AFW272/362Mid Term_2022

AFW362/272 MID TERM EXAM
JUL 2022

1.5 HOUR, answer in https://forms.office.com/r/2Bhz7Rbf3J

Q1. Name
Q2. Student ID

Answer all questions Q3 – Q35

3. Treasury notes, Treasury bonds, and municipal bonds are default risk free.
⊚ true
⊚ false

4. An unsecured bond that has no specific collateral other than the general creditworthiness of
the issuing firm is called a debenture.

⊚ true
⊚ false

5. Bonds rated below Baa by Moody's or BBB by S&P are junk bonds.
⊚ true
⊚ false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or
answers the question.
6. What factors are encouraging financial institutions to offer overlapping financial services such
as banking, investment banking, brokerage, etc.?
1.I. Regulatory changes allowing institutions to offer more services
2.II. Technological improvements reducing the cost of providing financial services
3.III. Increasing competition from full-service global financial institutions
4.IV. Reduction in the need to manage risk at financial institutions

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A) I only
B) II and III only
C) I, II, and III only
D) I, II, and IV only
E) I, II, III, and IV

7. A corporation seeking to sell new equity securities to the public for the first time in order to
raise cash for capital investment would most likely:

A) conduct an IPO with the assistance of an investment banker.
B) engage in a secondary market sale of equity.
C) conduct a private placement to a large number of potential buyers.
D) place an ad in the Wall Street Journal soliciting retail suppliers of funds.
E) issue bonds with the assistance of a dealer.

8. Households are increasingly likely to both directly purchase securities (perhaps via a broker)
and also place some money with a bank or thrift to meet different needs. Match the given
investor's desire with the appropriate intermediary or direct security.
1.I. Money likely to be needed within six months
2.II. Money to be set aside for college in 10 years
3.III. Money to provide supplemental retirement income
4.IV. Money to be used to provide for children in the event of death
1.Depository institutions
2.Insurer
3.Pension fund
4.Stocks or bonds

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A) 2, 3, 4, 1
B) 1, 4, 2, 3
C) 3, 2, 1, 4
D) 1, 4, 3, 2
E) 4, 2, 1, 3

9. The Securities Commission (SC) doesnot:

A) decide whether a public issue is fairly priced.
B) decide whether a firm making a public issue has provided enough information for
investors to decide whether the issue is fairly priced.
C) require exchanges to monitor trading to prevent insider trading.
D) attempt to reduce excessive price fluctuations.
E) monitor the major securities exchanges.

10. Liquidity risk at a financial intermediary (FI) is the risk:

A) that promised cash flows from loans and securities held by FIs may not be paid in full.
B) incurred by an FI when the maturities of its assets and liabilities do not match.
C) that a sudden surge in liability withdrawals may require an FI to liquidate assets
quickly at fire sale prices.
D) incurred by an FI when its investments in technology do not result in cost savings or
revenue growth.
E) that an FI may not have enough capital to offset a sudden decline in the value of its
assets.

11. Depository institutions (DIs) play an important role in the transmission of monetary policy
from the Federal Reserve to the rest of the economy because:

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A) loans to corporations are part of the money supply.
B) bank and thrift loans are tightly regulated.
C) U.S. DIs compete with foreign financial institutions.
D) DI deposits are a major portion of the money supply.
E) thrifts provide a large amount of credit to finance residential real estate.

12. Classify each of the following in terms of its effect on interest rates (increase or decrease):
1.I. Perceived risk of financial securities increases.
2.II. Near term spending needs decrease.
3.III. Future profitability of real investments increases.

A) I increases: II increases: III increases
B) I increases: II decreases: III decreases
C) I decreases: II increases: III increases
D) I decreases; II decreases; III decreases
E) None of these choices are correct.

13. Which of the following bond terms are generally positively related to bond price volatility?

1.I. Coupon rate
2.II. Maturity
3.III. YTM
4.IV. Payment frequency

A) II and IV only
B) I and III only
C) II and III only
D) II only
E) II, III, and IV only

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14. A security has an expected return less than its required return. This security is:

A) selling at a premium to par.
B) selling at a discount to par.
C) selling for more than its present value.
D) selling for less than its present value.
E) a zero-coupon bond.

