FIN 480 UPDATED STUDYS EXAM QUESTIONS AND
SOLUTIONS GUARANTEE A+
✔✔In general, a 30-year mortgage will have a ___ interest rate than a 30-year Treasury
bond because it has ____risk - ✔✔Higher; higher
✔✔Which of the following will increase the NPV of a project? - ✔✔A decrease in the
discount rate
✔✔Fed' "open market operations" influence interest rates that banks charge each other
of over-night loan be changing the ___ on the banking system's balance sheet. -
✔✔Composition of assets
✔✔A bank lends existing cash as a mortgage, this mortgage is ___ to the bak -
✔✔None of the above
✔✔A bank has a lot of mortgages on its balance sheet. If default rates increase for
these mortgages, then the bank's assets will ___while the capital___ - ✔✔decrease;
decrease
✔✔Regulators tell a bank that it needs to decrease its leverage. It could _____ - ✔✔Sell
off assets and reduce its liabilities
Increase its assets and its capital
✔✔A 1-year zero coupon bond with a face value of $1,000 is estimated to have a
probability of default equal to 5%. You estimate that it will pay $100 if it defaults. How
much should this bond trade for today if the risk-free rate is 2%? What is this bond's risk
premium? - ✔✔$936; 4.8%
✔✔Regulators tell a bank it needs to reduce its liquidity risk. It could ____ - ✔✔sell 30-
year mortgages and increase its reserves
✔✔In general, a bank would prefer to attract deposits in the form of ___ because these
deposits help to minimize liquidity risk - ✔✔Large certificates of deposit
✔✔When the Federal Reserve provides a loan to a bank, the bank's assets ____ and
it's liabilities ____, while its capital _____ - ✔✔increase; increase; stay the same
✔✔A bank run is an extreme example of - ✔✔Liquidity risk
✔✔If a bank has $100 billion in assets and capital of $10 billion, it's debt-to-equity ratio
is: - ✔✔Not 4, 5, 6, & 10
, ✔✔Liquidity risk is a potential problem for banks because - ✔✔a bank funds itself with
short-term liabilites
✔✔In general, banks would like to ____ leverage by increasing _____ because this
tends to increase profits - ✔✔Increase; liabilities
✔✔An investment costs $400 and has a 25% probability of returning $200; a 25%
probability of returning $500; and a 50% probability of returning $1,000; the expected
value of the investment is ___ while the Value of Risk (VaR) is ______ - ✔✔none of the
above
✔✔The current price of a $1,000 face value 1-year zero-coupon bond is $987. What is
the implied interest rate? - ✔✔1.32%
✔✔Which of the following will decrease the NPV of a project? - ✔✔An increase in the
discount rate
Increasing the amount of the initial cash investment
✔✔During a so-called "flight to safety" the yield of U.S treasuries tend to ____, while the
yield of risky assets tends to _____ - ✔✔Decrease; increase
✔✔An advantage that money has over other assets is that it - ✔✔Has lower transaction
costs to use as a means of payment than other assets
✔✔You buy a bond today for $100. Tomorrow, someone comes along and offers to
purchase the bond for $90. What does this imply about their risk premium relative to
your premium? If the bond has a $10 coupon, what is someone's yield? - ✔✔
✔✔10-year bond has ____ than a 20-year bond. A 10-year bond has ____ than a 1-
year bond. - ✔✔Less interest rate risk; more inflation risk
✔✔If a bond is downgraded, we would expect its risk premium to ____ and its yield to
____ - ✔✔Rise; rise
✔✔10-year treasury bond has ___ than a 30-year treasury bond and ___ than a 10 year
corporate bond - ✔✔Less inflation risk; less default risk
✔✔principal-agen problem is: - ✔✔a potential problem due moral hazard
✔✔Equity holders prefer ____ risky projects than debt holders. This is a _____ problem
- ✔✔More; moral hazard
SOLUTIONS GUARANTEE A+
✔✔In general, a 30-year mortgage will have a ___ interest rate than a 30-year Treasury
bond because it has ____risk - ✔✔Higher; higher
✔✔Which of the following will increase the NPV of a project? - ✔✔A decrease in the
discount rate
✔✔Fed' "open market operations" influence interest rates that banks charge each other
of over-night loan be changing the ___ on the banking system's balance sheet. -
✔✔Composition of assets
✔✔A bank lends existing cash as a mortgage, this mortgage is ___ to the bak -
✔✔None of the above
✔✔A bank has a lot of mortgages on its balance sheet. If default rates increase for
these mortgages, then the bank's assets will ___while the capital___ - ✔✔decrease;
decrease
✔✔Regulators tell a bank that it needs to decrease its leverage. It could _____ - ✔✔Sell
off assets and reduce its liabilities
Increase its assets and its capital
✔✔A 1-year zero coupon bond with a face value of $1,000 is estimated to have a
probability of default equal to 5%. You estimate that it will pay $100 if it defaults. How
much should this bond trade for today if the risk-free rate is 2%? What is this bond's risk
premium? - ✔✔$936; 4.8%
✔✔Regulators tell a bank it needs to reduce its liquidity risk. It could ____ - ✔✔sell 30-
year mortgages and increase its reserves
✔✔In general, a bank would prefer to attract deposits in the form of ___ because these
deposits help to minimize liquidity risk - ✔✔Large certificates of deposit
✔✔When the Federal Reserve provides a loan to a bank, the bank's assets ____ and
it's liabilities ____, while its capital _____ - ✔✔increase; increase; stay the same
✔✔A bank run is an extreme example of - ✔✔Liquidity risk
✔✔If a bank has $100 billion in assets and capital of $10 billion, it's debt-to-equity ratio
is: - ✔✔Not 4, 5, 6, & 10
, ✔✔Liquidity risk is a potential problem for banks because - ✔✔a bank funds itself with
short-term liabilites
✔✔In general, banks would like to ____ leverage by increasing _____ because this
tends to increase profits - ✔✔Increase; liabilities
✔✔An investment costs $400 and has a 25% probability of returning $200; a 25%
probability of returning $500; and a 50% probability of returning $1,000; the expected
value of the investment is ___ while the Value of Risk (VaR) is ______ - ✔✔none of the
above
✔✔The current price of a $1,000 face value 1-year zero-coupon bond is $987. What is
the implied interest rate? - ✔✔1.32%
✔✔Which of the following will decrease the NPV of a project? - ✔✔An increase in the
discount rate
Increasing the amount of the initial cash investment
✔✔During a so-called "flight to safety" the yield of U.S treasuries tend to ____, while the
yield of risky assets tends to _____ - ✔✔Decrease; increase
✔✔An advantage that money has over other assets is that it - ✔✔Has lower transaction
costs to use as a means of payment than other assets
✔✔You buy a bond today for $100. Tomorrow, someone comes along and offers to
purchase the bond for $90. What does this imply about their risk premium relative to
your premium? If the bond has a $10 coupon, what is someone's yield? - ✔✔
✔✔10-year bond has ____ than a 20-year bond. A 10-year bond has ____ than a 1-
year bond. - ✔✔Less interest rate risk; more inflation risk
✔✔If a bond is downgraded, we would expect its risk premium to ____ and its yield to
____ - ✔✔Rise; rise
✔✔10-year treasury bond has ___ than a 30-year treasury bond and ___ than a 10 year
corporate bond - ✔✔Less inflation risk; less default risk
✔✔principal-agen problem is: - ✔✔a potential problem due moral hazard
✔✔Equity holders prefer ____ risky projects than debt holders. This is a _____ problem
- ✔✔More; moral hazard
