MIDTERM EXAMINATION
MGT411- Money & Banking
Question No: 1 ( Marks: 1 ) - Please choose one
Which of the following are without maturity dates? ► Zero coupon bonds
► Coupon securities
► Consols
► Preferred Bonds
Question No: 2 ( Marks: 1 ) - Please choose one
Which of the following institution takes direct deposit from customer and gives loan to customer directly? ► Zarai Tarkaytee Bank LTD
► Soneri Bank
► Khushali Bank
► Credit union
Question No: 3 ( Marks: 1 ) - Please choose one
Mr. Ghazanfar obtains a home improvement loan from Allied Bank.This loan is: ► Mr. Ghazanfar’s asset and the bank's liability
► Mr. Ghazanfar 's asset, but the liability belongs to the bank's depositors
► Mr. Ghazanfar 's liability and an asset for the bank
► Both Mr. Ghazanfar's and bank's liability
Question No: 4 ( Marks: 1 ) - Please choose one
Components of M1 DO NOT include which one of the following? ► Currency in the hands of public
► Demand deposits
► Small denominations time deposit
► Checkable deposits
Question No: 5 ( 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: 6 ( Marks: 1 ) - Please choose one
Which of the following is NOT an example of financial institutions? ► Bank
► Securities firm
► Stock exchange
► Insurance company
Question No: 7 ( Marks: 1 ) - Please choose one
Requiring a large deductible on the part of an insured is one way insurers treat the problem of: ► Free-riding
► Moral hazard
► Adverse selection
► The Lemons market
Question No: 8 ( 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
► 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: 9 ( Marks: 1 ) - Please choose one
When stock prices reflect fundamental values: ► All investors will experience capital gains
► All companies will have an easier task of obtaining financing for investment projects
► The allocation of resources will be more efficient
► The overall level of the stock market should move higher continuously
Question No: 10 ( 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
► The index is more stable than the data it reflects
► It does not require any calculations to compute percentage changes
Question No: 11 ( Marks: 1 ) - Please choose one
The concept of limited liability says a stockholder of a corporation: ► Is liable for the corporation's liabilities, but nothing more
► Cannot receive dividends that exceed their investment
► Cannot own more than fiver percent of any public corporation
► Cannot lose more than their investment
Question No: 12 ( Marks: 1 ) - Please choose one
Other things remaining equal, the liquidity premium theory is based upon the idea that ____________. ► Investors prefer long-term bonds
► Investors prefer short-term bonds
► Investors are indifferent between short-term and long-term bonds
► Investors prefer intermediate-term bonds
Question No: 13 ( Marks: 1 ) - Please choose one
Which one of the following is NOT true for the expectation hypothesis? ► Risk free interest rate can be computed
► 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: 14 ( Marks: 1 ) - Please choose one
A graph of the term structure with YTM on Y-axis and time to maturity on X-axis is called: ► Demand curve
► Supply curve
► Yield curve
► Leffer curve
Question No: 15 ( Marks: 1 ) - Please choose one
| | Bond A | Bond B |
| Maturity | 5 years | 10 years |
| Default risk | 5% | 5% |
| Tax rate | 30% | 30% |
| Yield | ? | ? |
See the above table and choose the one option which is NOT correct about the yield of Bond A and Bond B?
