MIDTERM_Fall 2009_MGT411- Money & Banking (Session - 2)

MIDTERM EXAMINATION

Fall 2009

MGT411- Money & Banking (Session - 2)

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Time: 60 min

Marks: 49

Question No: 1 ( Marks: 1 ) - Please choose one

We need __________ to carry out day to day transactions.

► Money (correct)

► Bonds

► Stocks

► Loans

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 (correct)

Question No: 3 ( Marks: 1 ) - Please choose one

_____________ are organized to eliminate the need of costly information gathering.

► Central banks

► Commercial banks

► Stock exchanges (correct)

► Insurance companies

Question No: 4 ( 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: 5 ( 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 (correct)

► None of the given options

Question No: 6 ( 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: 7 ( 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 (correct)

► Pension funds

Question No: 8 ( Marks: 1 ) - Please choose one

Risk sharing is the characteristic of which one of the following?

► Checks

► Checking accounts

► Money

► Bonds (correct)

Question No: 9 ( Marks: 1 ) - Please choose one

Bonds that are issued by Government are called _________.

► Government bonds

► Treasury bonds (correct)

► Corporate bonds

► Callable bonds

Question No: 10 ( Marks: 1 ) - Please choose one

Which of the following is the difference that lies between the options and futures?

► Options is not binding whereas future is binding

► Futures carry risks but Options didn’t carry risk (correct)

► Centralized clearinghouses guarantee futures but not options contracts

► There is no difference between options and futures

Question No: 11 ( Marks: 1 ) - Please choose one

Which of the following describes the general formula for the calculation of the compound interest?

► FV ₌ PV/(1+i) ⁿ

► FV ₌ PV/(1-i) ⁿ

► FV = PV*(1+i) n (correct)

► FV ₌ PV*(1-i) ⁿ

Question No: 12 ( Marks: 1 ) - Please choose one

If you put $1,000 per year into bank at 4% interest, how much would you have saved after 40 years?

► $90,000 (correct)

► $98,826

► $82,286

► $85,880

Question No: 13 ( Marks: 1 ) - Please choose one

Which one of the following is the procedure of finding out the Present Value (PV)?

► Discounting (correct)

► Compounding

► Time value of money

► Bond pricing

Question No: 14 ( Marks: 1 ) - Please choose one

What is true about the relationship between standard deviation and risk?

► Greater the standard deviation greater will be the risk (correct)

► Greater the standard deviation lower will be the risk

► Greater the standard deviation risk will be remained the same

► No relation between them

Question No: 15 ( Marks: 1 ) - Please choose one

Most of the people among us are ___________.

► Risk lovers

► Risk enhancers

► Risk averse (correct)

► Risk tolerating

Question No: 16 ( Marks: 1 ) - Please choose one

___________ is the strategy of reducing overall risk by making two investments with opposing risks.

► Spreading the risk

► Standard deviation

► Hedging the risk (correct)

► Variance

Question No: 17 ( Marks: 1 ) - Please choose one

If ABC Inc. and XYZ Inc. have returns that are perfectly negatively correlated:

► Adding XYZ Inc. to a portfolio that consists of only ABC Inc. will reduce risk (correct)

► Adding ABC Inc. to a portfolio that includes only XYZ Inc. will increase risk

► Adding XYZ Inc. to a portfolio that consists of only ABC Inc. will neither increase nor decrease the risk of the portfolio

► Adding XYZ Inc. to a portfolio that consists of only ABC Inc. will lower systematic risk

Question No: 18 ( Marks: 1 ) - Please choose one

Mr. A has a Treasury bill with a maturity period of 6 months where as Mr. B has a bond with a maturity period of 1 year. Which of the following statement is NOT true for this situation?

► Mr. A has paid less price for his bond than Mr. B

► Mr. A and Mr. B is a holder of zero coupon bond (correct)

► Mr. A will receive payment at the end of the maturity period

► Mr. B will receive the payment at the end of the maturity period

Question No: 19 ( 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: 20 ( Marks: 1 ) - Please choose one

Which of the following best describes the relationship between Bond prices and yields?

► Move together directly

► Independent of each other

► Move together inversely (correct)

► Bond yields do not change since the coupon is fixed

Question No: 21 ( Marks: 1 ) - Please choose one

The relationship between the price and the interest rate for a zero coupon bond is best described as _________.

► Volatile

► Stable

► Inverse (correct)

► No relationship

Question No: 22 ( Marks: 1 ) - Please choose one

The price of a 6-month Treasury Bill is_________ the price of a 1-year Treasury Bill.

► Lower than (correct)

► Higher than

► Equal to

► None of the given options

Question No: 23 ( Marks: 1 ) - Please choose one

If YTM is greater than the coupon rate the price of the bond is __________.

