FFM Test with Complete Solutions 2025
Mutual Funds - ANSWER Financial intermediaries that pool funds from investors and
buy assets. Benefits: record keeping, diversification, professional management, lower
transaction costs
Asset Backed Securities - ANSWER Bundling of existing securities (mortgage, auto
loans, corporate bonds, receivables).
Securitization - ANSWER Financial engineering: pooling and trenching, creating
security out of asset that was previously untraded
Limited Liability - ANSWER all investors can lose is initial investment
Primary Market - ANSWER Raises capital through new issues of securities.
Government securities typically auctioned, Corporate securities underwritten by bank
Uniform Price Sealed Bid Auction - ANSWER Buyer collects bids, has limited supply.
Sells available bids at the lowest price of the accepted ones.
Underwriters - ANSWER syndicate of investment bank. Firm commitment, best
effort, book building
, Secondary Market - ANSWER Investors trade existing securities through broker, who
holds no inventory and does not hold positions. 3 means: Exchange (auction), Over
the Counter (dealers), Electronic (direct trade among investors). Determining which is
organized depends on volume of trade.
Call Auction - ANSWER Investors get together. Orders aggregated into supply-
demand curve to yield equilibrium price
Continuous Auction - ANSWER Investors want to trade immediately for liquidity and
information. Prices bounce around equilibrium. Fragmented order flow, thin
markets. Being a dealer/market maker is profitable
Market Maker - ANSWER Quotes bid and asks prices. Holds inventory, but aims for
zero inventory because it is risky. He provides liquidity and immediacy. Price of service
is the bid ask spread.
Ask Price and Bid Price - ANSWER Ask: Dealer sells, investor buys price. Bid: Dealer
buys, investor sells price
Determinants of the Bid Ask Spread - ANSWER Volume (high volume, low spread),
Volatility (high volatility, high spread), Competition (high competition, low
spread)
Trading Costs - ANSWER Commission cost and Bid-Ask Spread. Implicit Cost for
large orders: market impact (small for deep market, big for small market)
Short Sales - ANSWER Borrowing security and later replacing it. Profit made if short
position is covered at price lower than one established in. Bearish investment.
Subject to the uptick rule. Investor required to deposit collateral as guarantee against
default. Short sale proceeds remain with broker.
Mutual Funds - ANSWER Financial intermediaries that pool funds from investors and
buy assets. Benefits: record keeping, diversification, professional management, lower
transaction costs
Asset Backed Securities - ANSWER Bundling of existing securities (mortgage, auto
loans, corporate bonds, receivables).
Securitization - ANSWER Financial engineering: pooling and trenching, creating
security out of asset that was previously untraded
Limited Liability - ANSWER all investors can lose is initial investment
Primary Market - ANSWER Raises capital through new issues of securities.
Government securities typically auctioned, Corporate securities underwritten by bank
Uniform Price Sealed Bid Auction - ANSWER Buyer collects bids, has limited supply.
Sells available bids at the lowest price of the accepted ones.
Underwriters - ANSWER syndicate of investment bank. Firm commitment, best
effort, book building
, Secondary Market - ANSWER Investors trade existing securities through broker, who
holds no inventory and does not hold positions. 3 means: Exchange (auction), Over
the Counter (dealers), Electronic (direct trade among investors). Determining which is
organized depends on volume of trade.
Call Auction - ANSWER Investors get together. Orders aggregated into supply-
demand curve to yield equilibrium price
Continuous Auction - ANSWER Investors want to trade immediately for liquidity and
information. Prices bounce around equilibrium. Fragmented order flow, thin
markets. Being a dealer/market maker is profitable
Market Maker - ANSWER Quotes bid and asks prices. Holds inventory, but aims for
zero inventory because it is risky. He provides liquidity and immediacy. Price of service
is the bid ask spread.
Ask Price and Bid Price - ANSWER Ask: Dealer sells, investor buys price. Bid: Dealer
buys, investor sells price
Determinants of the Bid Ask Spread - ANSWER Volume (high volume, low spread),
Volatility (high volatility, high spread), Competition (high competition, low
spread)
Trading Costs - ANSWER Commission cost and Bid-Ask Spread. Implicit Cost for
large orders: market impact (small for deep market, big for small market)
Short Sales - ANSWER Borrowing security and later replacing it. Profit made if short
position is covered at price lower than one established in. Bearish investment.
Subject to the uptick rule. Investor required to deposit collateral as guarantee against
default. Short sale proceeds remain with broker.
