Financial Institutions – Exam 2, Lecture Notes, 2026 – Comprehensive
Study Material
a protective covenant may - ANS✔✔ restrict the amount of additional debt the firm can use
interest earned from Treasury bonds is - ANS✔✔ exempt from state and local taxes
___ bids for treasury bonds specify a price that the bidder is willing to pay and a dollar amount
of securities to be purchased - ANS✔✔ competitive
if interest rates suddenly ____, those existing bonds that have a call feature are ___ likely to be
called. - ANS✔✔ decline, more
some bonds are "stripped," which means that - ANS✔✔ they are transferred into principal-only
and interest-only securities
which of the following is not mentioned in the text as a protective covenant - ANS✔✔ the
appointment of a trustee in all bond indentures
the principal-only and the interest-only payments derive from a 20-year, 3.2% coupon bond
with a par value of $10,000 and semi-annual interest payments will be, respectively - ANS✔✔
$10,000 paid in 20 years, 40 payments of $160
if analysts expect that the demand for loanable funds will increase, and the supply of loanable
funds will decrease, they would most likely expect interest rates to ___ and prices of existing
bonds to ____ - ANS✔✔ increase, decrease
as interest rates increase, long-term bond prices - ANS✔✔ decrease by a greater degree than
short-term bond prices
, if the coupon rate equals the required rate of return, the price of the bond - ANS✔✔ should be
equal to its par value
the actual response of a bond's price to a change in bond yields is - ANS✔✔ convex
if the level of inflation is expected to ____, there will be ____ pressure on interest rates and
____ pressure on the required rate of return on bonds - ANS✔✔ increase, upward, upward
with a(n) ____ strategy, funds are allocated to bonds with a short term to maturity and bonds
with a long term to maturity. This, this strategy allocates some funds to achieving a relatively
high return and other funds to covering liquidity needs. - ANS✔✔ barbell
a financial institution has a higher degree of interest rate risk on a ____ than a ____ - ANS✔✔
30-year fixed-rate mortgage, 15-year fixed-rate mortgage
a mortgage which requires interest payments for a three- to five-year period, then full payment
of principal, is a(n): - ANS✔✔ balloon payment mortgage
mortgage companies specialize in - ANS✔✔ originating mortgages and selling those mortgages
which of the following mortgages allows the home purchaser to obtain a mortgage at a below-
market interest rate throughout the life of the mortgage - ANS✔✔ shared-appreciation
mortgage
a ____ mortgage allows the borrower to initially make small payments on the mortgage. The
payments then increase over the first 5 to 10 years and then level off. - ANS✔✔ graduated
payment
Study Material
a protective covenant may - ANS✔✔ restrict the amount of additional debt the firm can use
interest earned from Treasury bonds is - ANS✔✔ exempt from state and local taxes
___ bids for treasury bonds specify a price that the bidder is willing to pay and a dollar amount
of securities to be purchased - ANS✔✔ competitive
if interest rates suddenly ____, those existing bonds that have a call feature are ___ likely to be
called. - ANS✔✔ decline, more
some bonds are "stripped," which means that - ANS✔✔ they are transferred into principal-only
and interest-only securities
which of the following is not mentioned in the text as a protective covenant - ANS✔✔ the
appointment of a trustee in all bond indentures
the principal-only and the interest-only payments derive from a 20-year, 3.2% coupon bond
with a par value of $10,000 and semi-annual interest payments will be, respectively - ANS✔✔
$10,000 paid in 20 years, 40 payments of $160
if analysts expect that the demand for loanable funds will increase, and the supply of loanable
funds will decrease, they would most likely expect interest rates to ___ and prices of existing
bonds to ____ - ANS✔✔ increase, decrease
as interest rates increase, long-term bond prices - ANS✔✔ decrease by a greater degree than
short-term bond prices
, if the coupon rate equals the required rate of return, the price of the bond - ANS✔✔ should be
equal to its par value
the actual response of a bond's price to a change in bond yields is - ANS✔✔ convex
if the level of inflation is expected to ____, there will be ____ pressure on interest rates and
____ pressure on the required rate of return on bonds - ANS✔✔ increase, upward, upward
with a(n) ____ strategy, funds are allocated to bonds with a short term to maturity and bonds
with a long term to maturity. This, this strategy allocates some funds to achieving a relatively
high return and other funds to covering liquidity needs. - ANS✔✔ barbell
a financial institution has a higher degree of interest rate risk on a ____ than a ____ - ANS✔✔
30-year fixed-rate mortgage, 15-year fixed-rate mortgage
a mortgage which requires interest payments for a three- to five-year period, then full payment
of principal, is a(n): - ANS✔✔ balloon payment mortgage
mortgage companies specialize in - ANS✔✔ originating mortgages and selling those mortgages
which of the following mortgages allows the home purchaser to obtain a mortgage at a below-
market interest rate throughout the life of the mortgage - ANS✔✔ shared-appreciation
mortgage
a ____ mortgage allows the borrower to initially make small payments on the mortgage. The
payments then increase over the first 5 to 10 years and then level off. - ANS✔✔ graduated
payment