► Bond tax status and default rate are not the only factors that affect the yield of the two bonds
► Bond A has different yield from that of Bond B because of change in maturity period
► Yields of both the bonds are not disturbed by maturity period
► Yield of Bond B depends on what people expect to happen in years to come
Question No: 16 ( Marks: 1 ) - Please choose one
The____________ are an assessment of the creditworthiness of the corporate issuer. ► Bond yield
► Bond ratings
► Bond risk
► Bond price
Question No: 17 ( Marks: 1 ) - Please choose one
The bond rating of a security refers to which of the followings? ► The size of the coupon payment relative to the face value
► The return a holder is likely to receive
► The likelihood the lender/borrower will be repaid by the borrower/issuer
► The years until the bond matures
Question No: 18 ( Marks: 1 ) - Please choose one
An increase in the expected inflation shifts the bond demand to the _________ ► Right
► Left
► No change
► None of the given options
Question No: 19 ( Marks: 1 ) - Please choose one
The current yield on a $10,000, 5% coupon bond selling for $8,000 is: ► 6.25%
► 7.50%
► 8.00%
► 5.00%
Question No: 20 ( Marks: 1 ) - Please choose one
If the annual interest rate is 6% (.06); the price of a one year Treasury bill would be: ► $94.00
► $94.33
► $95.25
► $96.10
Question No: 21 ( Marks: 1 ) - Please choose one
The return on holding a bond till its maturity is called: ► Coupon rate
► Yield to maturity
► Current yield
► Fixed return
Question No: 22 ( 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
► Bond yields do not change since the coupon is fixed
Question No: 23 ( 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
► 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: 24 ( Marks: 1 ) - Please choose one
What is true relationship between return and risk? ► Lower the risk greater the return
► Greater the risk greater the return
► Greater the risk no change in return
► No relationship between them
Question No: 25 ( Marks: 1 ) - Please choose one
Sum of all the probabilities should be equal to which one of the following? ► Zero
► One
► Two
► Three
Question No: 26 ( Marks: 1 ) - Please choose one
_________ measures the probability of worst outcome in any investment project. ► Variance
► Standard deviation
► Value at risk
► Hedging
Question No: 27 ( Marks: 1 ) - Please choose one
The variance is generally less useful than the standard deviation on which of the following reasons? ► Variance is easier to calculate
► Variance is a measure of risk, whereas standard deviation is a measure of return
► Variance isn't calculated in the same units as payoffs where as standard deviation is
► Both are equally useful
Question No: 28 ( 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: 29 ( 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
► A high nominal interest rate
► A low nominal interest rate
Question No: 30 ( Marks: 1 ) - Please choose one
An investment carrying a current cost of $130,000 is going to generate $70,000 of revenue for each of the next three years. To calculate the internal rate of return we need to: ► Calculate the present value of each of the $70,000 payments and multiply these and set this equal to $130,000
► Take the present value of $210,000 for three years from now and set this equal to $130,000
► Set the sum of the present value of $70,000 for each of the next three years equal to $130,000
► Subtract $130,000 from $210,000 and set this difference equal to the interest rate
Question No: 31 ( Marks: 1 ) - Please choose one
A borrower is promised a $100 payment (including interest) one year from today. If the lender has an 8% opportunity cost of money, he should be willing to accept what amount today? ► Rs.100.00
► Rs.108.20
► Rs.92.59
► Rs.96.40
Question No: 32 ( 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: 33 ( Marks: 1 ) - Please choose one
Financial intermediaries provide small lender-savers all of the following advantages EXCEPT: ► Greater liquidity
► Lower transaction cost
► Lower risk
► Higher return
Question No: 34 ( Marks: 1 ) - Please choose one
The shares of McDonald Corporation stock are examples of: ► A standardized financial instrument
► A standardized financial liability instrument
► A non-standardized financial instrument
► A means of payment
Question No: 35 ( Marks: 1 ) - Please choose one
Which of the following statements is NOT correct? ► Banks are financial intermediaries
► Financial intermediary involves in giving loan and accepting deposit
► All financial intermediaries are insurance companies
► Financial intermediaries increase the efficiency of the economy
Question No: 36 ( Marks: 1 ) - Please choose one
Economic research shows: ► There is a strong inverse correlation between financial market development and economic growth
► There is weak relation between financial market development and economic growth around 0.25
► There is a relatively strong positive correlation between financial market development and economic growth
► There isn't any correlation between financial market development and economic growth
Question No: 37 ( Marks: 1 ) - Please choose one
Which of the following statements is correct? ► If you can buy the same goods this year as you bought last year with less money the money supply decreased.
► To purchase the same goods today that were purchased one year ago requires more money, there must have been inflation
► To purchase the same goods today as one year ago requires less money, the money supply must have increased
► To purchase the same goods today that were purchased one year ago requires the same amount of money, there must have been inflation
Question No: 38 ( Marks: 1 ) - Please choose one
The one that you get from bank when you open your checking account is __________. ► Debit card
► Credit card
► Store value card
► Customer card
Question No: 39 ( Marks: 1 ) - Please choose one
Wealth can be held in number of other forms but we use to hold money because of which one of the following reason? ► It is the only mode of payment
► It is an asset
► It is most liquid
► It is the only store of value
Question No: 40 ( Marks: 1 ) - Please choose one
Which of the following are used to monitor and stabilize the economy? ► Stock exchanges
► Commercial Banks
► Central Banks
► Financial institutions
Question No: 41 ( Marks: 10 )
“A financial instrument is a real or virtual document representing a legal agreement involving some sort of monetary value.” Discuss further on financial instruments by giving examples. Point out some of its uses and important characteristics.ANSWER: Financial Instrument: Financial instrument is a written obligation of one party to transfer something of value to anther party at a future date under certain conditions.
· By written obligation we mean that it is enforced by the government and this obligation is an important feature of a financial instrument.
· The party here can be an individual, company or a government
· Future date can be specified or when some event occurs.
