For Portfolio A, the expected return is:

A. €3,400
B. €9,800
C. €19,600
D. €3,420
ANSWER: A

54. An investor has two share portfolios Portfolio A and Portfolio B.

The following information is given on returns and probabilities.

Portfolio A Portfolio B

Returns (€) Probability Returns (€) Probability

1,000 20% 3,500 20%

2,500 30% 3,600 40%

4,000 20% 3,900 20%

5,000 20% 4,200 10%

6,500 10% 4,400 10%

For Portfolio B, the expected return is:

A. €9,700
B. €7,600
C. €3,780
D. €3,520
ANSWER: C
55. In relation to the Capital Asset Pricing Model (CAPM), which, if
any, of the following combined statements are correct?

(i) An underlying assumption of the CAPM is that unsystematic risk

can be completely diversified away.

(ii) With the CAPM, it is easy in practice to measure the market

return and individual shares return perfectly.

(iii) The main advantage of the CAPM over the traditional approach
to measuring the return on a security is that the CAPM approach
provides an enhanced reflection of the risk adjustment.

A. (i) and (ii) only

B. (i) and (iii) only
C. (ii) and (iii) only
D. (i), (ii) and (iii)

ANSWER: B

56. In portfolio analysis and management, the main difference

between Treynor and Sharpe ratios is:

A. While Treynor ratio considers only systematic risk,

Sharpe considers total risk
B. While Sharpe ratio considers only systematic risk,
Treynor considers total risk
C. Sharpe ratio considers markets return while Treynor
considers portfolio return
D. Sharpe ratio considers markets return while Treynor
considers portfolio return

ANSWER: A

57. _____________ implies systematic risk is equal to the aggregate

market risk.

A. β = 1
B. β > 1 aggressive
 C. β < 1 conservative
D. β = 0 return on security = return on risk free

ANSWER: A

58. In Capital Asset Pricing Model (CAPM) diversifiable risk is also

called _____________.

A. Certainty risk
B. Unsystematic risk Residual Risk
C. Systematic risk
D. Probable risk

ANSWER: B

59. Efficient frontier portfolios are those, which offer:

A. Minimum risk or a given level of return

B. highest risk for a given level of expected return
C. The maximum risk and the lowest expected return
D. Returns without risk
ANSWER: A

60. Beta measures:

A. the systematic risk of a security return

B. the risk of a security return
C. the total risk of a security return
D. the firm-level risk of a security return

ANSWER: A

61. If the beta of Microsoft is 1.5, risk-free rate is 6% and the

expected return on the market portfolio is 12%, calculate the
expected return for Microsoft.

A. 14%
B. 15%
 C. 16%
D. 17%

ANSWER: B

62. The capital asset pricing model (CAPM) establishes the relation

A. between the expected return of a security and its risk

B. between the expected return of a security and market risk
C. between the expected return of a security and its
competitor’s risk
D. between the market return on the exchange and the
expected risk of a security

ANSWER: A

63. The IRR is defined as:

A. The discount rate that makes the initial investment cost

equal to the sum of future cash flows
B. The difference between the cost of capital and the
present value of the cash flows
C. The discount rate that makes the initial investment cost
equal to the sum of the present values of future cash
flows
D. The discount rate used in the discounted payback period
method

ANSWER: C

64. Financial risk refers to the:

A. risk of owning equity securities.

B. risk faced by equity holders when debt is used.
C. general business risk of the firm.
D. possibility that interest rates will increase.
ANSWER: B
65. Credit tranching refers to creating a multi-layered capital
structure that has:

A. fully amortizing and partially amortizing tranches.

B. recourse and non-recourse tranches.
C. senior and subordinate tranches.
D. non-senior bond classes and junior bond classes
ANSWER:C
66. Frank Smith obtains a recourse mortgage loan for $300,000.
One year
later, when the outstanding balance of the mortgage is $290,000,
Frank
cannot make his mortgage payments and defaults on the loan. The
lender
forecloses the loan and sells the house for $250,000. What amount
is the
lender entitled to claim from Frank?
A. $0.
B. $40,000.
C. $50,000.
D. $60,000.
Answer B

67. Ali reviews the status of his home mortgage schedule for the
month of December 2013:
Date Item Balance
01 December Outstanding mortgage loan balance 700,000
31 December Total monthly required payment 15,000
31 December Interest component of total monthly required 3,000
payment
On 31 December 2013, Ali makes a payment of GBP 20,000 rather
than GBP 15,000. What will be outstanding mortgage loan balance
immediately after the payment is made
 A. GBP 680,000.
B. GBP 683,000.
C. GBP 688,000.
D. GBP 690,000
Answer B

