FI 412 Final Exam questions with complete solution1

FI 412 Final Exam questions with complete
solutions



Which one of the problems is adverse selection?
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a) asset substitution
v v v


b) risky firms are willing to borrow at high interest rates because they often default
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c) metered taxis often do not take the shortest route to a destination
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d) Homeowners with underwater mortgages sometimes neglect routine maintenance -
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answer-b
v




If a 15 year treasury bond is stripped, the number of securities that will be traded after
v v v v v v v v v v v v v v v v


vthe process is: v v v


a) 30 v v


b) 31 v


c) 15 v


d) 1 - answer-b
v v v




A face value $10,000, 8% (annualized) coupon bond sells for $10,000. If the maturity for
v v v v v v v v v v v v v v


this bond is 5 years, what is the (annualized) yield to maturity of this bond?
v v v v v v v v v v v v v v v


a) 8% v


b) 10% v


c) 12% v


d) 14% - answer-a
v v v




A coupon bond has a face value of $1,000, 9% coupon rate (annualized), and a maturity
v v v v v v v v v v v v v v v


of 5 years. If the price of this bond is $961.3913, what is the annualized yield to
v v v v v v v v v v v v v v v v v


maturity?
a) 7% v


b) 8% v


c) 9% v


d) 10% - answer-d
v v v




Goldman Sachs repos a Treasury note to J.P. Morgan for 30 days. The market value of
v v v v v v v v v v v v v v v


this Treasury note is $12 million. If J.P. Morgan takes a 5% haircut, and the repo rate is
v v v v v v v v v v v v v v v v v v


3%,
v


how much does Goldman Sachs need to pay back in 30 days in order to receive the
v v v v v v v v v v v v v v v v


Treasury note? (repo rate is quoted on a 360-day basis (MMY))
v v v v v v v v v v v


a) 13.1307 million
v v


b) 11.8864 million
v v

, c) 11.4285 million
v v


d) 11.7420 million - answer-c
v v v v




Answer this question using the following diagram. The red line in the following depicts
v v v v v v v v v v v v v


vbond price as a function of yield. Suppose the current yield is 𝑌0. When yield increases
v v v v v v v v v v v v v v v


from 𝑌0 to 𝑌1, which one of the following corresponds to the price change using duration
v v v v v v v v v v v v v v v


approximation?
a) P1 - P0
v v v


b) P2 - P0
v v v


c) P2 - P1 - answer-b
v v v v v




Suppose the 6-month spot rate is 1% and the 12-month spot rate is 2%. If you want to
v v v v v v v v v v v v v v v v v


borrow money for 6 months in 6 months from now and you want to lock in the rate today,
v v v v v v v v v v v v v v v v v v v


what is the interest rate you will be getting on this loan?
v v v v v v v v v v v


a) 1% v


b) 2% v


c) 3% v


d) 4% - answer-c
v v v




(True or False) In addition to the literal currency held in a bank's vault, the deposits held
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vin the Federal Reserve are also part of the cash item on a bank's balance sheet -
v v v v v v v v v v v v v v v v


vanswer-true

(True or False) In a Treasury bond auction, the coupon rate cannot be higher than the
v v v v v v v v v v v v v v v


vstop-out yield. - answer-true v v v




(True or False) All else being equal, when coupon rates go up, the Macaulay duration of
v v v v v v v v v v v v v v v


va coupon bond increases - answer-false
v v v v v




(True or False) The principal-agent problem would not arise if the owners of the firm had
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vcomplete information about the activities of the managers. - answer-true
v v v v v v v v v




If the Federal Reserve wants to expand reserves in the banking system, it will:
v v v v v v v v v v v v v v


a) purchase government securities
v v v v


b) raise the discount rate
v v v v v


c) sell government securities
v v v v


d) raise reserve requirements - answer-a
v v v v v




A discount loan by the Fed to a bank causes a(n) ________ in reserves in the banking
v v v v v v v v v v v v v v v v


system and a(n) ________ in the monetary base.
v v v v v v v v


a) increase; decrease
v v


b) decrease; decrease
v v


c) decrease; increase
v v


d) increase; increase - answer-d
v v v v