Examples: Stocks, bonds, insurance etc are examples of financial instruments.
Characteristics of Financial Instruments: There are certain characteristics of financial instruments.
- Standardization: It is a standardized agreement which enables reduction in costs of complexity. So because of this most financial instruments today are similar.
- Communicate Information: Provide certain important information about the issuer which otherwise would have been difficult to gather for the lenders.
Value of Financial Instruments: The value of financial instruments depends on various factors.
· Size: Larger the promised payment more valuable is the financial instrument.
· Timing: The sooner the payment is made increases the value of financial instrument.
· Risk: A financial instrument is more valuable if there are greater possibilities that payment will be made.
· Circumstances: Payments made when needed the most makes the financial instrument more valuable.
Uses of Financial Instruments:
· Store Of Value:
Stocks: The stock holder is a part owner of the firm and receives part of its profits.
Bonds: A form of loan which promises to make repayment in future dates.
Bank loans: Borrowers obtains resources from lenders in exchange of promised payments.
· Transfer of Risk:
Insurance: Takes premium to assure payment under particular conditions (accident, death etc)
Future contracts: It is an agreement to exchange fixed quantity of a commodity or an asset at a fixed price. Transfer risk of price fluctuations.
Options: Gives holder the right to purchase fixed quantity of an underlying asset at predetermined price within a specific period.
MIDTERM EXAMINATION MGT411- Money & Banking
Time: 60 min Marks: 49
Question No: 1 ( Marks: 1 ) - Please choose one
We need __________ to carry out day to day transactions.
► Money
► 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
Question No: 3 ( Marks: 1 ) - Please choose one
_____________ are organized to eliminate the need of costly information gathering.
► Central banks
► Commercial banks
► Stock exchanges
► 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
► 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
► 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
► 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
► 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
Question No: 9 ( Marks: 1 ) - Please choose one
Bonds that are issued by Government are called _________.
► Government bonds
► Treasury bonds
► 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
► 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
► 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
► $98,826
► $82,286
► $85,880
right option could ($95,025.52)
Question No: 13 ( Marks: 1 ) - Please choose one
Which one of the following is the procedure of finding out the Present Value (PV)?
► Discounting
► 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
► 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
► 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
► 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
► 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► 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
► 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
► 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
► 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
► 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
► 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
Question No: 25 ( Marks: 1 ) - Please choose one
The____________ are an assessment of the creditworthiness of the corporate issuer.
► Bond yield
► Bond ratings
► 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
► 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
► 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
► 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
► 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
► 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
Question No: 32 ( Marks: 1 ) - Please choose one
The liquidity premium theory suggests that yield curves should usually be:
► Up-sloping
► 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
► 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
► 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
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
Question No: 37 ( Marks: 1 ) - Please choose one
Previously financial markets were located in which one of the following?
► Coffee houses or Taverns
► 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
► Above their face value
► None of the given options
Zero coupon bonds are bonds that do not pay interest during the life of the bonds. Instead, investors buy zero coupon bonds at a deep discount from their face value, which is the amount a bond will be worth when it "matures" or comes due. When a zero coupon bond matures, the investor will receive one lump sum equal to the initial investment plus the imputed interest, which is discussed below.
Question No: 39 ( Marks: 3 )
How Financial System promotes economic efficiency? List down points.ple.
- They provide the channel for transfer of funds between saver and borrowers
- provide risk sharing like insurance
- provide payments like bank accounts
- 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.
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 deault 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?
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
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MIDTERM EXAMINATION
Fall 2009
MGT411- Money & Banking
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
Reference by Stephen G Cecchetti
two ideas are emphasized: that financial instruments transfer resources from savers to investors, and that in doing so, they transfer risk to those best equipped to bear it
Which of the following are used to monitor and stabilize the economy?
► Stock exchanges
► Central Banks
► 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
Question No: 4 ( Marks: 1 ) - Please choose one
The one that you get from bank when you open your checking account is __________.
► Debit card
► 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
Question No: 6 ( Marks: 1 ) - Please choose one
All of the following are the components of M2 EXCEPT?
► M1
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► Travelers cheques
► Mutual funds shares
M2: Equals M1 + savings deposits, time deposits less than $100,000 and money market deposit accounts for individuals.
Travelers cheques are example of M1
Question No: 7 ( Marks: 1 ) - Please choose one
The Consumer Price Index (CPI):
► Tends to overstate inflation due to substitution bias
► 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
► 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
► All of the given options
Question No: 10 ( Marks: 1 ) - Please choose one
______________ are the economies central nervous system.
► Financial Instruments
► Financial Markets
► Financial Institutions
► Financial Companies
Financial markets are like the "central nervous system" of the economy, says Cecchetti's textbook.
