MIDTERM EXAMINATION
Fall 2010
MGT411- Money & Banking (Session - 2)
Time: 60 min
Marks: 44
Question No: 1 ( Marks: 1 ) - Please choose one
Which of the following are used to transfer resources from savers to investors and to transfer risk to those who best equipped it?
► Financial markets
► Financial instruments
► Financial institutions
► Banks
Refrance page num 2
2. Financial Instruments
To transfer wealth from savers to borrowers
To transfer risk to those best equipped to bear it.
Once investing was an activity reserved for the wealthy
Costly individual stock transactions through stockbrokers
Information collection was not so easy
Now, small investors have the opportunity to purchase shares in "mutual funds."
Question No: 2 ( Marks: 1 ) - Please choose one
The reason for the government to get involved in the financial system is to:
► Protect investors
► Ensure the stability of the financial system
► Protect bank customers from monopolistic exploitation
► All of the given options
Refrance page num 92
There are three reasons for the government to get involved in the financial system
To protect investors
To protect bank customers from monopolistic exploitation
To ensure the stability of the financial system
Question No: 3 ( Marks: 1 ) - Please choose one
A Financial Intermediary:
► Is an agency that guarantees a loan
► Is involved in direct finance
► Would be used in indirect finance
► None of the given options
Question No: 4 ( Marks: 1 ) - Please choose one
A derivative instrument:
► Gets its value and payoff from the performance of the underlying instrument
► Is a high risk financial instrument used by highly risk averse savers
► Comes into existence after the underlying instrument is in default
► Should be purchased prior to purchasing the underlying security
Page num 16
Derivative Instruments
Value and payoffs are "derived from" the behavior of the underlying instruments
Question No: 5 ( Marks: 1 ) - Please choose one
The financial intermediary that obtains funds largely through premium payments and uses those funds to purchase corporate bonds and mortgages is:
► Credit unions
► Mutual funds
► Life insurance companies
► Pension funds
Ref page 21
Question No: 6 ( Marks: 1 ) - Please choose one
Which one of the following financial instrument is NOT primarily used as store of value?
► Banks loans
► Asset-backed securities
► Insurance contracts
► Stocks
Ref page 17
Primarily Stores of Value
Bank Loans
A borrower obtains resources from a lender immediately in exchange for a promised set of
payments in the future
Bonds
A form of a loan, whereby in exchange for obtaining funds today a government or corporation
promises to make payments in the future
Home Mortgages
A loan that is used to purchase real estate
The real estate is collateral for the loan,
It is a specific asset pledged by the borrower in order to protect the interests of the lender in the
event of nonpayment.
If payment is not made the lender can foreclose on the property.
Stocks
An owner of a share owns a piece of the firm and is entitled to part of its profits.
Question No: 7 ( Marks: 1 ) - Please choose one
Which one of the following represents the main purpose for which the secondary markets are made?
► Small investors who don't have an access to new securities
► Primary market is not enough for buying and selling of securities
► Large investors usually traded in these markets
► Prices in the secondary markets are known to investors
Question No: 8 ( Marks: 1 ) - Please choose one
Which one of the following is NOT an example of Centralized exchange?
► New York Stock Exchange
► NASDAQ
► Large exchanges in London
► Large exchanges in Tokyo
Question No: 9 ( Marks: 1 ) - Please choose one
What will be the effect on the present value if we double the future value of the payment?
► It will decrease the value by one-half
► It will increase the value by one-half
► It will equally increase the value i.e. doubles the value
► It will have no effect on the value
Question No: 10 ( Marks: 1 ) - Please choose one
The interest rate that is involved in _____________ calculation is referred to as discount rate
► Present value
► Future value
► Intrinsic value
► Discount value
Question No: 11 ( Marks: 1 ) - Please choose one
A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called:
► Simple loan
► Fixed-payment loan
► Coupon bond
► Discount bond
Question No: 12 ( Marks: 1 ) - Please choose one
Mary is planning on taking out a mortgage loan for her new house. She is given the choice of two different banks: Bank A has quoted annual rate of 8% compounded semi-annually and Bank B has a quoted annual rate of 7.5% compounded for a certain number of times a year. Which bank should Mary choose?
► Bank A
► Bank B
► Indifferent between Bank A and Bank B
► Insufficient information
Question No: 13 ( Marks: 1 ) - Please choose one
For a $1000 one year discount bond with a price of $975, the yield to maturity is which of the following?
► $975/$1000
► ($1000 – $975)/$975
► ($1000 – $975)/($1000)
► $1000/$975
Cuppon rate/ market price
Question No: 14 ( Marks: 1 ) - Please choose one
If YTM equals the coupon rate the price of the bond is __________.
► Greater than its face value
► Lower than its face value
► Equals to its face value
► Insufficient information is given
Ref chaptor 14 start
Question No: 15 ( Marks: 1 ) - Please choose one
If YTM is less than the coupon rate the price of the bond is __________.
► Greater than its face value
► Lower than its face value
► Equals to its face value
► Insufficient information is given
Ref chaptor 14 start
Page 43
Yield to Maturity: General Relationships
General Relationships
If the yield to maturity equals the coupon rate, the price of the bond is the same as its face value.
