12/10/2016 FinalExam

FinalExam

1.(1) Whatfactorsareencouragingfinancialinstitutionstoofferoverlappingfinancialservicessuchas
banking,investmentbanking,brokerage,etc.?

I.Regulatorychangesallowinginstitutionstooffermoreservices
II.Technologicalimprovementsreducingthecostofprovidingfinancialservices
III.Increasingcompetitionfromfullserviceglobalfinancialinstitutions
IV.Reductionintheneedtomanageriskatfinancialinstitutions

Ionly
IIandIIIonly
I,II,andIIIonly
I,II,andIVonly
I,II,III,andIV

2.(1) IBMcreatesandsellsadditionalstocktotheinvestmentbankerMorganStanley.MorganStanley
thenresellstheissuetotheU.S.public.

Thistransactionisanexampleofa(n)

primarymarkettransaction.
assettransformationbyMorganStanley.
moneymarkettransaction.
foreignexchangetransaction.
forwardtransaction.

3.(1) Thelargestcapitalmarketsecurityoutstandingin2010measuredbymarketvaluewas
securitizedmortgages.
corporatebonds.
municipalbonds.
Treasurybonds.
corporatestocks.

4.(1) Matchtheintermediarywiththecharacteristicthatbestdescribesitsfunction.

I.Provideprotectionfromadverseevents.
II.Poolfundsofsmallsaversandinvestineithermoneyorcapitalmarkets.
III.Provideconsumerloansandrealestateloansfundedbydeposits.
IV.Accumulateandtransferwealthfromworkperiodtoretirementperiod.
V.Underwriteandtradesecuritiesandprovidebrokerageservices.
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1.Thrifts
2.Insurers
3.Pensionfunds
4.Securitiesfirmsandinvestmentbanks
5.Mutualfunds

1,3,2,5,4
4,2,3,5,1
2,5,1,3,4
2,4,5,3,1
5,1,3,2,4

5.(1) Secondarymarketshelpsupportprimarymarketsbecausesecondarymarkets

I.offerprimarymarketpurchasersliquidityfortheirholdings.
II.updatethepriceorvalueoftheprimarymarketclaims.
III.reducethecostoftradingtheprimarymarketclaims.

Ionly
IIonly
IandIIonly
IIandIIIonly
I,II,andIII

6.(1) Householdsareincreasinglylikelytobothdirectlypurchasesecurities(perhapsviaabroker)and
alsoplacesomemoneywithabankorthrifttomeetdifferentneeds.Matchupthegiveninvestor's
desirewiththeappropriateintermediaryordirectsecurity.

I.Moneylikelytobeneededwithinsixmonths
II.Moneytobesetasideforcollegein10years
III.Moneytoprovidesupplementalretirementincome
IV.Moneytobeusedtoprovideforchildrenintheeventofdeath

1.Depositoryinstitutions
2.Insurer
3.Pensionfund
4.Stocksorbonds

2,3,4,1
1,4,2,3
3,2,1,4
1,4,3,2
4,2,1,3

7.(1) Themostdiversifiedtypeofdepositoryinstitutionsis

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creditunions.
savingsassociations.
commercialbanks.
financecompanies.
mutualfunds.

8.(1) Insolvencyriskatafinancialintermediary(FI)istherisk
thatpromisedcashflowsfromloansandsecuritiesheldbyFIsmaynotbepaidinfull.
incurredbyanFIwhenthematuritiesofitsassetsandliabilitiesdonotmatch.
thatasuddensurgeinliabilitywithdrawalsmayrequireanFItoliquidateassetsquicklyat
firesaleprices.
incurredbyanFIwhenitsinvestmentsintechnologydonotresultincostsavingsor
revenuegrowth.
riskthatanFImaynothaveenoughcapitaltooffsetasuddendeclineinthevalueofits
assets.

9.(1) Liquidityriskatafinancialintermediary(FI)istherisk
thatpromisedcashflowsfromloansandsecuritiesheldbyFIsmaynotbepaidinfull.
incurredbyanFIwhenthematuritiesofitsassetsandliabilitiesdonotmatch.
thatasuddensurgeinliabilitywithdrawalsmayrequireanFItoliquidateassetsquicklyat
firesaleprices.
incurredbyanFIwhenitsinvestmentsintechnologydonotresultincostsavingsor
revenuegrowth.
riskthatanFImaynothaveenoughcapitaltooffsetasuddendeclineinthevalueofits
assets.

10.(1)Commercialpaperis
atimedraftpayabletoasellerofgoods,withpaymentguaranteedbyabank.
aloantoanindividualorbusinesstopurchaseahome,land,orotherrealproperty.
shorttermfundstransferredbetweenfinancialinstitutionsusuallyfornomorethanone
day.
amarketablebankissuedtimedepositthatspecifiestheinterestrateearnedandafixed
maturitydate.
ashorttermunsecuredpromissorynoteissuedbyacompanytoraisefundsforashort
timeperiod.