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
► 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
► 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
► 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
► 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
► 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
► Present value will be higher
► Interest rate will be lower
► Time has no effect on present value
Reference: As we calculate PV through dividing the future value by the discount factor which is (1+i) n so if we increase the value of ‘n’ It will surely increase the discount factor which is the denominator and the greater the denominator the smaller will be the value of the fraction.
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
► $362.8
Lets see the given is that 5% interest rate, FV= $100, PV = $90.70
Now calculate for ‘n’ that is no of years. As mentioned is that k without using formula so do not use the compounding formula. Use the simple one
FV=PV*i*n
n=FV / PV*i
n=100 / 90.7*0.05
n=22
We are asked to calculate PV if FV=200
PV=FV / i*n
PV=200 / 1.1
PV=$181.4
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
► 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
► 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
► The price of bonds
► The return of bonds
nominal interest rate is equal to the real interest rate plus the expected rate of inflation
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
► Principal amount is paid fully in the periodic payments
These loans are amortized, meaning that the borrower pays off the principal along with the interest over the life of the loan. Each payment includes both interest and some portion of the principal.
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
► 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
► $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
► 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
► 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
► No change
► None of the given options
A business-cycle downturn shifts the bond supply to the left and the bond demand to the left. In this case the bond price can rise or fall, depending on which shift is greater. But interest rates tend to fall in recessions, so bond prices are likely to increase
Question No: 27 ( Marks: 1 ) - Please choose one
In the long run, the yield curve tends to be which of the following?
► Upward sloping
► Downward sloping
► Nearly vertical
► Nearly horizontal
The yield curve’s upward slope is due to long-term bonds being riskier than short-term bonds
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)
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
► 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
► 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
One of the primary reasons municipal bonds are considered separately from other types of bonds is their special ability to provide tax-exempt income. Interest paid by the issuer to bond holders is often exempt from all federal taxes, as well as state or local taxes depending on the state in which the issuer is located
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
► 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
► 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
► 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
► 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
► Says Insider-information makes markets less efficient
► Rules out high returns due to chance
► Assumes people have equal luckReference
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
► 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
Reference
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
► 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
► 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.
MIDTERM EXAMINATION
Spring 2009
Time: 60 min
Marks: 50
Question No: 1 ( Marks: 1 ) - Please choose one
Which of the following statement is true about the relationship between bond ,coupon payment and interest?
► Coupon payments fall, the interest rate falls, and Bond price will rise
► Coupon payments rise, the interest rate falls, and Bond price will rise
► Coupon payments fall, the interest rate falls, and Bond price will fall
► Coupon payments rise, the interest rate falls, and Bond price will fall
The value of the coupon bond rises when the yearly coupon payments rise and when the interest rate falls
Lower interest rates mean higher bond prices and vice versa.
Question No: 2 ( Marks: 1 ) - Please choose one
Which of the following institution takes direct deposit from customer and gives loan to customer directly?
► Zarai Tarkaytee Bank LTD
► Soneri Bank
► Khushali Bank
► Credit union
Question No: 3 ( Marks: 1 ) - Please choose one
Which of the following is NOT true for financial institutions?
► It reduces the transaction cost
► It reduces the information cost
► It reduces the asymmetric information
► It doesn’t make long term loans
Question No: 4 ( 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: 5 ( Marks: 1 ) - Please choose one
Della's Donut Shop goes out of business due to decreasing sales resulting from the dramatic increase in people on low carbohydrate diets. The decrease in business also results in Della's defaulting on the loan they have with the bank. This is an example of:
► Asymmetric information in financial markets
► Lack of perfect information in financial markets
► Moral hazard in financial markets
► Adverse selection
Question No: 6 ( Marks: 1 ) - Please choose one
A bank can usually offer a saver a higher return for the same risk because:
► The bank can usually purchase assets at a higher cost than any one saver
► The bank can pool the resources of larger savers and purchase lower denominated assets
► Economies of scale can be applied by the bank in its purchase of assets
► None of the given options
Question No: 7 ( 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
Question No: 8 ( Marks: 1 ) - Please choose one
The process of financial intermediation:
► Creates a net cost to an economy but is unavoidable
► Is used primarily in underdeveloped countries
► Is always used when a borrower needs to obtain funds
► Increases the economy's ability to produce
Question No: 9 ( 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: 10 ( 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
► 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: 11 ( Marks: 1 ) - Please choose one
Which statement shows the major difference between stocks and bonds?
