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Wednesday, December 1, 2010

Mgt411 Mid Term Current Paper (Dec 2010)

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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