Chap 10

Which of the following statements is (are) correct regarding duration?

• In comparing two bonds with the same yield to maturity and the same maturity, a bond with a higher coupon rate will have a longer duration.

• In comparing two loans with the same maturity and the same interest rate, a fully amortized loan will have a shorter duration than a loan with a balloon payment

Which of the following is true of Treasury bills?

• A) Interest on Treasury bills is exempt from state income taxes.

• B) Interest on Treasury bills is exempt from federal income taxes

• C) Treasury bills pay a lower pretax yield than comparable corporate securities

• E) A and C only

Which of the following is true? Mortgage prepayment risk:

• Is higher on high interest rate mortgages

• Is eliminated by the use of mortgage backed securities

Which of the following would not be considered a bank qualified municipal security?

• A Treasury bond to finance government debt.

• A City of Chicopee general obligation bond to pay for a new city jail

The Dillinger State Bank has purchased a bond from the Interstate Manufacturing Company that has 15 years to maturity and has a coupon rate of 12.5%. Market interest rates have recently declined to 8% and the Dillinger State Bank is worried that the Interstate Manufacturing Company will retire the bond and issue new ones with a lower coupon rate. What type of risk is the Dillinger State Bank worried about?

The Terrell State Bank is a small bank located in Guyman, Oklahoma. All of their loans are agriculture and small business loans in Guyman. They want to buy a municipal bond from the state of South Carolina. What type of risk are they likely trying to reduce with this purchase?

The Caldwell National Bank has purchased a bond that pays a coupon rate of 10.5%. They are a little concerned because they believe rates will decrease in the future and they will not be able to reinvest the coupon payments at the same rate. What type of risk are they concerned about?

Moody's Investor Service has added the numbers 1, 2 and 3 to some of their ratings. What type of risk are these ratings attempting to measure?

The Roy State Bank has just purchase a portfolio of asset backed securities. What type of risk do these securities have that other securities do not have?

Bankers' acceptances are considered to be among the safest of all money market instruments.

• True

• False