MIDTERM EXAMINATION
Fall 2009
MGT411- Money & Banking
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Question No: 1 ( Marks: 1 ) - Please choose
► Financial markets
► Financial instruments (correct)
► Financial institutions
► Banks
Question No: 2 ( Marks: 1 ) - Please choose one
Which of the following are used to monitor and stabilize the economy?
► Stock exchanges
► Commercial Banks
► Central Banks (correct)
► Financial institutions
Question No: 3 ( 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 (correct)
Question No: 4 ( Marks: 1 ) - Please choose one
The one that you get from bank when you open your checking account is __________.► Debit card (correct)
► Credit card
► Store value card
► Customer card
Question No: 5 ( Marks: 1 ) - Please choose one
E money is really a form of which one of the following?
► Paper money
► Fiat money
► Government money
► Private money (correct)
Question No: 6 ( Marks: 1 ) - Please choose one
All of the following are the components of M2 EXCEPT?
► M1
► Saving deposits
► Travelers cheques (correct)
► Mutual funds shares
Question No: 7 ( Marks: 1 ) - Please choose one
The Consumer Price Index (CPI):
► Tends to overstate inflation due to substitution bias (correct)
► Tends to understate actual inflation
► Is more accurate than the GDP deflator
► Is based on basket of goods that changes monthly with consumer expenditures
Question No: 8 ( Marks: 1 ) - Please choose one
Considering the value of a financial instrument, the longer the time until the promised payment is made:
► The less valuable is the promise to make it since time is valuable (correct)
► The greater the risk, therefore the promise has greater value
► The more valuable is the promise to make it
► It has no effect on the value of instrument
Question No: 9 ( Marks: 1 ) - Please choose one
Commissions paid to an insurance broker are an example of which of the following?
► Risk transfer
► Information asymmetry
► Transaction costs (correct)
► All of the given options
Question No: 10 ( Marks: 1 ) - Please choose one
______________ are the economies central nervous system.
► Financial Instruments
► Financial Markets (correct)
► Financial Institutions
► Financial Companies
Question No: 11 ( 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 (correct)
► Large exchanges in Tokyo
Question No: 12 ( Marks: 1 ) - Please choose one
Which of the following market allowed networks of dealers that are connected electronically?
► New York Stock Exchange
► NASDAQ (correct)
► Large exchanges in London
► Large exchanges in Tokyo
Question No: 13 ( Marks: 1 ) - Please choose one
Bonds that are issued by Government are called _________.
► Government bonds
► Treasury bonds (correct)
► Corporate bonds
► Callable bonds
Question No: 14 ( Marks: 1 ) - Please choose one
What is relationship between interest rate and future value?
► Lower the interest rate higher will be the future value
► Higher the interest rate higher will be the future value (correct)
► Higher the interest rate lower will be the future value
► Interest rate has no effect on future value
Question No: 15 ( Marks: 1 ) - Please choose one
The future value of $100 left in a savings account earning 4.5% for two and a half years is best expressed by:
► $100(1.045)3/2
► $100( 0.45)2.5
► $100(1.045)2.5 (correct)
► 100 x 2.5 x (1.045)
Question No: 16 ( Marks: 1 ) - Please choose one
If the factor time (n) is longer then:
► Present value will be lower (correct)
► Present value will be higher
► Interest rate will be lower
► Time has no effect on present
Question No: 17 ( Marks: 1 ) - Please choose one
If at 5% interest rate, $100 payment has a PV of $90.70. Then what will be the PV value of $200 payment? (Without applying formula).
► $45.35
► $272.1
► $181.4 (correct)
► $362.8
Question No: 18 ( Marks: 1 ) - Please choose one
Which of the following provides the greatest incentive to borrow?
► A high real interest rate
► A low real interest rate (correct)
► A high nominal interest rate
► A low nominal interest rate
Question No: 19 ( Marks: 1 ) - Please choose one
Which of the following represents the fisher’s equation?
► Nominal interest rate = real interest rate + inflation (correct)
► Nominal interest rate + inflation = real interest rate
► Nominal interest rate = real interest rate - inflation
► Nominal interest rate = real interest rate / inflation
Question No: 20 ( Marks: 1 ) - Please choose one
What will be the result of the difference of real and nominal interest rate?
► The cost of borrowing
► The effect of inflation (correct)
► The price of bonds
► The return of bonds
Question No: 21 ( Marks: 1 ) - Please choose one
Which of the following statement is true for amortized loan?
► Payment includes interest and full amount of principal
► Payment includes only the interest
► Payment includes both interest and some portion of the principal (correct)
► Principal amount is paid fully in the periodic payments
Question No: 22 ( Marks: 1 ) - Please choose one
A zero coupon bond:
► Does not pay any coupon payments because the issuer is in default
► Pays coupons only once a year versus the usual twice a year
► Promises a single future payment (correct)
► Pays coupons only if the bond price is below face value
Question No: 23 ( Marks: 1 ) - Please choose one
Which of the following best expresses the formula for determining the price of a U.S. Treasury bill per $100 of face vale?
