MIDTERM EXAMINATION
Spring 2009
MGT411- Money & Banking (Session - 2)
Solved by vuZs Soultion Team
umeed_e_subh <umeed.e.subh@gmail.com
Zubair Hussain <zubair254@gmail.com>
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Time: 60 min
Marks: 50
Question No: 1 ( Marks: 1 ) - Please choose one
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Which of the following statement is true about the relationship between bond ,coupon payment and interest?
► Coupon payments fall, the interest rate falls, and Bond price will rise
► Coupon payments rise, the interest rate falls, and Bond price will rise
► Coupon payments fall, the interest rate falls, and Bond price will fall
► Coupon payments rise, the interest rate falls, and Bond price will fall
The value of the coupon bond rises when the yearly coupon payments rise and when the interest rate falls
Lower interest rates mean higher bond prices and vice versa.
Question No: 2 ( Marks: 1 ) - Please choose one
Which of the following institution takes direct deposit from customer and gives loan to customer directly?
► Zarai Tarkaytee Bank LTD
► Soneri Bank
► Khushali Bank
► Credit union
Question No: 3 ( Marks: 1 ) - Please choose one
Which of the following is NOT true for financial institutions?
► It reduces the transaction cost
► It reduces the information cost
► It reduces the asymmetric information
► It doesn't make long term loans
Question No: 4 ( Marks: 1 ) - Please choose one
Often a bank will require a loan officer to make personal visits on customers with loans outstanding. This is encouraged because:
► The bank worries about competitors trying to steal their customers
► The bank wants to make sure the business is still there
► The bank likely has excess funds available and hopes to make another loan to the business
► This is an effective monitoring technique and should reduce moral hazard
Question No: 5 ( Marks: 1 ) - Please choose one
Della's Donut Shop goes out of business due to decreasing sales resulting from the dramatic increase in people on low carbohydrate diets. The decrease in business also results in Della's defaulting on the loan they have with the bank. This is an example of:
► Asymmetric information in financial markets
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► Lack of perfect information in financial markets
► Moral hazard in financial markets
► Adverse selection
Question No: 6 ( Marks: 1 ) - Please choose one
A bank can usually offer a saver a higher return for the same risk because:
► The bank can usually purchase assets at a higher cost than any one saver
► The bank can pool the resources of larger savers and purchase lower denominated assets
► Economies of scale can be applied by the bank in its purchase of assets
► None of the given options
Question No: 7 ( Marks: 1 ) - Please choose one
Without the ability of financial intermediaries to pool the resources of small savers:
► Borrowers needing large amounts of money would find it less costly to obtain the funds
► The economy would likely grow faster
► People would likely save more
► The risk associated with lending would increase
Question No: 8 ( Marks: 1 ) - Please choose one
The process of financial intermediation:
► Creates a net cost to an economy but is unavoidable
► Is used primarily in underdeveloped countries
► Is always used when a borrower needs to obtain funds
► Increases the economy's ability to produce
Question No: 9 ( Marks: 1 ) - Please choose one
The Theory of Efficient Markets:
► Allows for higher than average returns if the investor takes higher risk
► Says Insider-information makes markets less efficient
► Rules out high returns due to chance
► Assumes people have equal luck
Question No: 10 ( Marks: 1 ) - Please choose one
If we ignore risk, the dividend discount model says the fundamental price of a stock is simply:
► The current dividend divided by the interest rate less the dividend growth rate
► The annual growth rate of the dividend minus the interest rate divided by the current dividend
► The current dividend divided by the interest rate plus the dividend growth rate
► The current dividend divided by the dividend growth rate less the interest rate
Question No: 11 ( Marks: 1 ) - Please choose one
Which statement shows the major difference between stocks and bonds?
► Bonds pay their owners dividends while stocks pay interest
► Bonds pay their owners interest while stocks pay dividends
► Interest on a bond is not guaranteed while dividends on stock are legally required
► Bonds represent ownership while stock represents debt
Question No: 12 ( Marks: 1 ) - Please choose one
The concept of limited liability says a stockholder of a corporation:
► Is liable for the corporation's liabilities, but nothing more
► Cannot receive dividends that exceed their investment
► Cannot own more than fiver percent of any public corporation
► Cannot lose more than their investment
Question No: 13 ( Marks: 1 ) - Please choose one
The liquidity premium theory suggests that yield curves should usually be:
► Up-sloping
► Inverted
► Flat
► Up-sloping through year 1, then flat thereafter
Question No: 14 ( Marks: 1 ) - Please choose one
Which of the following statement is true about two bonds having same default rate and tax status but different maturity dates?