68. Which of the following is an important consideration of non-

agency residential mortgage-backed security (RMBS) as compared
to an agency RMBS?
A. Transfer credit risk.
B. Extension risk.
C. Contraction risk.
D. Credit risk.
Answer D
69. At the loan level, mechanisms that are introduced to protect
investors from the prepayment risk include all but
A. prepayment lockouts and Prepayment Gift
B. prepayment penalty points and Prepayment Lockout
C. yield maintenance charges and Defeasance
D. defeasance and Prepayment Penalty Point
Answer A
70. Which of the following is least likely a benefit of securitization
for banks?
A. It transfers credit risk.
B. It provides credit to the real economy than other
banks.
C. It increases funding availability without increasing
reserve requirements.
D. It increases market capital requirements
Answer D

71. Which of the following statements about securitization is least

accurate? Due to Securitization,
 A. the risk adjusted returns to the ultimate investors can
be enhanced.
B. the profitability of banks can be improved.
C. the costs paid by borrowers are effectively higher.
D. risks are potentially better and managed
Answer C

72. A conditional prepayment rate (CPR) of 6% means that

approximately 6%
of the outstanding mortgage pool balance at the beginning of this
year will be prepaid.
A. in the current month.
B. by the end of the year.
C. over the life of the mortgages.
D. by the end of the month
Answer B
73. In the context of mortgage-backed securities, a conditional
prepayment
rate of 10% means that approximately 10% of an outstanding
mortgage pool balance at the beginning of the year will be prepaid:
A. by the end of the year.
B. by the end of the month.
C. over the life of the mortgage.
D. by the end of the week
Answer A
74. Suppose there are three mortgages with respective balances of
$100,000,
$200,000, and $300,000. The mortgage rates are 6%, 7%, and 8%
respectively. The WAC is closest to:
A. 6.33
B. 7.33.
C. 8.33.
D. 9.33
75. In a credit card receivable asset backed securities (ABS) cash
flows paid to
security holders is based on:
A. finance charges collected and fees.
B. finance charges collected only.
C. fees only.
D. none of the above.
Answer A
76. Jane Smith is seeking to purchase an ABS backed by automobile
loans.
However, Jane is extremely concerned about prepayment risk.
Which of the following factors should least concern Jane?

A. Insurance payoffs.
B. Loan refinancing.
C. Trade-ins.
D. Credit Tranchin
Answer B

77. The set of risky portfolio that give the highest return at each
level of risk will most likely lie on the:
A. capital allocation line.
B. efficient frontier.
C. security market line.
D. risk asset weight.
Answer B

78. The capital allocation line (CAL) dominates the efficient frontier
because of the ability of the investor to:

A. invest in the risk-free asset.

B. invest in market portfolio.
 C. invest in a zero-beta asset.
D. Invest in private equity market.
Answer A
79. An investment has a 50% probability of returning 10% and a
50% probability of returning 4%. An investor prefers this uncertain
investment over a guaranteed return of 8%. This preference most
likely indicates that the investor is risk:

A. seeking.
B. neutral.
C. averse.
D. none of the above.
Answer A
80. Saman purchases two shares of Sun Co, one for $32 at time t =
0 and the other for $45 at t = 1. At t = 2, he sells them both for
$53 each. The stock paid a dividend of $0.75 per share at t = 1 and
at t = 2. The periodic money weighted rate of return on the
investment is closest to:

A. 23.82%.
B. 25.76%.
C. 26.75%.
D. 29.13%.
Answer C

81. For a top-down security analysis, the first step is to:

A. examine macro-economic conditions.

B. identify the most lucrative companies within each
industry.
C. analyze a firm's business projections and
management quality.
D. Examine expected returns of various securities.
Answer C
82. The following Information presents historical information for two
stocks, ABC and XYZ:

Variance of returns for ABC 0.0308

Variance of returns for XYZ 0.0705

Correlation coefficient between ABC and XYZ0.6500

The covariance between ABC and XYZ is closest to:

A. 0.0014.
B. 0.0303.
C. 0.0550
D. 0.0717.
Answer B
83. A measure of how the returns of two risky assets move in
relation to each other is the:

