FIN 6320 Money and Capital Markets, Spring
2004 – Test 2. Peter
Lewin.
Please read the
following carefully:
Multiple Choice – 25 questions. Please use a 50 question scantron (882-ES)
with a pencil. Hand in only the scantron
(you may keep this question paper).
This is a closed book exam. Cheating will result in a zero (among other
possible sanctions).
Among the possibilities given
in each question select the best alternative.
Solution and grade distribution at end.
1.
The current price of a government bond is $920.
The bond pays $90 in interest this year. At the end of the current year, the
bond matures, and the principal of $1,000 is repaid. What is the return to the
holder of this bond?
a.
9 percent
b.
8 percent
c.
17 percent
d.
1 percent
2.
The standard deviation around an expected value
is a useful measure of
a.
deviation of an asset's
actual returns from its expected returns.
b.
the difference between
the best-case return of an asset and its worst-case return.
c.
expected value of an
asset.
d.
economic value of an
asset.
3.
If an investor holds two risky assets with a
perfect negative correlation, then risk
a.
is increased.
b.
is reduced by 50
percent.
c.
falls to zero.
d.
is unaffected.
4.
Portfolio diversification is ineffective when
a.
assets in the portfolio
have precisely the same pattern of returns.
b.
assets in the portfolio
are uncorrelated.
c.
assets in the portfolio
have negative correlations.
d.
Portfolio diversification is ineffective in each
of the above scenarios.
5.
Firms with a continuous need for working capital
financing will probably want to have __________ with a bank.
a.
a line of credit
b.
individually negotiated loans
c.
trade credit
d.
repurchase agreements
6.
An "unsecured" loan is one
a.
that is pending
approval by a bank loan committee.
b.
in which the borrower
is delinquent in loan payments but has not formally defaulted on.
c.
which has collateral.
d.
with no stated
collateral.
7.
A __________ may agree to waive a restrictive
covenant, especially if doing so appears to make the loan __________.
a.
borrower; no riskier
b.
lender; riskier
c.
lender; no riskier
d.
borrower; riskier
8.
Private placements avoid
a.
the primary market.
b.
restrictive agreements.
c.
public disclosure of
financial information that is required of securities that are registered with the
SEC.
d.
the need for
collateral.
9.
Large companies with good credit ratings tend to
rely on __________ for short-term financing.
a.
the commercial paper market
b.
equity
c.
private placements
d.
finance companies
10.
Asymmetric information is a particular problem for
__________ firms or firms with __________ relationship with a particular
lending institution.
a.
large; a longstanding
b.
large; only a recent
c.
small; only a recent
d.
small; a longstanding
11.
The putting up of outside collateral is
a.
a signal of a low-quality
borrower.
b.
one way of dealing with
the moral hazard problem.
c.
a signal of a
high-quality borrower.
d.
one way of dealing with
the adverse selection problem.
12.
The possibility that a borrower will break a
promise made to the lender after the loan is made is one form of
a.
the moral hazard
problem.
b.
outside collateral.
c.
the adverse selection
problem.
d.
inside collateral.
13.
"Insider trading" laws are meant to
prevent
a.
foreign investors from
gaining controlling interest in
b.
the issuing of bonds
for the purpose of buying stock.
c.
the executives of a
corporation from holding a majority of its outstanding shares.
d.
buying or selling
shares based on information not available to the public.
14.
Margin requirements on stocks are set by
a.
the National
Association of Securities Dealers.
b.
the
c.
the Securities Exchange
Commission.
d.
the Federal Reserve
System.
15.
Our "dual" banking system refers to
a.
federal and state
chartering and supervision of commercial banks.
b.
commercial banks and
thrifts.
c.
stockholder-ownership
and depositor-ownership of depository institutions.
d.
banks that are members
and non-members of the Fed.
16.
The regulator that determines the permissible
activities any bank may engage in is the
a.
Comptroller of the Currency.
b.
Federal Reserve.
c.
House Banking Committee.
d.
FDIC.
17.
The existence of multiple federal bank
regulatory authorities has been permitted to continue because
a.
many regulatory
authorities are necessary to insure the safety of depositor's funds.
b.
different types of
banks require different kinds of regulation.
c.
the legislative will to
replace the current regulatory system has been lacking.
d.
the regulators
coordinate their activities well enough to avoid differences.
18.
In bank regulation in the United States there is
a strong emphasis on
a.
maximizing depositor
risk.
b.
limiting depositor
risk.
c.
limiting depositor
returns.
d.
maximizing depositor
returns.
19.
Of the two conflicts, __________ get(s) more
severe the larger the firm.
a.
manager-stockholder conflict
b.
the stockholder-lender conflict
c.
both
d.
neither
20.
Small firms borrow from
"monitoring-intensive" financial intermediaries in __________
financial systems.
a.
socialist
b.
banking-oriented
c.
banking- and markets-oriented
d.
markets-oriented
21.
__________ buy or sell futures contracts to
reduce their exposure to the risk of future price movements in the underlying
asset.
a.
Speculators
b.
Hedgers
c.
Arbitrageurs
d.
None of the above.
22.
In order to reduce market risk associated with bonds
held in inventory, a dealer can
a.
take a long position in
bond futures.
b.
use settlement by
offset procedures.
c.
purchase bonds at the
mark-to-market settlement price.
d.
take a short position
in bond futures.
23.
In the options market, the right to buy an
underlying asset rests with
a.
call buyers.
b.
put sellers.
c.
call sellers.
d.
put buyers.
24.
An option premium is
a.
paid by the long to the
short as soon as the option is purchased.
b.
paid by the short to
the long as soon as the option is purchased.
c.
paid by the long to the
short when the option is exercised.
d.
paid by the short to
the long when the option is exercised.
25.
A call option has a strike price of $80. If the
underlying stock is selling for $83 on the expiration date, the intrinsic value
of the call option is __________ per share.
a.
$3
b.
$83
c.
$0
d.
$163
GRADE DISTRIBUTION:
If you score is greater
than or equal to: your grade is
|
22 |
A |
|
21 |
B+ |
|
20 |
B |
|
18 |
C+ |
|
17 |
C |
|
ELSE |
C- |
Solution:
1.
c
2.
a
3.
c
4.
a
5.
a
6.
d
7.
c
8.
c
9.
a
10.
c
11.
c (I am throwing this out.)
12.
a
13.
d
14.
d
15.
a
16.
b
17.
c
18.
b
19.
a
20.
c
21.
b
22.
d
23.
a
24.
a
25.
a