► Bonds pay their owners dividends while stocks pay interest
► Bonds pay their owners interest while stocks pay dividends
► Interest on a bond is not guaranteed while dividends on stock are legally required
► Bonds represent ownership while stock represents debt
Question No: 12 ( Marks: 1 ) - Please choose one
The concept of limited liability says a stockholder of a corporation:
► Is liable for the corporation's liabilities, but nothing more
► Cannot receive dividends that exceed their investment
► Cannot own more than fiver percent of any public corporation
► Cannot lose more than their investment
Question No: 13 ( Marks: 1 ) - Please choose one
The liquidity premium theory suggests that yield curves should usually be:
► Up-sloping
► Inverted
► Flat
► Up-sloping through year 1, then flat thereafter
Question No: 14 ( Marks: 1 ) - Please choose one
Which of the following statement is true about two bonds having same default rate and tax status but different maturity dates?
► It creates no effect on yield of bonds
► Both of them have different yield
► Liquidity risk factor should be taken into consideration
► It is impossible that default risk and tax status of two bonds are same
Question No: 15 ( Marks: 1 ) - Please choose one
A business cycle downturn shifts the bond supply to the:
► Right
► Left
► No change
► None of the given options
A business-cycle downturn shifts the bond supply to the left and the bond demand to the left. In this case the bond price can rise or fall, depending on which shift is greater. But interest rates tend to fall in recessions, so bond prices are likely to increase.Question No: 16 ( Marks: 1 ) - Please choose one
An increase in the expected inflation shifts the bond demand to the _________
► Right
► Left
► No change
► None of the given options
Question No: 17 ( 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: 18 ( Marks: 1 ) - Please choose one
Current yield did NOT measure which of the following?
► Return arises from coupon payment
► Capital gain and loss
► Return arises from bond holding till maturity
► All of the given options
Question No: 19 ( 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: 20 ( 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
► No relationship
Question No: 21 ( Marks: 1 ) - Please choose one
Which of the following statement is NOT true for consols?
► Consol offers only periodic interest payments
► Borrower never repays the principal
► There are Government and as well as private consols
► Price of a consol is the present value of all the future interest payments
There are no privately issued consols because only governments can credibly promise to make payments forever
Question No: 22 ( 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
► Variance
Hedging is the strategy of reducing overall risk by making two investments with opposing risks so that when one does poorly the other does well and vice versa.
Question No: 23 ( Marks: 1 ) - Please choose one
The variance is generally less useful than the standard deviation on which of the following reasons?
► Variance is easier to calculate
► Variance is a measure of risk, whereas standard deviation is a measure of return
► Variance isn't calculated in the same units as payoffs where as standarad deviation is
► Both are equally useful
Question No: 24 ( Marks: 1 ) - Please choose one
Suppose a $1000 investment has a fixed return of 5% per annum, which one of the following statement is NOT true for this investment?
► Its return can be calculated
► It’s a risky investment
► It will give return annually
► Its future value is known
Question No: 25 ( Marks: 1 ) - Please choose one
If a bond sells at a premium, where price exceeds face value, then we would expect to see:
► Market interest rate the same as the coupon rate
► Market interest rates above the coupon rate
► Market interest rates below the coupon rate
► None of the given options
Question No: 26 ( Marks: 1 ) - Please choose one
The rule of 72 says that at 12% interest $100 should become $200 in about _________.
► 72 months
► 100 months
► 12 years
► 8.2 years
Question No: 27 ( Marks: 1 ) - Please choose one
A borrower is promised a $100 payment (including interest) one year from today. If the lender has an 8% opportunity cost of money, he should be willing to accept what amount today?
► Rs.100.00
► Rs.108.20
► Rs.92.59
► Rs.96.40
Question No: 28 ( Marks: 1 ) - Please choose one
___________ is the today's value of a payment that is promised to be made in the future.
► None of the given options
► Future value
► Present value
► Agreed value
The present value is the value today of a payment that is promised to be made in the future. It is the amount that must be invested today in order to realize a specific amount on a given future date
Question No: 29 ( 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
► 100 x 2.5 x (1.045)
Question No: 30 ( 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
► Higher the interest rate lower will be the future value
► Interest rate has no effect on future value
Question No: 31 ( Marks: 1 ) - Please choose one
Which of the following is a financial market in which a borrower obtains funds from a lender by selling newly issued securities?