A. portfolio return.
B. covariance.
C. standard deviation.
D. average return
Answer B

84. Selected information about shares of two companies is provided

below:
ABC Corporation XYZ Corporation
Standard deviation 25% 30%
Correlation of returns 0.24
Portfolio weights 40% 60%
The standard deviation of returns of the portfolio formed
with these two stocks is closest to:
A. 0.0043.
B. 0.0756.
 C. 0.2259.
D. 0.3462
Answer C
85. An analyst studies an investment portfolio with stocks of
Company ABC and Company JKL. He wishes to compute the
correlation of returns between the stocks. However, the only bits of
information available include the following data.
Stock Standard Deviation Portfolio Weights
ABC 36% 40%
JKL 27% 60%
The standard deviation of the returns for the portfolio is
30%.
The correlation coefficient for the returns is closest to:
A. 0.92.
B. 1.02.
C. 1.84.
D. 2.92.
Answer A
86. The following data is available:
Expected Return Standard Deviation Risk aversion coefficient
15% 27% 4
The utility of this investment is closest to:
A. 0.0040.
B. 0.0041.
C. 0.0042.
D. 0.0044
Answer C
87. The set of risky portfolio that give the highest return at each
level of risk will most likely lie on the:
A. capital allocation line.
B. efficient frontier.
C. security market line.
D. risk asset weight.
Answer B
88. The capital allocation line (CAL) dominates the efficient frontier
because of the ability of the investor to:
A. invest in the risk-free asset.
B. invest in market portfolio.
C. invest in a zero-beta asset.
D. Invest in private equity market.
Answer A
89. Which of the following in combination with the risk-free asset
forms the dominant capital allocation line?
A. global minimum-variance portfolio.
B. optimal risky portfolio.
C. levered portfolio of risky assets.
D. optimal-zero beta asse
Answer B
90. The optimal portfolio, as suggested by the mean–variance
theory, is determined by every individual investor’s:
A. borrowing rate.
B. risk-free rate.
C. risk preference.
D. portfolio returns.
Answer C
91. In a strategic asset allocation, assets within a specific asset class
are most likely to have:
A. high paired correlations.
B. low paired correlations.
C. high correlations with other asset classes.
D. low correlations with other asset classes.
Answer A

92. Returns on asset classes are a function of:

A. exposure to the failure of arbitrage.

B. exposure to sets of systematic factors relevant to
those asset classes.
C. exposure to the idiosyncratic risks of those asset
classes.
D. Exposure to the success of arbitrage.
Answer B
93. An investment manager in an asset management company is
in the process of defining asset classes. Which of the following
activities would be most appropriate considering the paired
correlations of assets?

A. Assets with low correlations placed in the same asset

class.
B. Assets with low correlations placed in different asset
classes.
C. Assets with high correlations placed in different asset
classes.
D. None of the above
Answer B
94. An investment policy statement that includes a risk objective of
“Return should be within 4% of the S&P 500 index return” is best
characterized as having a(n):

A. arbitrage-based risk objective.

B. absolute risk objective.
C. relative risk objective.
D. none of the above.
Answer B

95. Dean Jones is 43 years old and has a secure job with an
annual salary of AUD 300,000. The income is sufficient to cover his
and his family’s expenses. He owns the house his family lives in
and has savings of AUD 1,000,000. Jones is reluctant to invest in
the stock market because he believes that stock market returns
are based on luck. Furthermore, the thought of losing money
causes him to have sleepless nights. Based on this information
which of the following statements is most accurate?

A. Jones has a low ability to take risk but a high

willingness to take risk.
B. Jones has a high ability to take risk and a high
willingness to take risk.
C. Jones has a high ability to take risk but a low
willingness to take risk.
D. Jones has a low ability to take risk and a low
willingness to take risk.
Answer C
96. Emily Rose is willing to take risk when investing. She is young
and has a secure, well-paying job. Her risk tolerance will most
likely be characterized as:

A. high.
 B. medium.
C. low.
D. none of the above
Answer A

97. Which of the following statements about LTV is least accurate?

A. LTV is the ratio of the property’s purchase price to the

amount of the
mortgage.
B. Lower the LTV, the more likely the borrower is to
default.
C. Lower the LTV, the more protection the lender has for
recovering the
amount loaned if the borrower defaults.
E. LTV repossess and sells the property.
Answer B
98. A general problem with external credit enhancement is that:

A. they can only be used after internal credit

enhancements have been
exhausted.
B. they are expensive as compared to the internal credit
enhancements.
C. they are subject to the credit risk of the third-party
guarantee.
D. they provide cash reserves or guarantees.
Answer C
99. Which of the following statements about the planned
amortization class (PAC) structure is least accurate?

A. Support tranches are exposed to high levels of credit

risk.
B. Support tranches provide prepayment protection to
the PAC tranches.
C. If prepayments are too low to maintain the PAC
schedule, the shortfall is provided by the support
tranche.
D. Support tranches are exposed to low level of credit
risk
Answer A
100. The set of risky portfolio that give the highest return at each
level of risk will most likely lie on the:
A. capital allocation line.
B. efficient frontier.
C. security market line.
D. risk asset weight.
Answer B