Today Paper (26-05-2010)

MIDTERM EXAMINATION

Spring 2010

MGT411- Money & Banking (Session - 2)

Time: 60 min

Marks: 44

Student Info
StudentID:
Center:	OPKST
ExamDate:	5/26/2010 12:00:00 AM

For Teacher's Use Only
Q No.	1	2	3	4	5	6	7	8	Total
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Q No.	9	10	11	12	13	14	15	16
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Q No.	17	18	19	20	21	22	23	24
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Q No.	25	26	27	28	29	30	31	32
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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

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

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

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

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

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

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

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

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

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

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

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

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

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?