6.Which of the following is least likely to be a cause of market inefficiencies in the corporate credit market? A) Index-based investing and performance measurement. B) The requirement that pension funds and insurance companies hold mostly high-grade debt. C) The purchase of investment grade debt by commercial banks. D) The practice of compensating corporate managers with stock options. The correct answer was C) Inefficiencies in the fixed income market have been solved when commercial banks stepped in to purchase investment grade debt. American pension funds and insurance companies are legally required to hold 95 percent of their debt portfolios in investment-grade debt even though there is no evidence that the long-term performance of investment-grade debt is any better than that of speculative-grade debt. Fixed income portfolio managers are reluctant to invest outside their benchmark index, even though there may be undesirable bonds in the index. Corporate managers who are compensated with equity options are motivated to increase the value of these options by increasing the risk of their firm via increased leverage. The now-risky debt of these highly leveraged firms is often held in index-based portfolios. 7.Consider the following three statements. Statement 1: | “Mortgage-backed securities provide investors with the opportunity to diversify their mortgage portfolios geographically and provide mortgage lenders with a liquid market for loanable funds.”
| Statement 2: | “The original mortgage passthrough securities were structured to protect investors from the risk associated with mortgage refinancing.”
| Statement 3: | “U.S. pension funds are required to hold 95 percent of their debt portfolios in investment grade debt because of the historical evidence that investment grade debt performs better than speculative debt.” |
Which of the following best describes the accuracy of these statements?
| Statement 1 | Statement 2 | Statement 3 |
A) Correct Correct Incorrect B) Incorrect Incorrect Incorrect C) Correct Incorrect Incorrect D) Correct Correct Correct The correct answer was C) Statement 2 is incorrect. Collateralized mortgage obligations (CMOs) were created from mortgage pass-through securities. CMOs have different tranches that distributed interest rate (prepayment risk). Statement 3 is incorrect. There is no evidence that investment grade debt outperforms speculative debt in the long run. 8.Consider the following three statements.
Statement 1: | “The securities created to address the market inefficiency associated with the lack of demand for traditional mortgage pass-through securities is called planned amortization obligations (PAOs).”
| Statement 2: | “The optionality of mortgage-backed securities is primarily due to the legal right of U.S. mortgage borrowers to repay their mortgage loan at any time.”
| Statement 3: | “Interstate banking improved market efficiency by providing investors with the opportunity to diversify mortgage portfolio risk geographically.” |
Which of the following best describes the accuracy of these statements?
| Statement 1 | Statement 2 | Statement 3 |
A) Correct Correct Incorrect B) Incorrect Incorrect Incorrect C) Incorrect Correct Incorrect D) Correct Correct Correct The correct answer was C) Statement 1 is incorrect. Collateralized mortgage obligations (CMO’s) were created to address the lack of demand for pass-throughs. Statement 3 is incorrect. Mortgage backed securities have improved market efficiency by providing the opportunity for investors to diversify mortgage portfolio risk geographically. Interstate banking has improved efficiency by making deposits made in one region available for lending in another region. | 
发表于 2008-4-19 18:57
|