If the yield is greater than the coupon rate, the price is lower;
if the yield is below the coupon rate, the price is greater
If you buy a bond at a price less than its face value you will receive its interest and a capital gain,
which is the difference between the price and the face value.
As a result you have a higher return than the coupon rate
When the price is above the face value, the bondholder incurs a capital loss and the bond's yield to
maturity falls below its coupon rate
Question No: 16 ( Marks: 1 ) - Please choose one
Current yield is equal to which of the following?
► Price paid / yearly coupon payment
► Price paid *yearly coupon payment
► Yearly coupon payment / face value of bond
► Yearly coupon payment / price paid
Question No: 17 ( Marks: 1 ) - Please choose one
For a $100 one-year zero-coupon bond, the supply will be __________ at $95 than it will be at $90, all other things being equal.
► Higher than before
► Lower than before
► Stable
► Insufficient information
For a $100 one-year zero-coupon bond, the supply will be higher at $95 than it will be at $90, all
other things being equal.
Question No: 18 ( Marks: 1 ) - Please choose one
An increase in the expected inflation shifts the bond supply to the _________
► Right
► Left
► No change
► None of the given options
An increase in expected inflation shifts bond supply to the right and bond demand to the left.
Question No: 19 ( Marks: 1 ) - Please choose one
The default premium:
► Is positive for a U.S. Treasury bond
► Must always be less than 0 (zero)
► Is also known as the risk spread
► Is assigned by a bond rating agency
Question No: 20 ( Marks: 1 ) - Please choose one
Calculate tax implication on Bond yields. Consider a one year bond face value Rs.100 (issued by Government) with coupon rate of 6%.What is the income of bond that is received at maturity? (Tax rate is 30%).
► Rs.6
► Rs.1.80
► Rs.4.20
► Rs.7.80
Tax-Exempt Bond Yield = (Taxable Bond Yield) x (1- Tax Rate).
Question No: 21 ( Marks: 1 ) - Please choose one
Which of the following statement is true for the given sentence, "that tax affects the bond return"?
► Because only interest income they receive from bond is taxable
► Because principal amount and interest income they receive from bond is taxable
► Because bond holders are taxpayers
► Because all bond is sold with a condition that tax will be deducted from its return
The important factor that affects the return on a bond is taxes
Bondholders must pay income tax on the interest income they receive from privately issued
Question No: 22 ( Marks: 1 ) - Please choose one
Expectation hypothesis focuses on which one of the following?
► Risk premium
► Risk free interest rate
► Yield to maturity
► None of the given options
Reference:
Expectations Hypothesis
The risk-free interest rate can be computed, assuming that there is no uncertainty about the future
Question No: 23 ( Marks: 1 ) - Please choose one
According to the liquidity premium theory of the term structure, when the yield curve has its usual slope, the market expects
► Short-term interest rates to rise sharply
► Short-term interest rates to stay near their current levels
► Short-term interest rates to drop sharply
► Short-term interest rates does not change
Question No: 24 ( Marks: 1 ) - Please choose one
The Theory of Efficient Markets:
► Allows for higher than average returns if the investor takes higher risk
► Says Insider-information makes markets less efficient
► Rules out high returns due to chance
► Assumes people have equal luck
Question No: 25 ( Marks: 1 ) - Please choose one
If information in a financial market is asymmetric, this means:
► Borrowers and lenders have the same information
► Lenders lack any information
► Borrowers and lenders have perfect information
► Borrowers would have more information than lenders
Question No: 26 ( Marks: 1 ) - Please choose one
Often a bank will require a loan officer to make personal visits on customers with loans outstanding. This is encouraged because:
► The bank worries about competitors trying to steal their customers
► The bank wants to make sure the business is still there
► The bank likely has excess funds available and hopes to make another loan to the business
► This is an effective monitoring technique and should reduce moral hazard
Question No: 27 ( Marks: 1 ) - Please choose one
Financial instruments are used to transfer which of the following?
► Both Risk and Resources
► Risk
► Resources
► Mortgages
Question No: 28 ( Marks: 1 ) - Please choose one
Which of the following has created an opportunity for small investors to participate in economic activity?
► Mutual funds
► Small corporations
► Stock brokers
► Small investors cannot take part in economic activity
Question No: 29 ( Marks: 3 )
Find out YTM of 1 year 12% coupon bond selling at $130. (Face value of bond = $100).
Question No: 30 ( Marks: 3 )
Why stocks are risky?
Question No: 31 ( Marks: 5 )
Discuss the negative consequences of information costs and also suggest their solution.
Question No: 32 ( Marks: 5 )
Ahmad purchases a 10 year 8% coupon bond with the face value of $100. He wants to hold this bond for 1-year and then sells a 9-year bond after 1-year.
(i) If interest rate does not change then what will be the rate of return?
(ii) If interest rate falls to 6% then suppose price increases to $109.16. What will be the capital gain after the price rise?
(iii) After the price rise, what will be the one year holding period return?
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