► Secondary market
► Primary market
► Over the counter market
► Centralized market
In a primary market a borrower obtains funds from a lender by selling newly issued securities. Most of the action in primary markets goes on out of public view. Most companies use an investment bank, which will determine a price and then purchase the company’s securities in preparation for resale to clients; this is called underwriting. We hear more about the secondary markets where people can buy and sell existing securities.Question No: 32 ( Marks: 1 ) - Please choose one
Repurchase agreements are:
► The most liquid of all money market instruments
► In use for hundreds of years
► Loans of deposits at the Federal Reserve
► Short term loans with Treasury bills as collateral
Question No: 33 ( 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
► 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: 34 ( 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: 35 ( Marks: 1 ) - Please choose one
The Consumer Price Index (CPI):
► Tends to overstate inflation due to substitution bias
► 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: 36 ( Marks: 1 ) - Please choose one
All of the following are the components of M2 EXCEPT?
► M1
► Saving deposits
► Travelers cheques
► Mutual funds shares
Question No: 37 ( Marks: 1 ) - Please choose one
Which of the following statement truly represents the main difference between debit card and store value card?
► Debit card is operated by ATM machine while Store value card doesn’t
► Debit card appearance is different from Store value card
► Debit card is not specific for user but store value card is specific
► Debit card is specific for user but store value card is not
Question No: 38 ( Marks: 1 ) - Please choose one
In electronic transfer the most common method is to send money through a system maintained by Federal reserve called __________.
► Fedex
► Fedwire
► Fedtransfer
► Fedmoney
One wire transfer system used generally to transfer large dollar amounts instantaneously and which is provided by the US Federal Reserve System
Question No: 39 ( Marks: 1 ) - Please choose one
The one that you get from bank when you open your checking account is __________.
► Debit card
► Credit card
► Store value card
► Customer card
Question No: 40 ( Marks: 1 ) - Please choose one
Mr. Ghazanfar has assets which when converted to cash, yield more currency then he needs to pay his debt. Which of the following statement best suites Mr. Ghazanfar?
► Mr. Ghazanfar earns good income
► Mr. Ghazanfar is a wealthy person
► All of the given options
► Mr. Ghazanfar has a lot of money at point in time
Question No: 41 ( Marks: 10 )
What are five core principles of financial system? Discuss it in detail.
Answer:
Financial System:
In finance, the financial system is the system that allows the transfer of money between savers and borrowers.
Five Core Principles of the Financial System & Details:
According to Mr. Brown, five core principles of Financial System, as outlined below:
1) First, transparency means bringing the so-called ’shadow banking system’ into the regulatory system, not operating parallel to it. And across the world, financial institutions need to be supervised not on what name they give themselves - be it banks, hedge funds or investment funds - but on what they do. We also need to ensure that all jurisdictions - such as offshore havens - and all important markets are covered by global supervision.
2) Second accountability means boardroom integrity, where boards of directors must understand and be held responsible for the risks they undertake. And credit rating agencies need to be free of conflicts of interest and be properly licensed.
3) Third, responsible risk taking means an end to the excesses from short-termism; instead rewarding people for long term success not short term deals. But to be most effective it has to be done internationally. A race to the bottom is in no one’s interest. So we should agree a new international approach to pay and bonus structures.
4) The fourth principle of prudential regulation means taking into account the effect of a bank’s capital, liquidity, solvency and conduct on the whole financial system.
5) Finally, he stated: “Lastly, international co-operation lies at the heart of all our changes - recognizing that financial institutions that work across borders need to be under cross border supervision too and regulators in one country must co-operate far more closely with regulators in other countries to create a global network of regulation that captures the risks to us all.
Other Principles of Financial are below:
a. Facilitate Payments
b. Channel Funds from Savers to Borrowers
c. Enable Risk Sharing
MIDTERM EXAMINATION
Which of the following are without maturity dates?
► Zero coupon bonds
► Coupon securities
► Consols
► Preferred Bonds
Question No: 2 ( Marks: 1 ) - Please choose one
Which of the following institution takes direct deposit from customer and gives loan to customer directly?
► Zarai Tarkaytee Bank LTD
► Soneri Bank
► Khushali Bank
► Credit union
Mr. Ghazanfar obtains a home improvement loan from Allied Bank.This loan is:
► Mr. Ghazanfar’s asset and the bank's liability
► Mr. Ghazanfar 's asset, but the liability belongs to the bank's depositors
► Mr. Ghazanfar 's liability and an asset for the bank
► Both Mr. Ghazanfar's and bank's liability
Question No: 4 ( Marks: 1 ) - Please choose one
Components of M1 DO NOT include which one of the following?
► Currency in the hands of public
► Demand deposits
► Small denominations time deposit
► Checkable deposits
Question No: 5 ( 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: 6 ( Marks: 1 ) - Please choose one
Which of the following is NOT an example of financial institutions?