11.(1) Thehigherabond'scoupon,thelowerthebond'spricevolatility.
True
False

12.(1)Higherinterestratesleadtolowerbondconvexity,ceterisparibus.
True
False

13.(1)Ignoringdefaultrisk,ifabond'sexpectedreturnisgreaterthanitsrequiredreturn,thenthebond's
marketpricemustbegreaterthanthepresentvalueofthebond'scashflows.
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True
False

14.(1)Asecurityhasanexpectedreturnlessthanitsrequiredreturn.Thissecurityis
sellingatapremiumtopar.
sellingatadiscounttopar.
sellingformorethanitsPV.
sellingforlessthanitsPV.
azerocouponbond.

15.(1)YouwouldwanttopurchaseasecurityifP____________PVorE(r)____________r.

16.(1)CorporateBondAreturns5percentofitscostinPVtermsineachofthefirstfiveyearsand75
percentofitsvalueinthesixthyear.CorporateBondBreturns8percentofitscostinPVtermsin
eachofthefirstfiveyearsand60percentofitscostinthesixthyear.IfAandBhavethesame
requiredreturn,whichofthefollowingis/aretrue?

I.BondAhasabiggercouponthanBondB.
II.BondAhasalongerdurationthanBondB.
III.BondAislesspricevolatilethanBondB.
IV.BondBhasahigherFPVthanBondA.
IIIonly
I,III,andIVonly
I,II,andIVonly
IIandIVonly
I,II,III,andIV

17.(1)Convexityarisesbecause
bondspayinterestsemiannually.
couponchangesaretheoppositesignofinterestratechanges.
durationisanincreasingfunctionofmaturity.
presentvaluesareanonlinearfunctionofinterestrates.
durationincreasesathigherinterestrates.

18.(1)Supposetwobondsofequivalentriskandmaturityhavedifferentpricessuchthatoneisapremium
bondandoneisadiscountbond.Thepremiumbondmusthaveagreaterexpectedreturnthanthe
discountbond.
True
False

19.(1)Allelseequal,theholderofafairlypricedpremiumbondmustexpectacapitallossoverthe

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holdingperiod.
True
False

20.(1)Thedurationofafouryearmaturity10percentcouponbondislessthanfouryears.

True
False

21.(1)Higherinterestratesleadtolowerbondconvexity,ceterisparibus.
True
False

22.(1)YouwouldwanttopurchaseasecurityifP____________PVorE(r)____________r.

23.(1)Asixyearannualpaymentcorporatebondhasarequiredreturnof9.5percentandan8percent
coupon.Itsmarketvalueis$20overitsPV.Whatisthebond'sE(r)?
8.00percent
10.21percent
9.98percent
9.03percent
3.53percent

24.(1)Anannualpaymentbondwitha$1,000parhasa5percentquotedcouponrate,a6percent
promisedYTM,andsixyearstomaturity.Whatisthebond'sduration?
5.31years
5.25years
4.76years
4.16years
3.19years

25.(1)Anannualpaymentbondhasa9percentrequiredreturn.Interestratesareprojectedtofall25basis
points.Thebond'sdurationis12years.Whatisthepredictedpricechange?
2.75percent
33.33percent
1.95percent
1.95percent
2.75percent

26.(1)Abondthatpaysinterestannuallyhasa6percentpromisedyieldandapriceof$1,025.Annual
interestratesarenowprojectedtofall50basispoints.Thebond'sdurationissixyears.Whatisthe

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predictednewbondpriceaftertheinterestratechange?(Watchyourrounding.)
$1,042.33
$995.99
$1,054.01
$987.44
Noneoftheoptionspresented

27.(1)TheU.S.Treasuryswitchedfromadiscriminatingpriceauctiontoasinglepriceauctionbecause
thelatterloweredtheaveragepricepaidbyinvestors.
True
False

28.(1)IntheTbillsecondarymarkettheaskyieldwillnormallybelessthanthebidyield.

True
False

29.(1)ThelargestsecondarymoneymarketintheUnitedStatesisthesecondarymarketforTbills.

True
False

30.(1)ThediscountyieldonaTbilldiffersfromtheTbill'sbondequivalentyield(BEY)because

I.thediscountyieldisthereturnperdollaroffacevalueandtheBEYisareturnperdollar
originallyinvested.
II.a360dayyearisusedonthediscountyieldandtheBEYuses365days.
III.thediscountyieldiscalculatedwithoutcompounding,andtheBEYiscalculatedwith
compounding.

Ionly
IIonly
IandIIonly
IIandIIIonly
I,II,andIII

31.(1)Themostliquidofthemoneymarketsecuritiesare
commercialpaper.
banker'sacceptances.
Tbills.
Fedfunds.
repurchaseagreements.

32.(1)Indollarsoutstandingin2013,thelargestmoneymarketsecuritywas

commercialpaper.
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banker'sacceptances.
Tbills.
Fedfundsandrepos.