► Greater than its face value

► Lower than its face value (correct)

► Equals to its face value

► Insufficient information is given

Question No: 24 ( 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 (correct)

Question No: 25 ( Marks: 1 ) - Please choose one

The____________ are an assessment of the creditworthiness of the corporate issuer.

► Bond yield

► Bond ratings (correct)

► Bond risk

► Bond price

Question No: 26 ( 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: 27 ( Marks: 1 ) - Please choose one

Which one of the following is true for the relationship between the yield of taxable and tax exempt bond?

► Higher the tax rate wider the gap between the yield of taxable and tax exempt bond (correct)

► Taxable bond yield is always greater than tax exempt bond

► Higher the tax rate shorter the gap between yield of taxable and tax exempt bond

► Lower the tax rate wider the gap between yield of taxable and tax exempt bond

Question No: 28 ( Marks: 1 ) - Please choose one

If the tax rate is higher than gap between yield on taxable and tax exempt bond?

► Shorter

► Wider (correct)

► No gap

► Any thing can be possible

Question No: 29 ( Marks: 1 ) - Please choose one

Which of the following statement is correct about the yield curve?

► Yield on short term bonds are not more volatile than yield on long term bond

► Long term yields tend to be higher than short term yield (correct)

► Interest rate of different maturities don’t tend to move together

► None of the given options

Question No: 30 ( Marks: 1 ) - Please choose one

Which one of the following is NOT true for the expectation hypothesis?

► Risk free interest rate can be computed (correct)

► There is uncertainty in the future

► Identifying yield of bond today that will be available next year

► It focuses on risk free interest rate and the risk premium

Question No: 31 ( Marks: 1 ) - Please choose one

The slope of the yield curve seems to predict the performance of the economy with:

► Usually 3 months lag

► Usually two years lag

► Usually within few weeks

► Usually one year lag (correct)

Question No: 32 ( Marks: 1 ) - Please choose one

The liquidity premium theory suggests that yield curves should usually be:

► Up-sloping (correct)

► Inverted

► Flat

► Up-sloping through year 1, then flat thereafter

Question No: 33 ( Marks: 1 ) - Please choose one

If we ignore risk, the dividend discount model says the fundamental price of a stock is simply:

► The current dividend divided by the interest rate less the dividend growth rate(correct)

► The annual growth rate of the dividend minus the interest rate divided by the current dividend

► The current dividend divided by the interest rate plus the dividend growth rate

► The current dividend divided by the dividend growth rate less the interest rate

Question No: 34 ( Marks: 1 ) - Please choose one

The theory of efficient market states that prices of financial instruments reflect:

► All available information (correct)

► Some of the information

► No information

► Imperfect information

Question No: 35 ( Marks: 1 ) - Please choose one

Without the ability of financial intermediaries to pool the resources of small savers:

► Borrowers needing large amounts of money would find it less costly to obtain the funds

► The economy would likely grow faster

► People would likely save more

► The risk associated with lending would increase (correct)

Question No: 36 ( 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 (correct)

Question No: 37 ( Marks: 1 ) - Please choose one

Previously financial markets were located in which one of the following?

► Coffee houses or Taverns (correct)

► Stock exchanges

► Bazaar

► Both Coffee houses and Stock exchanges

Question No: 38 ( Marks: 1 ) - Please choose one

Zero-Coupon Bonds are pure discount bonds since they sell at a price __________.

► Equal their face value

► Below their face value (correct)

► Above their face value

► None of the given options

Question No: 39 ( Marks: 3 )

How Financial System promotes economic efficiency? List down points.ple.

1. They provide the channel for transfer of funds between saver and borrowers
2. provide risk sharing like insurance
3. provide payments like bank accounts
4. Help those people which do not have enough capital to use profitable opportunity.

Question No: 40 ( Marks: 3 )

Briefly discuss different types of speculative grades of Long term ratings be PACRA.

Sepulative grade means there are possibility of credit risk.

Answer:

Pacra has B class rating for them BB shows that there is a possibility of credit risk in making.

B Highly speculative in nature. ‘B’ it shows that that significant credit risk is there, but a limited

margin of safety remains.

CCC, C,CC High default risk. Chances of dealt is a real possibility.

Question No: 41 ( Marks: 5 )

Suppose that over the past 20 years, the average annual return on investments has been 12%. For each dollar invested at the beginning of the period. How much money would investors have at the end of 20 years?

Answer:

N= 20

I = 12% or .12

AMT = 1 $

FV = ?

FV = amt * FVIF= [ (1+i)^n-1 ]/i

FVIF = [(1.12)^20 – 1]/.12 = 72.05

FV = 1*72.05 = 72.05