► It creates no effect on yield of bonds
► Both of them have different yield
► Liquidity risk factor should be taken into consideration
► It is impossible that default risk and tax status of two bonds are same
Question No: 15 ( Marks: 1 ) - Please choose one
A business cycle downturn shifts the bond supply to the:
► Right
► Left
► No change
► None of the given options
A business-cycle downturn shifts the bond supply to the left and the bond demand to the left. In this case the bond price can rise or fall, depending on which shift is greater. But interest rates tend to fall in recessions, so bond prices are likely to increase.
Question No: 16 ( Marks: 1 ) - Please choose one
An increase in the expected inflation shifts the bond demand to the _________
► Right
► Left
► No change
► None of the given options
Question No: 17 ( Marks: 1 ) - Please choose one
An increase in the expected inflation shifts the bond supply to the _________
► Right
► Left
► No change
► None of the given options
Question No: 18 ( Marks: 1 ) - Please choose one
Current yield did NOT measure which of the following?
► Return arises from coupon payment
► Capital gain and loss
► Return arises from bond holding till maturity
► All of the given options
Question No: 19 ( Marks: 1 ) - Please choose one
Current yield is equal to which of the following?
► Price paid / yearly coupon payment
► Price paid *yearly coupon payment
► Yearly coupon payment / face value of bond
► Yearly coupon payment / price paid
Question No: 20 ( Marks: 1 ) - Please choose one
The relationship between the price and the interest rate for a zero coupon bond is best described as _________.
► Volatile
► Stable
► Inverse
► No relationship
Question No: 21 ( Marks: 1 ) - Please choose one
Which of the following statement is NOT true for consols?
► Consol offers only periodic interest payments
► Borrower never repays the principal
► There are Government and as well as private consols
► Price of a consol is the present value of all the future interest payments
There are no privately issued consols because only governments can credibly promise to make payments forever
Question No: 22 ( Marks: 1 ) - Please choose one
___________ is the strategy of reducing overall risk by making two investments with opposing risks.
► Spreading the risk
► Standard deviation
► Hedging the risk
► Variance
Hedging is the strategy of reducing overall risk by making two investments with opposing risks so that when one does poorly the other does well and vice versa.
Question No: 23 ( Marks: 1 ) - Please choose one
The variance is generally less useful than the standard deviation on which of the following reasons?
► Variance is easier to calculate
► Variance is a measure of risk, whereas standard deviation is a measure of return
► Variance isn't calculated in the same units as payoffs where as standarad deviation is
► Both are equally useful
Question No: 24 ( Marks: 1 ) - Please choose one
Suppose a $1000 investment has a fixed return of 5% per annum, which one of the following statement is NOT true for this investment?
► Its return can be calculated
► It's a risky investment
► It will give return annually
► Its future value is known
Question No: 25 ( Marks: 1 ) - Please choose one
If a bond sells at a premium, where price exceeds face value, then we would expect to see:
► Market interest rate the same as the coupon rate
► Market interest rates above the coupon rate
► Market interest rates below the coupon rate
► None of the given options
Question No: 26 ( Marks: 1 ) - Please choose one
The rule of 72 says that at 12% interest $100 should become $200 in about _________.
► 72 months
► 100 months
► 12 years
► 8.2 years
Question No: 27 ( Marks: 1 ) - Please choose one
A borrower is promised a $100 payment (including interest) one year from today. If the lender has an 8% opportunity cost of money, he should be willing to accept what amount today?
► Rs.100.00
► Rs.108.20
► Rs.92.59
► Rs.96.40
Question No: 28 ( Marks: 1 ) - Please choose one
___________ is the today's value of a payment that is promised to be made in the future.
► None of the given options
► Future value
► Present value
► Agreed value
The present value is the value today of a payment that is promised to be made in the future. It is the amount that must be invested today in order to realize a specific amount on a given future date
Question No: 29 ( Marks: 1 ) - Please choose one
The future value of $100 left in a savings account earning 4.5% for two and a half years is best expressed by:
► $100(1.045)3/2
► $100( 0.45)2.5
► $100(1.045)2.5
► 100 x 2.5 x (1.045)
Question No: 30 ( Marks: 1 ) - Please choose one
What is relationship between interest rate and future value?
► Lower the interest rate higher will be the future value
► Higher the interest rate higher will be the future value
► Higher the interest rate lower will be the future value
► Interest rate has no effect on future value
Question No: 31 ( Marks: 1 ) - Please choose one
Which of the following is a financial market in which a borrower obtains funds from a lender by selling newly issued securities?
