MOCKEXAM-WITHSOLUTIONS20111004082649

5/27/2018 MOCKEXAM-WITHSOLUTIONS20111004082649

1/6

Academic Year 2010-11

30006 FINANCIAL MARKETS AND INSTITUTIONS(BIEMF 17 and 18)

GENERAL EXAM

February 07, 2010

NAME: __________________________________

SURNAME: __________________________________

MATRICULATION NUMBER: __________________________________

SIGNATURE: __________________________________

Report answers of Multiple Choices here. Be aware some questions have NO (E) reply!!!

Question

1 A B C D E

2 A B C D E

3 A B C D E

4 A B C D E

5 A B C D E

6 A B C D E

7 A B C D E

8 A B C D E

9 A B C D E

10 A B C D E

11 A B C D E

12 A B C D E

13 A B C D E

14 A B C D E

15 A B C D E16 A B C D E


2/6

MULTIPLE CHOICE QUESTIONS (1 point each)

1. In which of the following situations would you prefer to be making a loan?A) The nominal interest rate is 9 percent and the expected inflation rate is 7 percentB) The nominal interest rate is 4 percent and the expected inflation rate is 1 percentC) The nominal interest rate is 13 percent and the expected inflation rate is 15 percentD) The nominal interest rate is 25percent and the expected inflation rate is 50 percent

2. The Fisher equation states that:A) the nominal interest rate equals the real interest rate plus the expected rate of inflationB) the real interest rate equals the nominal interest rate less the expected rate of inflationC) the nominal interest rate equals the real interest rate less the expected rate of inflationD) both A and B of the above are trueE) both A and C of the above are true

3. When the default risk on corporate bonds decreases, other things equal, the demand curve forcorporate bonds shifts to the _________ and the demand curve for Treasury bonds shifts tothe _________.

A) right; rightB) right; leftC) left; leftD) left;right

4. If the Federal Reserve wants to drain reserves from the banking system, it will:A)purchase government securitiesB) raise reserve requirementsC) sell government securities

5. The security with the longest maturity is a Treasury:A) noteB) bondC) bill

6. The concept of adverse selection helps to explainA) why collateral is not a common feature of many debt contracts.B) why large, well-established corporations find it so difficult to borrow funds in securities

markets.C) why financial markets are among the most heavily regulated sectors of the economy.D) all of the above.

7. The free-rider problemA) occurs when people do not pay for information take advantage of the information other people

have to pay for.B) suggests that the private sale of information will only be a partial solution to the lemons

problem.C) prevents the private market from producing enough information to eliminate all the

asymmetric information that leads to adverse selection.D) all of the above.

8. If a bank has more rate-sensitive assets than rate-sensitive liabilities, then a(n) _________ in interestrates will _________ bank profits.

A) increase; reduceB) increase; increaseC) decline; increaseD) decline; not affect


3/6

9. Duration analysis involves comparing the average duration of the bank's _________ to the average

duration of its _________A) securities portfolio; non-deposit liabilities.B) loan portfolio; non-deposit liabilities.C) loan portfolio; rate-sensitive liabilities.D) rate-sensitive assets; rate-sensitive liabilities.E) assets; liabilities.

10.What should a bank manager do if she feels the bank holds too much capital?A) Increase dividends to reduce retained earningsB) Issue stockC) Slow asset growth (retire debt) or sell securities.D) All of the aboveE) only A and C

11.Referring to Table A below, First National Bank has an income gap of _________.Table A: First National Bank

A) 0B) +30C) -30D) 60

12.One problem of the too-big-to-fail policy is that it _________ the incentives for _________ by bigbanks.

A) reduces; moral hazardB) increases; moral hazardC) reduces; adverse selectionD) increases; adverse selection

13.Tasks that investment bankers perform when acting as underwriters to sell securities to the publicinclude:

A)pricing the security.B) preparing the filings required by the Securities and Exchange Commission.C) arranging for the security to be rated.D) all of the above.E) only A and B of the above.

14.A typical venture capital firm has a _________ number of investors who each contribute a _________amount of money to the fund.

A) large; smallB) small; largeC) large; largeD) small; small


4/6

15.Most mutual funds are structured in two ways. The most common structure is a(n) _________ fund,from which shares can be redeemed at any time at a price that is tied to the asset value of the fund.A(n) _________ fund has a fixed number of nonredeemable shares that are traded in the over-the-counter market.

A) closed-end; open-endB) open-end; closed-endC) no-load; closed-endD) no-load; loadE) load; no-load

16.Insurance companies' attempts to minimize adverse selection and moral hazard explain which of thefollowing insurance practices?

A) Gender-neutral premiumsB) Flat-rate premiumsC) Restrictive provisionsD) All of the aboveE) Only A and B of the above

******************

PROBLEMS

1. The current yield ona $6,000 (FV), 10 percent coupon bond selling for $5,000 is (2 points):A) 5%B) 10%C) 12%D) 15%

2. A stock currently sells for $25 per share and pays $0.24 per year in dividends. What is aninvestor's valuation of this stock if she expects it to be selling for $30 in one year and requires

15 percent return on equity investments (cost of equity, Ke) (2 points)?A) $30.2B) $26.3C) $26.1D) $27.7


5/6

3. Government economists have forecasted one-year T-bill rates for the following five years, asfollows (4 points):

Year 1-year rate

1 4.25%

2 5.15%

3 5.50%

4 6.25%

5 7.10%

You have liquidity premium 0.25% for the next two years and 0.50% thereafter. Would you be willing topurchase a four-year T-bond at a 5.75% interest rate?

Solution: Your required interest rate on a 4-year bond Average interest on 4 one-year bonds LiquidityPremium

(4.25% 5.15% 5.50% 6.25%)/4 0.5%

5.29% 0.50% 5.79%

At a rate of 5.75%, the T-bond is just below your required rate.

4. What is the yield on a $1,000,000 municipal bond with a coupon rate of 8%, paying interestannually, versus the yield of a $1,000,000 corporate bond with a coupon rate of 10% payinginterest annually? Assume that you are in the 25% tax bracket (2 points):.

Solution: Municipal bond coupon payments equal $80,000 per year. No taxes are deducted; therefore, theyield would equal 8%.

The coupon payments on a corporate bond equal $100,000 per year. But you onlykeep $75,000 because you are in the 25% tax bracket. Therefore your after-tax yieldis only 7.5%


6/6

5. Option strategies (5 points)Suppose two options on same stock:Put: Strike price K1=$11.50; Cost= $0.10Call: Strike price K2=$12.00; Cost= $0.10

A traders strategy is as follows: Buy call, Buy Put.

a.

The initial cost of the strategy is: ___________________________________b. Construct a table that shows the profit and payoff of the strategy.c. Draw the diagram of the profit in function of the spot price of the underlying asset.

MOCKEXAM-WITHSOLUTIONS20111004082649

Documents

Transcript of MOCKEXAM-WITHSOLUTIONS20111004082649