33.(1)LIBORisgenerally_______________theFedfundsratebecauseforeignbankdepositsare
generally________________domesticbankdeposits.

greaterthanlessriskythan
lessthanriskierthan
thesameasofequalriskto
greaterthanriskierthan
lessthanlessriskythan

34.(1)Alongterminvestorinahighmarginaltaxbracketwillnormallypreferadollarofcapitalgaintoa
dollarofdividendyield.
True
False

35.(1)Atyearendafirmhasassetsof$100anddebtsdueof$120.Inthissituation,thestockholdersmust
payanadditional$20outoftheirownpocket.
True
False

36.(1)Youbuyastockfor$34pershareandsellitfor$36afteryoucollecta$1.00persharedividend.
Yourpretaxcapitalgainyieldis________________andyourpretaxdividendyieldis
________________.
2.94percent2.78percent
8.82percent0.00percent
5.88percent2.94percent
5.56percent2.78percent
4.65percent3.17percent

37.(1)With____________voting,alldirectorsupforelectionarevotedonbytheshareholdersatthe
sametimeinonegeneralelection.
straight
participating
nonparticipating
proxy
cumulative

38.(1)Ifallpreferreddividendpaymentsthathavebeenmissedmustbepaidbeforeanycommonstock
dividendcanbepaid,thepreferredstockiscalled_____________preferredstock.

cumulative
participating
nonparticipating
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voting
dualclass

39.(1)In2007theNYSEmergedwith_________________.
Nasdaq
Euronext
AmericanExchange
ChicagoMercantileExchange
LondonStockExchange

40.(1)Thepreemptiverightisdesignedto
allowmanagementtodiffusestockownershipanyvotingpower
allowmanagerstopreemptastockofferingiftheydonotlikethetermsofthedeal
allowexistingshareholderstherighttoselltheirexistingsharesbeforethenewoffer
allowexistingshareholderstobuysharesofthenewofferingiftheydesire
noneoftheoptions

41.(1)ThepreliminaryversionofasecurityofferthatiscirculatedtopotentialbuyersbeforeSEC
approval(registration)isobtainediscalleda
finalprospectus.
shelfregistrationstatement.
duediligencedraft.
waitingperiodoffer.
redherringprospectus.

42.(1)AsofDecember2005,tradinglicensesarerequiredtoconducttradesontheflooroftheNYSE.
Whichofthefollowingstatementsaboutthesetradinglicensesis/arecorrect?

I.LicensesareauctionedoffinaspecialtypeofauctioncalledaDutchauction.
II.TheNYSEdeterminestheminimumbidprice.
III.TheSECdeterminesthemaximumbidprice.
IV.Tradinglicensesaregoodfor10years.
IIandIIIonly
IandIIonly
IandIIIonly
IIandIVonly
I,II,III,andIV

43.(1)TheelectronicbasedmarketforlessactivelytradedU.S.securitiesisthe
ADRmarket.
OTCBulletinBoard.
PinkSheetstocks.
NYSELowVolumeMarket.
ECNMarket.

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44.(1)AEuropeaninvestorcanearna4.75percentannualinterestrateinEuropeor2.75percentperyear
intheUnitedStates.Ifthespotexchangerateis$1.58pereuro,atwhatoneyearforwardrate
wouldaninvestorbeindifferentbetweentheU.S.andEuropeaninvestments?
$1.5484
$1.6108
$1.5335
$1.5498
$1.5977

45.(1)IfinterestrateparityholdsandtheannualGermannominalinterestrateis3percentandtheU.S.
annualnominalrateis5percentandrealinterestratesare2percentinbothcountries,theninflation
inGermanyisabout_______________thanintheUnitedStates.

1percenthigher
2percenthigher
1percentlower
4percentlower
2percentlower

46.(1)AnegotiatedOTCagreementtoexchangecurrenciesatafixeddateinthefuturebutatanexchange
ratespecifiedtodayisa
currencyswapagreement.
forwardforeignexchangetransaction.
currencyfuturescontract.
currencyoptionscontract.
spotforeignexchangetransaction.

47.(1)Whichofthefollowingconditionsmayleadtoadeclineinthevalueofacountry'scurrency?

I.Lowinterestrates
II.Highinflation
III.Largecurrentaccountdeficit
Ionly
IandIIonly
IIandIIIonly
IIonly
IIIonly

48.(1)Youcanbuyorselltheyenspotat102tothedollar.Youcanbuyorselltheyenoneyearforward
at104tothedollar.IfU.S.annualinterestratesare4percent,whatmustbetheapproximateone
yearJapaneseinterestrateifinterestrateparityholds?
6.04percent
3.20percent
2.75percent
4.73percent

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6.80percent

49.(1)AU.S.bankhas120millioninloanstocorporatecustomersandhas70millionindepositsit
owestocustomerswiththesamematurity.Thebankhasalsosold20millionpoundsforward.The
bank'snetexposureis
210million.
30million.
70million.
170million.
190million.

50.(1)Mostofthechangesinsize,structure,andcompositionofthebankingindustryinrecentyearsare
dueto
bankfailures.
increasingregulations.
newchartersgranted.
declinesinthenumberofbranchoffices.
mergersandacquisitions.

Preparedby:Andres,Carlsberg

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