► Bank
► Securities firm
► Stock exchange
► Insurance company
Question No: 7 ( Marks: 1 ) - Please choose one
Requiring a large deductible on the part of an insured is one way insurers treat the problem of:
► Free-riding
► Moral hazard
► Adverse selection
► The Lemons market
Question No: 8 ( 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
► 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: 9 ( Marks: 1 ) - Please choose one
When stock prices reflect fundamental values:
► All investors will experience capital gains► All companies will have an easier task of obtaining financing for investment projects
► The allocation of resources will be more efficient
► The overall level of the stock market should move higher continuously
Question No: 10 ( 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
► The index is more stable than the data it reflects
► It does not require any calculations to compute percentage changes
Question No: 11 ( Marks: 1 ) - Please choose one
The concept of limited liability says a stockholder of a corporation:
► Is liable for the corporation's liabilities, but nothing more► Cannot receive dividends that exceed their investment
► Cannot own more than fiver percent of any public corporation
► Cannot lose more than their investment
Question No: 12 ( Marks: 1 ) - Please choose one
Other things remaining equal, the liquidity premium theory is based upon the idea that ____________.
► Investors prefer long-term bonds
► Investors prefer short-term bonds
► Investors are indifferent between short-term and long-term bonds
► Investors prefer intermediate-term bonds
Question No: 13 ( Marks: 1 ) - Please choose one
Which one of the following is NOT true for the expectation hypothesis?
► Risk free interest rate can be computed
► 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: 14 ( Marks: 1 ) - Please choose one
A graph of the term structure with YTM on Y-axis and time to maturity on X-axis is called:
► Demand curve
► Supply curve
► Yield curve
► Leffer curve
Question No: 15 ( Marks: 1 ) - Please choose one
| | Bond A | Bond B |
| Maturity | 5 years | 10 years |
| Default risk | 5% | 5% |
| Tax rate | 30% | 30% |
| Yield | ? | ? |
See the above table and choose the one option which is NOT correct about the yield of Bond A and Bond B?
► Bond tax status and default rate are not the only factors that affect the yield of the two bonds
► Bond A has different yield from that of Bond B because of change in maturity period
► Yields of both the bonds are not disturbed by maturity period
► Yield of Bond B depends on what people expect to happen in years to come
Question No: 16 ( Marks: 1 ) - Please choose one
The____________ are an assessment of the creditworthiness of the corporate issuer.
► Bond yield
► Bond ratings
► Bond risk
► Bond price
Question No: 17 ( Marks: 1 ) - Please choose one
The bond rating of a security refers to which of the followings?
► The size of the coupon payment relative to the face value
► The return a holder is likely to receive
► The likelihood the lender/borrower will be repaid by the borrower/issuer
► The years until the bond matures
Question No: 18 ( Marks: 1 ) - Please choose one
An increase in the expected inflation shifts the bond demand to the _________
► Right
► Left
► No change
► None of the given options
Question No: 19 ( Marks: 1 ) - Please choose one
The current yield on a $10,000, 5% coupon bond selling for $8,000 is:
► 6.25%
► 7.50%
► 8.00%
► 5.00%
Question No: 20 ( Marks: 1 ) - Please choose one
If the annual interest rate is 6% (.06); the price of a one year Treasury bill would be:
► $94.00
► $94.33
► $95.25
► $96.10
Question No: 21 ( Marks: 1 ) - Please choose one
The return on holding a bond till its maturity is called:
► Coupon rate
► Yield to maturity
► Current yield
► Fixed return
Question No: 22 ( 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
► Bond yields do not change since the coupon is fixed
Question No: 23 ( 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► 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: 24 ( Marks: 1 ) - Please choose one
What is true relationship between return and risk?
► Lower the risk greater the return
► Greater the risk greater the return
► Greater the risk no change in return
► No relationship between them
Question No: 25 ( Marks: 1 ) - Please choose one
Sum of all the probabilities should be equal to which one of the following?
► Zero
► One
► Two
► Three
Question No: 26 ( Marks: 1 ) - Please choose one
_________ measures the probability of worst outcome in any investment project.
► Variance
► Standard deviation
► Value at risk
► Hedging
Question No: 27 ( Marks: 1 ) - Please choose one
The variance is generally less useful than the standard deviation on which of the following reasons?
