BA4345 - Summer 2004 test 1

BA4345 - Summer 2004 test 1. Peter Lewin

Multiple choice, 25 questions.

Of the possible answers choose the best alternative.

This is a closed book test. Cheating will result in a zero among other possible sanctions.

Please keep this test and hand in only your scantron. Use only a 882-ES Scantron.

Solution and Grade Distribution at end.

Consider the following:

A transportation firm has to transport a precious cargo, which contains 100 pieces of valuable gold bars, from point A to point B. There is a 5% probability that the cargo will get hijacked along the way. The firm has two transportation trucks and two drivers at its disposal. (Questions 1 through 4).

Which of the following is true? The probability of both trucks getting hijacked is (you may assume that the probability of each truck getting hijacked is independent of the other)

a. .25 %

b. .5 %

c. .10 %

d. .2 %

Assume the cost of running two trucks is the same as the cost of running one truck. Then the firm should

definitely run only one truck
definitely run two tucks
flip a coin to decide what to do
not run any trucks

Assume the cost of running two trucks is twice the cost of running one truck. Then the firm should

definitely run only one truck
definitely run two tucks
flip a coin to decide what to do
not run any trucks
it is impossible to say from the information we have

If the cost of running the second truck is less than half the expected loss from running only one truck then the firm should

definitely run only one truck
definitely run two tucks
flip a coin to decide what to do
not run any trucks
it is impossible to say from the information we have

The nominal interest rate is defined as:

the actual interest rate plus the expected rate of inflation
the actual interest rate minus the expected rate of inflation
the actual rate people pay rather than the advertised rate
the money rate that we observe, inclusive of any expected inflation.

Which of the following is NOT intermediation?

lenders lend directly to borrowers
borrowers obtain their loans from banks
businesses obtain their loans from banks
lenders deposit money in banks.

7. If you use money to buy a new car, you are using money as a

a. means of payment

b. form of credit

c. source of income

d. standard of value

8. Which of the following lists of assets is in the correct order from most liquid to least liquid?

a. a dollar bill, government bonds, a house

b. a car, a small denomination time deposit, a dollar bill

c. government bonds, apartment building, money market deposit account

d. government bonds, checking accounts, parcel of land

9. When borrower-spenders raise funds in financial markets, they issue new securities in

a. an intermediated market

b. the national market

c. the secondary market

d. the primary market

10. A secondary market is one in which

a. savers place funds in financial intermediaries

b. existing securities can be bought and sold

c. new securities are issued

d. financial intermediaries make loans

11. The issuer of a bond is a

a. lender

b. saver

c. borrower

d. creditor

12. Which of the following investments do not make interest payments annually but are sold at a discount with the face value of the security paid at maturity?

a. preferred stock

b. zero coupon bonds

c. preferred bonds

d. convertible preferred stock

13. All securities share the characteristic that they represent a claim to future

a. dividend payments

b. interest income

c. cash flows

d. ownership

14. An investor who anticipates that interest rates will rise should

a. buy long on a bond futures contract

b. buy a variable-rate bond

c. sell short on a bond futures contract

d. buy preferred corporate stock

15. That segment of the market for securities which have original maturities of more than one year is called the

a. derivative securities market

b. capital market

c. money market

d. stock market

16. An example of a financial instrument in the capital market is

a. commercial paper

b. corporate bonds

c. U.S. Treasury bills

d. negotiable bank CDs

17. An example of a financial instrument in the money market is

a. corporate bonds

b. U.S. government agency securities

c. residential mortgages

d. negotiable bank CDs

18. Which of the following will suffer the smallest loss in value from rising interest rates?

a. a U.S. Treasury bond

b. a commercial mortgage

c. a negotiable CD

d. a corporate bond

19. Which of the following will suffer the largest loss in value from rising interest rates?

a. a U.S. Treasury bill

b. a corporate bond

c. a negotiable CD

d. commercial paper

20. The total amount of interest collected after two years from a $6,000 loan with a simple annual interest rate of 6 percent is equal to

a. $12,360

b. $180

c. $720

d. $6,360

21. The coupon rate is equal to the

a. present value of the bond

b. face value divided by the yield to maturity

c. real rate of return

d. interest rate printed on the face of the bond

22. Suppose an individual pays $4,000 for a $5,000-face-value coupon-bearing bond that pays $400 per year and will be held until it matures in 10 years. The current yield on this bond is

a. 6 percent

b. 8 percent

c. 5 percent

d. 10 percent

23. The yield to maturity on a bond is the

a. coupon payment multiplied by the number of payments

b. coupon payment divided by the purchase price

c. printed interest rate

d. rate of discount that makes the sum of present values for all future payments equal to the purchase price

