FI 412 FINAL EXAM QUESTIONS WITH COMPLETE SOLUTION2

FI 412 FINAL EXAM QUESTIONS WITH
COMPLETE SOLUTIONS



***If the Federal Reserve wants to expand reserves in the banking system, it will
c c c c c c c c c c c c c


A) purchase government securities.
c c c


B) raise the discount rate.
c c c c


C) sell government securities.
c c c


D) raise reserve requirements. - answer-A) purchase government securities.
c c c c c c c c




***If the Federal Reserve wants to lower the monetary base and the money supply, it will
c c c c c c c c c c c c c c c


A) increase bank reserves.
c c c


B) lower the discount rate.
c c c c


C) sell government securities.
c c c


D) lower reserve requirements. - answer-C) sell government securities.
c c c c c c c c




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


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


A) increase; decrease
c c


B) decrease; decrease
c c


C) decrease; increase
c c


D) increase; increase - answer-D) increase; increase
c c c c c c




***When a bank repays a discount loan to the Fed, there is a(n) ________ in reserves in
c c c c c c c c c c c c c c c c


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


A) increase; decrease
c c


B) decrease; decrease
c c


C) decrease; increase
c c


D) increase; increase - answer-B) decrease; decrease
c c c c c c




Holding everything else constant, if the federal funds rate rises, then the demand for
c c c c c c c c c c c c c


A) excess reserves rises because they have a higher return.
c c c c c c c c c


B) excess reserves falls because they have a higher cost.
c c c c c c c c c


C) required reserves falls because the cost of borrowing from the Fed is relatively
c c c c c c c c c c c c c


higher.
c


D) required reserves rises because the cost of borrowing from the Fed is relatively lower.
c c c c c c c c c c c c c c


E) reserves will not change because the Fed sets the level of required reserves. -
c c c c c c c c c c c c c c


answer-B) excess reserves falls because they have a higher cost.
c c c c c c c c c c

, Holding everything else constant, if the federal funds rate falls, then the demand for
c c c c c c c c c c c c c


A) excess reserves falls because they have a lower return.
c c c c c c c c c


B) excess reserves rises because they have a lower cost.
c c c c c c c c c


C) required reserves rises because the cost of borrowing from the Fed is relatively
c c c c c c c c c c c c c


higher.
c


D) required reserves rises because the cost of borrowing from the Fed is relatively lower.
c c c c c c c c c c c c c c


E) reserves will not change because the Fed sets the level of required reserves. -
c c c c c c c c c c c c c c


answer-B) excess reserves rises because they have a lower cost.
c c c c c c c c c c




***What is the underlying reason that causes "too big to fail?" - answer-Moral hazard
c c c c c c c c c c c c c




TRUE OR FALSE: c c


The economic meaning of Modified Duration is the interest sensitivity of a financial
c c c c c c c c c c c c


asset's price - answer-TRUE
c c c c




***TRUE OR FALSE: c c


If you hold a short position in 30-year U.S. Treasury bond futures, when interest rates go
c c c c c c c c c c c c c c c


cup you make money - answer-TRUE
c c c c c




***TRUE OR FALSE: c c


If you enter an interest rate swap agreement where you receive fixed and pay floating,
c c c c c c c c c c c c c c


cwhen interest rate goes up you make money - answer-FALSE
c c c c c c c c c




Suppose you pay a 5-year floater (the same as the floating side of an interest rate
c c c c c c c c c c c c c c c


swap). The floating rate is assumed to reset at the end of each year, and there is
c c c c c c c c c c c c c c c c c


assumed to be one payment at the end of each year. What is the Macaulay Duration of
c c c c c c c c c c c c c c c c c


this floater? - answer-1 year
c c c c c




***Managers can achieve the results of zero duration net worth by using ____________
c c c c c c c c c c c c


to hedge interest rate risk - answer-Derivatives
c c c c c c c




***TRUE OR FALSE: c c


Funding liquidity risk only arises when depositors demand immediate cash from the
c c c c c c c c c c c


bank - answer-FALSE
c c c




***TRUE OR FALSE: c c


95% VAR not only tells you the worst losses that might occur to a bank 95% of the time,
c c c c c c c c c c c c c c c c c c


but also tells you how big the losses could be during the remaining 5% of the time -
c c c c c c c c c c c c c c c c c c


answer-FALSE
c




***TRUE OR FALSE: c c


When using historical simulation to calculate VAR we should use as long an estimation
c c c c c c c c c c c c c


period as possible. - answer-FALSE
c c c c c




What is LTCM's trading strategy? State LTCM's position on "on the run" and "off the run"
c c c c c c c c c c c c c c c


bond. - answer-LTCM longs off the run and shorts on the run. On bonds trade at a
c c c c c c c c c c c c c c c c c