FIN 480 Exam 2 Questions and Answers
Graded A+
D - Correct answer-During a so-called "flight to safety" the yield on U.S. treasuries
tends to __________________ while the prices of U.S. treasuries tends to
__________________.
A. Increase; increase
B. Decrease; decrease
C. Increase; decrease
D. Decrease; increase
C - Correct answer-A company has issued a 1-year coupon bond with a face value
of $10,000. Suppose that there is a 25% probability that the company will default
on the bond, in that case, the bond is worth $1000. What price should this bond sell
for today?
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,A. $2500
B. $7500
C. $7750
D. $10000
E. None of the above
D - Correct answer-In general, a bank makes its profits by gathering
_____________________ and issuing ___________________.
A. Short-term assets; long-term assets
B. Short-term assets; long-term liabilities
C. Short-term liabilities; long-term liabilities
D. Short-term liabilities; long-term assets
A - Correct answer-Which of the following statements is true?
A. Leverage increases expected return and increases risk.
B. Leverage increases expected return but has no effect on risk.
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,C. Leverage decreases expected return and increases on risk.
D. Leverage has no effect on expected return but increases risk.
B - Correct answer-Which of the following will increase the NPV of a project?
A. An increase in the discount rate
B. A decrease in the amount of the initial cash investment
C. A decrease in the final periods cash flow
D. Both B and C would increase the NPV
E. All would decrease the NPV
Composition of assets - Correct answer-The Federal Reserve's "open market
operations" influence interest rates that banks charge each other for over-night
loans by changing _______________ on the banking system's balance sheet.
Fall; rise - Correct answer-If a bond is upgraded, we would expect the yield to
_______________ and the assets of a bank that owned this bond to
________________.
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, Rise; fall - Correct answer-If a bond is downgraded, we would expect its risk
premium to _________________ and the assets of a bank that owned this bond to
____________________.
The price will increase, the yield will decrease - Correct answer-The probability of
a bond defaulting has decreased. In general,
_________________________________________
A moral hazard problem - Correct answer-A debt covenant is designed to limit risk
taking by borrowers, this is an attempt to solve _________________________
Asset - Correct answer-Reserves are a ___________________ to a bank.
Composition of assets - Correct answer-A bank lends existing cash as mortgage,
this mortgage is ____________________ to the bank.
D - Correct answer-If a bank's assets increase while its capital stays the same, then
A. Its liabilities must increase
B. Its leverage must increase
C. Its leverage must decrease
D. Both A and B are correct
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Graded A+
D - Correct answer-During a so-called "flight to safety" the yield on U.S. treasuries
tends to __________________ while the prices of U.S. treasuries tends to
__________________.
A. Increase; increase
B. Decrease; decrease
C. Increase; decrease
D. Decrease; increase
C - Correct answer-A company has issued a 1-year coupon bond with a face value
of $10,000. Suppose that there is a 25% probability that the company will default
on the bond, in that case, the bond is worth $1000. What price should this bond sell
for today?
©COPYRIGHT 2025, ALL RIGHTS RESERVED 1
,A. $2500
B. $7500
C. $7750
D. $10000
E. None of the above
D - Correct answer-In general, a bank makes its profits by gathering
_____________________ and issuing ___________________.
A. Short-term assets; long-term assets
B. Short-term assets; long-term liabilities
C. Short-term liabilities; long-term liabilities
D. Short-term liabilities; long-term assets
A - Correct answer-Which of the following statements is true?
A. Leverage increases expected return and increases risk.
B. Leverage increases expected return but has no effect on risk.
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,C. Leverage decreases expected return and increases on risk.
D. Leverage has no effect on expected return but increases risk.
B - Correct answer-Which of the following will increase the NPV of a project?
A. An increase in the discount rate
B. A decrease in the amount of the initial cash investment
C. A decrease in the final periods cash flow
D. Both B and C would increase the NPV
E. All would decrease the NPV
Composition of assets - Correct answer-The Federal Reserve's "open market
operations" influence interest rates that banks charge each other for over-night
loans by changing _______________ on the banking system's balance sheet.
Fall; rise - Correct answer-If a bond is upgraded, we would expect the yield to
_______________ and the assets of a bank that owned this bond to
________________.
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, Rise; fall - Correct answer-If a bond is downgraded, we would expect its risk
premium to _________________ and the assets of a bank that owned this bond to
____________________.
The price will increase, the yield will decrease - Correct answer-The probability of
a bond defaulting has decreased. In general,
_________________________________________
A moral hazard problem - Correct answer-A debt covenant is designed to limit risk
taking by borrowers, this is an attempt to solve _________________________
Asset - Correct answer-Reserves are a ___________________ to a bank.
Composition of assets - Correct answer-A bank lends existing cash as mortgage,
this mortgage is ____________________ to the bank.
D - Correct answer-If a bank's assets increase while its capital stays the same, then
A. Its liabilities must increase
B. Its leverage must increase
C. Its leverage must decrease
D. Both A and B are correct
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