24. Assume that a lottery winner receives $20 million in equal payments spread out over twenty years. The present value of the winnings is

a. less than $20 million

b. greater than $20 million

c. either greater than or less than $20 million, depending on the discount rate used for the calculation

d. equal to $20 million

25. The yield to maturity on a zero-coupon bond with a one-year maturity, a face value of $1,000, and a purchase price of $900 is equal to

a. 9 percent

b. 10 percent

c. 11 percent

d. 5 percent

26. If the inflation rate is expected to be 2 percent and creditors will lend only if the real interest rate is 3 percent, the nominal interest rate will be

a. 1 percent

b. 12 percent

c. 7 percent

d. 5 percent

27. An increase in interest rates causes _____________ the demand-for-loanable funds curve

a. movement up along

b. a rightward shift in

c. movement down along

d. a leftward shift in

28. The supply of loanable funds is equivalent to the

a. demand for securities

b. demand for loanable funds

c. supply of securities

d. supply of bonds

29. Which of the following would NOT cause an increase in the demand for loanable funds?

a. an increase in business borrowing

b. an increase in the public debt

c. a decrease in interest rates

d. a decrease in mortgage borrowing

30. What will cause the quantity of loanable funds supplied to increase?

a. a decrease in interest rates

b. an increase in interest rates

c. a decrease in inflationary expectations

d. an increase in inflationary expectations

31. Which of these will cause the equilibrium interest rate to rise?

a. a decrease in the demand for loanable funds

b. a decrease in the quantity of loanable funds supplied

c. a decrease in the supply of loanable funds

d. a decrease in the quantity of loanable funds demanded

32. An increase in saving by households will

a. raise the equilibrium interest rate

b. lower the price of securities

c. have no effect on the equilibrium interest rate

d. lower the equilibrium interest rate

33. The equilibrium interest rate will fall if the

a. demand for securities increases

b. supply of loanable funds decreases

c. inflation rate increases

d. demand for loanable funds decreases

34. An increase in the expected rate of inflation causes

a. a decrease in the demand for loanable funds

b. interest rates to fall

c. interest rates to rise

d. an increase in the supply of loanable funds

35. Creditors expecting lower inflation will

a. supply more loanable funds at each real interest rate

b. supply less loanable funds at each nominal interest rate

c. supply less loanable funds at each real interest rate

d. supply more loanable funds at each nominal interest rate

36. During the expansion phase of the business cycle

a. bond prices tend to rise

b. interest rates tend to rise

c. the demand for loanable funds tends to fall

d. inflationary expectations tend to fall

37. The term structure of interest rates provides a framework for analyzing securities of the same

a. class

b. yield

c. corporation

d. maturity

38. If the yield on long-term securities is greater than the yield on comparable short-term securities, the yield curve will be

a. undefined

b. in the negative quadrant

c. negatively sloped

d. positively sloped

39. Assume that two-year securities are yielding 6 percent and comparable one-year securities are yielding 8 percent. According to the pure expectations theory, the market expects next year's comparable one-year securities to yield

a. 6 percent

b. 4 percent

c. 8 percent

d. 14 percent

40. If one-year securities are yielding 5 percent but the market anticipates rates for one-year securities will rise to 7 percent, then according to the expectations theory, current two-year securities should be yielding

a. 12 percent

b. 5 percent

c. 6 percent

d. 7 percent

41. Using the pure expectations theory of term structure, a negatively sloped yield curve indicates that investors expect

a. rising short term interest rates

b. falling short term interest rates

c. falling long term interest rates

d. rising long term interest rates

42. Compared with long-term securities, the prices of short-term securities are always

a. higher

b. lower

c. less volatile

d. more volatile

43. The original maturity on U.S. Treasury notes is between

a. ten and thirty years

b. one and ten years

c. three months and one year

d. six months and three years

44. Which of the following is the most destructive of economic stability?

a. high interest rates

b. inflation

c. deflation

d. foreign exchange

45. Commercial paper is to corporate bonds as Treasury Bills are to

a. stocks

b. money

c. Treasury bonds

d. a and c of the above

46. Some types of risk are not subject to reduction by diversification. This is known as

a. systematic risk

b. non-systematic risk

c. non-reducible risk

d. paradoxical risk

47. The manager-stockholder conflict generally becomes less severe

a. the smaller the firm

b. the larger the firm

c. is unaffected by the size of the firm

d. none of the above

48. The stockholder-lender conflict refers to situations in which

a. firm owners have an incentive to understate their true riskiness in order to borrow on more favorable terms

b. firm owners have an incentive to overstate their true riskiness in order to borrow on more favorable terms

c. firm owners have an incentive to accurately reveal their true riskiness in order to borrow on more favorable terms

d. firms (managers and owners) have an incentive to become riskier after their loans are funded

e. a and d of the above

49. The manager-stockholder conflict refers to situations in which

a. ownership and control are separated

b. ownership and control are united

c. the owner is the only shareholder

d. none of the above

50. The fact that a potential borrower has more knowledge about the likely risks associated with the use of funds than a potential lender is known as the problem of:

a. moral hazard

b. adverse selection

c. asymmetric information

d. default risk

Grade distribution:

If your score was greater than or equal to your grade is:

44	A+
40	A
38	A-
37	B+
33	B
30	B-
28	C+
27	C
Else	C-

Solution: (07/11 - I made some changes and have adjusted the scores).

1. a

2. b

3. e

4. b

5. d

6. a

7. a

8. a

9. d

10. b

11. c

12. b

13. c

14. c

15. b

16. b

17. d

18. c

19. b

20. c

21. d

22. d

23. d

24. a

25. c

26. d

27. a

28. a

29. c or d

30. b

31. c

32. d

33. d

34. c

35. a

36. b

37. a

38. d

39. b

40. c

41. b

42. c

43. b

44. b

45. c

46. a

47. a

48. e

49. a

50. b