Global Banking Mock Exam

Quizzes Global Banking
LECTURE 1

Q1 When FIs are useless or redundant

 Never
 Under very special conditions
 When Modigliani miller does not hold
 Always

Q2 what is adverse selection

 The investors do not know the quality of the firms
 The manager invests in petty projects
 The firms have different project quality
 None of the above
Q3 what is Moral Hazard?

 Manger does not provide effort on the job
 Manager invests in petty projects
 Managers seeks M&A for empire building
 All the above

Q4 A FI acting purely as a broker, can tackle only one problem. Which one?

 Liquidity creation
 Adverse selection
 Moral hazard
 None of the above

Q5 What is the function of FIs as asset transformer?

 Transform low performing assets into high performing
 Transform risky assets into safe assets
 Transform long term assets into short-term assets
 All of the above

Q6 why banks need special regulatory attention?
 They have a lot of money
 They are politically connected
 They have negative externalities on the economies
 They provide useful and important products

,Q7 assume there are two firms that want to issue shares. One firm is worth 50 the other firm
is worth 10. Investors do not know the quality of the firms. How much are rational investors
willing to pay

 35
 25
 30
 Impossible to say

Q8 considering that investors pay 30 for the shares, when the firm worth 50 is willing to issue
the shares

 Never
 Only if the payoff of its investment is higher than 20
 Only if the payoff of its investment is higher than 50
 Only if the payoff of its investment is higher than 30

LECTURE 2

Q1 given m the number of investors, K the per-borrower cost of monitoring, D

 K+D < min [S, mK]
 K + D < mk
 K + D >min [S, mL]
 K+D < S

Q2 when monitoring is not possible, what is the best contract that lenders can sign with
borrowers

 Either debt or equity since they have the same effect
 Equity contract
 A combination between equity and debt contract
 Debt contract

Q3 When monitoring is possible what is the best contract that the bank can sign with the
depositor and the borrowers (assuming sufficient diversification)?

 Unmonitored debt with depositors and equity with borrowers
 Unmonitored debt with depositors and monitored debt with borrowers
 Unmonitored debt with depositors and borrowers
 Monitored debt with depositors and unmonitored debt with borrowers

, Q4 a borrower needs 1usd to finance a project with uncertain realization V. The distribution
of V is known to everybody, it can be either V=1.3usd with probability 0.7 or V = 1usd with
probability 0.3. the actual realization of the project however is known only to the borrower.
Investors require a return of 6% on their lending. If monitoring is not possible, what is the
cost i.e. interest rate) of an unmonitored debt?

 50,64%
 53.23%
 52.34%
 51.42% (0.7f=1.6 -> f=1.5142) [0.7f=1.6  f=1.5142]

Q5 monitoring now is possible and one investor becomes the bank. There are two
independent and identical projects (i.e. with realization either V=1.3usd with probability 0.7
or V = 1usd with probability 0.3) to finance. What is the interest rate the bank will pay on
deposits

 16.48% [(0.7*0,7)+(0*0.3)*2) B=1.06  B=1.1648]
 17.42%
 15.34%
 15.89%

Q6 monitoring now is possible and one investor becomes the bank. Two independent and
identical projects (i.e. with realizations either V=1.3usd with probability 0.7 or V=1usd with
probability 0.3) to finance. What is the interest rate the bank charges on loans?

 30.75%
 33.67%
 31.87%
 32.96% [1+F = 2B  1+F=2.3296  F=1.3296]

Q7 monitoring now is possible and one investor becomes the bank. Two independent and
identical projects (i.e., with realization either V=1.3usd with probability 0.7 or V=1usd with
probability 0.3) to finance. What is the interest rate on loans that guarantees the bank
monitors, when cost of monitoring is K=0.0002 per borrower

 33.87%
 33.05% {[((0.7*0.3)*2)*(1+F-2B)=2K]  F=1.3305}
 34.67%
 34.45%