► $100(1 + i)
► $100/ (1 + i) n (correct)
► $100/ (1 + i)
► 1 + $100/ (1 + i) n
Question No: 24 ( 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 (correct)
► Insufficient information is given
Question No: 25 ( Marks: 1 ) - Please choose one
The return on the bond is equal to which of the following?
► Coupon rate + rate of capital gains
► Current yield + rate of capital gains (correct)
► Coupon rate - rate of capital gains
► Current yield - rate of capital gains
Question No: 26 ( Marks: 1 ) - Please choose one
A business cycle downturn shifts the bond supply to the:
► Right
► Left (correct)
► No change
► None of the given
Question No: 27 ( Marks: 1 ) - Please choose one
In the long run, the yield curve tends to be which of the following?
► Upward sloping (correct)
► Downward sloping
► Nearly vertical
► Nearly
Question No: 28 ( Marks: 1 ) - Please choose one
Yield curves show which of the followings?
► The relationship between bond interest rates (yields) and bond prices
► The relationship between liquidity and bond interest rates (yields)
► The relationship between risk and bond interest rates (yields)
► The relationship between time to maturity and bond interest rates (yields) (correct)
Question No: 29 ( Marks: 1 ) - Please choose one
Mr. Ghazanfar wants to invest Rs.2,000 in a bond. If this bond is expected to receive a return of Rs.100 per month and a tax of Rs.3 will be deducted on this return. Then Mr. Ghazanfar made his decision by considering which of the following fact?
► He is attracted by Rs.100 return per month
► He considers Rs.100 less deduction for tax i.e.Rs.97 (correct)
► He takes into consideration only the portion of tax which is deducted
► His decision will not be affected by any of the given factors
Question No: 30 ( Marks: 1 ) - Please choose one
Mr. Ali has a bond, which is issued by local government of Punjab which is NOT true for situation?
► He faces tax affects on return on bond (correct)
► His bond can also be named as municipal bond
► He receive interest on that bond throughout life period of bond
► Default risk affects its return on bond
Question No: 31 ( 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 (correct)
► 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: 32 ( Marks: 1 ) - Please choose one
The expectations theory of the term structure assumes:
► Buyers of bonds consider bonds of different maturities to be perfect substitutes (correct)
► Markets for different maturity bonds are completely separate
► Buyers of bonds prefer bonds with shorter maturities
► Buyers of bonds prefer bonds with longer maturities
Question No: 33 ( Marks: 1 ) - Please choose one
The fact that common stockholders are residual claimants means:
► The stockholders receive their dividends before any other residuals are paid
► The stockholders receive the remains after everyone else is paid (correct)
► The stockholders are paid any past due dividends before other claims are paid
► The common stockholders are responsible for all corporate debts
Question No: 34 ( Marks: 1 ) - Please choose one
An index number is a valuable tool because:
► The number by itself provides all of the useful information needed
► The index provides a meaningful measurement scale to calculate percentage changes (correct)
► The index is more stable than the data it reflects
► It does not require any calculations to compute percentage changes
Question No: 35 ( Marks: 1 ) - Please choose one
The Theory of Efficient Markets:
► Allows for higher than average returns if the investor takes higher risk (correct)
► Says Insider-information makes markets less efficient
► Rules out high returns due to chance
► Assumes people have equal luck
Question No: 36 ( Marks: 1 ) - Please choose one
In a financial market where information is symmetric:
► The same information would be known by both parties in a transaction (correct)
► One party to a transaction knows information the other party does not
► The ability to obtain information is available to only one party
► All of the given options
Question No: 37 ( Marks: 1 ) - Please choose one
Which of the following has created an opportunity for small investors to participate in economic activity?
► Mutual funds (correct)
► Small corporations
► Stock brokers
► Small investors cannot take part in economic activity
Question No: 38 ( Marks: 1 ) - Please choose one
Money once consisted of Gold and silver coins which were eventually replaced by which of the following?
► Plastic money
► Paper money (correct)
► Commodity money
► E-money
Question No: 39 ( Marks: 3 )
Briefly discuss different types of investment grades of Long term ratings be PACRA.
Answer : PACRA is the Pakistan Credit rating agency which rates different companies in Pakistan who offer bonds or stocks to investors. They rate companies independently to protect investors from companies who might default and not pay the investors. Based on their ratings given to different companies people who want to invest will know which companies to go for investment and which to avoid.
The different types of investment grades given of long term ratings given by them are :
AAA : This is highest credit quality and has lowest expectation of risk
AA : Very high credit quality and very low expectation of risk
A: High credit quality and low expectation of risk
BB : Good credit quality and as of now there is low expectation of credit risk.
Question No: 40 ( Marks: 3 )
Money is accepted in economic exchange. Discuss.
Question No: 41 ( Marks: 5 )
“People differ in their opinions of how stocks should be valued”. Discuss it.
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