Fin 6320, Spring 2002 - Test 1.                       Peter Lewin.

 

Please read the following carefully:

 

Multiple Choice -25 questions.  Please use a half page 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.        Which of the following is  not true?

a.       Money is a means of payment

b.       Money is an evolved unintended outcome of human actions

c.       All moneys evolved, directly or indirectly, from a commodity that was once not money

d.       Governments invariably get involved and end up monopolizing the issue of money 

e.       Money must be "legal tender" enforced by the government in order to work properly

 

2.        If money is a means of payment it must also be

a.       a unit of account

b.       a store of value

c.       a medium of exchange

d.       issued by the government

e.       b and c of the above

 

3.        The measure of the money supply called M1 consists of

a.       currency outside banks plus checkable accounts Eurodollars

b.       currency outside banks plus checkable accounts plus money market deposit accounts

c.       currency outside banks plus checkable accounts plus travelers' checks

d.       currency outside banks plus checkable accounts plus small denomination time deposits

 

4.        An asset that can be quickly turned into the medium of exchange with minimal loss is said to possess a high degree of

a.       accountability                 b.  liquidity                 c.  divisibility                 d.  velocity

 

5.        Savers, or surplus spending units are typically

a.       numerous

b.       small

c.       risk averse

d.       possessors of short time horizons

e.       all of the above

 

6.        Borrower-lenders, deficit spending units, are typically

a.       larger than surplus spending units

b.       risk takers

c.       fewer in number than surplus spending units

d.       also possessors of a short time horizon

e.       a, b and c of the above

 

7.        Financial intermediations exist essentially because

a.       governments designed them

b.       of bad regulation

c.       information is not free and they specialize in gathering and using valuable information

d.       by operating in large scale they spread and reduce risk

e.       c and d of the above

 

8.        In the flow of funds indirect finance occurs when

a.       funds flow from saver-lenders to borrower-spenders through financial intermediaries

b.       funds flow from saver-lenders to borrower-spenders through financial markets

c.       funds flow to saver-lenders from borrower-spenders through financial intermediaries

d.       funds flow to saver-lenders from borrower-spenders through financial markets

 

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

a.       the primary market

b.       the secondary market

c.       an intermediated market

d.       the national market

 

10.     Investment banks specialize in information on

a.       commodities

b.       certificates of deposit

c.       demand deposits

d.       primary securities

 

11.     A one-year Treasury bill with a face value of $1,000 which sells for $960 has a yield to maturity of

a.       3 percent                 b.  3.6 percent                 c.  4.2 percent                 d.  5.1 percent

 

12.     Bond prices are

a.       equal to the face value of bond

b.       equal to the real interest rate

c.       equal to the nominal interest rate

d.       inversely related to the interest rate

e.       b and c of the above

 

13.     Assume a consol (a perpetuity - it has no maturity date) with an annual coupon payment of $100 and a price of $800. The yield on this security is equal to

a.       6 percent b.  10 percent c.  12.5 percent d.  14 percent

 

14.     Assume a bond earns $100 a year for the next three years and then returns the $2,000 principle. What is the present value of this bond when the relevant interest rate is 10% (to the nearest dollar)?

a.       $175                 b.  $1,751                 c.  $17,510                 d.  $2,000                 e.  $1,000

 

15.     A rise in interest rates will cause short-term bond prices to

a.  fall less than long-term bond prices            b.  fall more than long-term bond prices

c.  rise less than long-term bond prices            d.  rise more than long-term bond prices

 

16.     If the inflation rate is expected to be 5 percent and nominal interest rate is 9 percent, then the real interest rate will be

a.       14 percent                b.  9 percent                c.  5 percent                 d.  4 percent

 

17.     Observations of the yield curve suggest that when interest rates are high and investors expect interest rates to fall, the yield curve will have a(n)

a.  upward slope              b.  downward slope

c.  horizontal slope              d.  vertical slope

 

18.     If one-year securities are yielding 10 percent but the market anticipates rates for one-year securities will rise to 14 percent, then according to the pure expectations theory, current two-year securities should be yielding

a.       12 percent                 b.  7 percent                 c.  6 percent                 d.  5 percent

 

19.     Assume that an investor pays 20 percent of his income in taxes and purchases a $1,000 corporate bond yielding 10 percent.  The after-tax yield on this bond is

a.       9 percent                 b.  8 percent                 c.  7 percent                 d.  6 percent

 

20.     Holding a group of assets reduces risk relative to holding a single asset as long as the assets

a.       are dependent on each other

b.       are positively correlated

c.       are uncorrelated

d.       do not have precisely the same pattern of returns

 

21.     Assume a portfolio in which there is equal investment in two assets that are perfectly positively correlated, with equally expected returns of 10 percent and 6 percent for asset A and 8 percent and 4 percent for asset B.  The expected yield on this portfolio is

a.       8 percent                 b.  7 percent                 c.  6 percent                 d.  5 percent

 

22.     In the futures market, the difference between the price of the futures and the underlying asset is eliminated by

a.       speculators                 b.  hedgers                 c.  arbitrageurs                 d.  longs

 

23.     In the options market, the short has the

a.       right to buy shares at a specified price

b.       obligation to buy shares at a specified price

c.       right to sell shares at a specified price

d.       obligation to sell shares at a specified price

 

24.     The value of the put option rises when the underlying asset

a.       experiences price increases

b.       experiences price declines

c.       experiences reduced volatility

d.       has a relatively short maturity

 

25.     An increase in the demand for loanable funds causes

a.       the price of securities to rise

b.       interest rates to rise

c.       the supply of securities to shift to the left

d.       the demand for securities to shift to the right

 

GRADE DISTRIBUTION:

 

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

22

A

21

B+

20

B

18

B-

17

C+

ELSE

C

 

 

Solution:

 

1

e

2

e

3

c

4

b

5

e

6

e

7

e

8

a

9

a

10

d

11

c

12

d

13

c

14

b

15

a

16

d

17

b

18

a

19

b

20

c or d

21

b

22

c

23

b or d

24

b

25

b