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Monday 6 December 2010

MGT411- Money & Banking Spring 2010 Solved Midterm Paper

MIDTERM EXAMINATION
Spring 2010
MGT411- Money & Banking (Session - 2)
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
► Banks loans
► Asset-backed securities
NOT primarily used as store of value?Insurance contracts
► Stocks
Ref page 17
Primarily Stores of Value
Bank Loans
of
payments in the future
A borrower obtains resources from a lender immediately in exchange for a promised set
Bonds
corporation
promises to make payments in the future
A form of a loan, whereby in exchange for obtaining funds today a government or
Home Mortgages
A loan that is used to purchase real estate
The real estate is collateral for the loan ,
lender in the
event of nonpayment.
It is a specific asset pledged by the borrower in order to protect the interests of the
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
► New York Stock Exchange
► NASDAQ
NOT an example of Centralized exchange?
► 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 semiannually
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
face value.
If the yield to maturity equals the coupon rate, the price of the bond is the same as its
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
which is the difference between the price and the face value.
If you buy a bond at a price less than its face value you will receive its interest and a capital gain ,
As a result you have a higher return than the coupon rate
to
maturity falls below its coupon rate
When the price is above the face value, the bondholder incurs a capital loss and the bond’s yield
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
taxable
Because principal amount and interest income they receive from bond is
Because bond holders are taxpayers
return
Because all bond is sold with a condition that tax will be deducted from its
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:
risk
Allows for higher than average returns if the investor takes higher
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
loan to the business
The bank likely has excess funds available and hopes to make another
hazard
This is an effective monitoring technique and should reduce moral
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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