► Variance is easier to calculate
► Variance is a measure of risk, whereas standard deviation is a measure of return
► Variance isn't calculated in the same units as payoffs where as standard deviation is
► Both are equally useful
Question No: 28 ( 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: 29 ( 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
► A high nominal interest rate
► A low nominal interest rate
Question No: 30 ( Marks: 1 ) - Please choose one
An investment carrying a current cost of $130,000 is going to generate $70,000 of revenue for each of the next three years. To calculate the internal rate of return we need to:
► Calculate the present value of each of the $70,000 payments and multiply these and set this equal to $130,000
► Take the present value of $210,000 for three years from now and set this equal to $130,000
► Set the sum of the present value of $70,000 for each of the next three years equal to $130,000
► Subtract $130,000 from $210,000 and set this difference equal to the interest rate
Question No: 31 ( Marks: 1 ) - Please choose one
A borrower is promised a $100 payment (including interest) one year from today. If the lender has an 8% opportunity cost of money, he should be willing to accept what amount today?
► Rs.100.00
► Rs.108.20
► Rs.92.59
► Rs.96.40
Question No: 32 ( 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: 33 ( Marks: 1 ) - Please choose one
Financial intermediaries provide small lender-savers all of the following advantages EXCEPT:
► Greater liquidity
► Lower transaction cost
► Lower risk
► Higher return
Question No: 34 ( Marks: 1 ) - Please choose one
The shares of McDonald Corporation stock are examples of:
► A standardized financial instrument
► A standardized financial liability instrument
► A non-standardized financial instrument
► A means of payment
Question No: 35 ( Marks: 1 ) - Please choose one
Which of the following statements is NOT correct?
► Banks are financial intermediaries
► Financial intermediary involves in giving loan and accepting deposit
► All financial intermediaries are insurance companies
► Financial intermediaries increase the efficiency of the economy
Question No: 36 ( Marks: 1 ) - Please choose one
Economic research shows:
► There is a strong inverse correlation between financial market development and economic growth
► There is weak relation between financial market development and economic growth around 0.25
► There is a relatively strong positive correlation between financial market development and economic growth
► There isn't any correlation between financial market development and economic growth
Question No: 37 ( Marks: 1 ) - Please choose one
Which of the following statements is correct?
► If you can buy the same goods this year as you bought last year with less money the money supply decreased.
► To purchase the same goods today that were purchased one year ago requires more money, there must have been inflation
► To purchase the same goods today as one year ago requires less money, the money supply must have increased
► To purchase the same goods today that were purchased one year ago requires the same amount of money, there must have been inflation
Question No: 38 ( Marks: 1 ) - Please choose one
The one that you get from bank when you open your checking account is __________.
► Debit card
► Credit card
► Store value card
► Customer card
Question No: 39 ( Marks: 1 ) - Please choose one
Wealth can be held in number of other forms but we use to hold money because of which one of the following reason?
► It is the only mode of payment
► It is an asset
► It is most liquid
► It is the only store of value
Question No: 40 ( Marks: 1 ) - Please choose one
Which of the following are used to monitor and stabilize the economy?
► Stock exchanges
► Commercial Banks
► Central Banks
► Financial institutions
Question No: 41 ( Marks: 10 )
“A financial instrument is a real or virtual document representing a legal agreement involving some sort of monetary value.” Discuss further on financial instruments by giving examples. Point out some of its uses and important characteristics.
ANSWER: Financial Instrument: Financial instrument is a written obligation of one party to transfer something of value to anther party at a future date under certain conditions.
· By written obligation we mean that it is enforced by the government and this obligation is an important feature of a financial instrument.
· The party here can be an individual, company or a government
· Future date can be specified or when some event occurs.
Examples: Stocks, bonds, insurance etc are examples of financial instruments.Characteristics of Financial Instruments: There are certain characteristics of financial instruments.
- Standardization: It is a standardized agreement which enables reduction in costs of complexity. So because of this most financial instruments today are similar.
- Communicate Information: Provide certain important information about the issuer which otherwise would have been difficult to gather for the lenders.
Value of Financial Instruments: The value of financial instruments depends on various factors.
· Size: Larger the promised payment more valuable is the financial instrument.
· Timing: The sooner the payment is made increases the value of financial instrument.
· Risk: A financial instrument is more valuable if there are greater possibilities that payment will be made.
· Circumstances: Payments made when needed the most makes the financial instrument more valuable.
Uses of Financial Instruments:
· Store Of Value:
Stocks: The stock holder is a part owner of the firm and receives part of its profits.
Bonds: A form of loan which promises to make repayment in future dates.
Bank loans: Borrowers obtains resources from lenders in exchange of promised payments.
· Transfer of Risk:
Insurance: Takes premium to assure payment under particular conditions (accident, death etc)
Future contracts: It is an agreement to exchange fixed quantity of a commodity or an asset at a fixed price. Transfer risk of price fluctuations.
Options: Gives holder the right to purchase fixed quantity of an underlying asset at predetermined price within a specific period.
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