► Secondary market
► Primary market
► Over the counter market
► Centralized market
In a primary market a borrower obtains funds from a lender by selling newly issued securities. Most of the action in primary markets goes on out of public view. Most companies use an investment bank, which will determine a price and then purchase the company's securities in preparation for resale to clients; this is called underwriting. We hear more about the secondary markets where people can buy and sell existing securities.
Question No: 32 ( Marks: 1 ) - Please choose one
Repurchase agreements are:
► The most liquid of all money market instruments
► In use for hundreds of years
► Loans of deposits at the Federal Reserve
► Short term loans with Treasury bills as collateral
Question No: 33 ( Marks: 1 ) - Please choose one
Considering the value of a financial instrument, the longer the time until the promised payment is made:
► The less valuable is the promise to make it since time is valuable
► The greater the risk, therefore the promise has greater value
► The more valuable is the promise to make it
► It has no effect on the value of instrument
Question No: 34 ( Marks: 1 ) - Please choose one
A Financial Intermediary:
► Is an agency that guarantees a loan
► Is involved in direct finance
► Would be used in indirect finance
► None of the given options
Question No: 35 ( Marks: 1 ) - Please choose one
The Consumer Price Index (CPI):
► Tends to overstate inflation due to substitution bias
► Tends to understate actual inflation
► Is more accurate than the GDP deflator
► Is based on basket of goods that changes monthly with consumer expenditures
Question No: 36 ( Marks: 1 ) - Please choose one
All of the following are the components of M2 EXCEPT?
► M1
► Saving deposits
► Travelers cheques
► Mutual funds shares
Question No: 37 ( Marks: 1 ) - Please choose one
Which of the following statement truly represents the main difference between debit card and store value card?
► Debit card is operated by ATM machine while Store value card doesn't
► Debit card appearance is different from Store value card
► Debit card is not specific for user but store value card is specific
► Debit card is specific for user but store value card is not
Question No: 38 ( Marks: 1 ) - Please choose one
In electronic transfer the most common method is to send money through a system maintained by Federal reserve called __________.
► Fedex
► Fedwire
► Fedtransfer
► Fedmoney
One wire transfer system used generally to transfer large dollar amounts instantaneously and which is provided by the US Federal Reserve System
Question No: 39 ( Marks: 1 ) - Please choose one
The one that you get from bank when you open your checking account is __________.
► Debit card
► Credit card
► Store value card
► Customer card
Question No: 40 ( Marks: 1 ) - Please choose one
Mr. Ghazanfar has assets which when converted to cash, yield more currency then he needs to pay his debt. Which of the following statement best suites Mr. Ghazanfar?
► Mr. Ghazanfar earns good income
► Mr. Ghazanfar is a wealthy person
► All of the given options
► Mr. Ghazanfar has a lot of money at point in time
Question No: 41 ( Marks: 10 )
What are five core principles of financial system? Discuss it in detail.
Answer:
Financial System:
In finance, the financial system is the system that allows the transfer of money between savers and borrowers.
Five Core Principles of the Financial System & Details:
According to Mr. Brown, five core principles of Financial System, as outlined below:
1) First, transparency means bringing the so-called 'shadow banking system' into the regulatory system, not operating parallel to it. And across the world, financial institutions need to be supervised not on what name they give themselves - be it banks, hedge funds or investment funds - but on what they do. We also need to ensure that all jurisdictions - such as offshore havens - and all important markets are covered by global supervision.
2) Second accountability means boardroom integrity, where boards of directors must understand and be held responsible for the risks they undertake. And credit rating agencies need to be free of conflicts of interest and be properly licensed.
3) Third, responsible risk taking means an end to the excesses from short-termism; instead rewarding people for long term success not short term deals. But to be most effective it has to be done internationally. A race to the bottom is in no one's interest. So we should agree a new international approach to pay and bonus structures.
4) The fourth principle of prudential regulation means taking into account the effect of a bank's capital, liquidity, solvency and conduct on the whole financial system.
5) Finally, he stated: "Lastly, international co-operation lies at the heart of all our changes - recognizing that financial institutions that work across borders need to be under cross border supervision too and regulators in one country must co-operate far more closely with regulators in other countries to create a global network of regulation that captures the risks to us all.
Other Principles of Financial are below:
a. Facilitate Payments
b. Channel Funds from Savers to Borrowers
c. Enable Risk Sharing
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