15. You would want to purchase a security if the price is ________ the present value or if the
expected return is ________ the required rate of return.

A) greater than or equal to; less than or equal to
B) greater than or equal to; greater than or equal to
C) less than or equal to; greater than or equal to
D) less than or equal to; less than or equal to

16. All is held constant, the ________ the coupon and the ________ the maturity; the ________
the duration of a bond.

A) larger; longer; longer
B) larger; longer; shorter
C) smaller; shorter; longer
D) smaller; shorter; shorter
E) None of these choices are correct.

17. The primary policy tool used by the Fed to meet its monetary policy goals is: 5
Version 1

A) changing the discount rate.
B) changing reserve requirements.
C) devaluing the currency.
D) changing bank regulations.
E) open market operations.

18. All else held constant, if the Fed was targeting the quantity of money supplied and money
demand dropped, the Fed would likely ______________. If the Fed was instead targeting interest
rates and money demand dropped, the Fed would likely _______________.

A) increase the money supply; do nothing
B) do nothing; decrease the money supply
C) decrease the money supply; do nothing
D) do nothing; increase the money supply
E) increase the money supply; decrease the money supply

19. The major asset of the Federal Reserve is:

A) U.S. Treasury securities.
B) depository institution reserves.
C) currency outside banks.
D) vault cash of commercial banks.
E) gold and foreign exchange.

20. The Fed funds rate is the rate that:

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A) banks charge for loans to corporate customers.
B) banks charge to lend foreign exchange to customers.
C) the Federal Reserve charges on emergency loans to commercial banks.
D) banks charge each other on loans of excess reserves.
E) banks charge securities dealers to finance their inventory.

21. A decrease in reserve requirements could lead to an:

A) increase in bank lending.
B) increase in the money supply.
C) increase in the discount rate.
D) increase in bank lending and an increase in the money supply.
E) increase in bank lending and an increase in the discount rate.

22. If the Fed wishes to stimulate the economy, it could:1.I. buy U.S. government securities.
2.II. raise the discount rate.
3.III. lower reserve requirements.

A) I and III only
B) II and III only
C) I and II only
D) II only
E) I, II, and III

23. Assume oil prices rise in the United States, generating concerns that inflation may increase.
If the Fed wishes to ensure that inflation does not get out of hand, the Fed could:

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A) intervene in the currency markets to push the value of the dollar down.
B) decrease the discount rate.
C) lower the target Fed funds rate.
D) lower the target money supply growth rate.
E) reduce reserve requirements at banks.

24. The Federal Reserve does all but which one of the following?

A) Conducts monetary policy
B) Supervises and regulates bank activities
C) Serves as the commercial bank for the U.S. Treasury
D) Operates check clearing and wire transfer facilities
E) Insures deposits

25. What are the intended consequences from charging an interest on excess reserves by Central
banks?

A) Banks lend less money.
B) Interest rates increase.
C) Banks deposits increase.
D) Banks lend more money.
E) All of these choices are correct.

26. LIBOR is generally _______________ the Fed funds rate because foreign bank deposits are
generally ________________ than domestic bank deposits.

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A) greater than; less risky
B) less than; more risky
C) the same as; equally risk
D) greater than; more risky
E) less than; less risky <i></i>

27. Standard revenue bonds are:

A) backed by the full taxing authority of the municipality.
B) collateralized by the earnings from a specific project.
C) backed by mortgages.
D) backed by the U.S. Treasury.
E) always offered with a best efforts offering. <i></i>

28. Bearer bonds are bonds:

A) with coupons attached that are redeemable by whoever has the bond.
B) where the registered owner automatically receives bond payments when scheduled.
C) in which the issue matures on a series of dates.
D) issued in a different currency than the bond issuer's home currency.
E) issued in a different country than the bond issuer's home country.

29. Common stocks typically have which of the following that bonds do not have?1.I. Voting
rights
2.II. Fixed cash flows
3.III. Set maturity date
4.IV. Tax deductibility of cash flows to investors

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A) I only
B) I, II, and IV only
C) II, III, and IV only
D) IV only
E) I, II, III, and IV

30. If the net proceeds are greater than the gross proceeds in an underwritten offering, then:

A) the investment banker made a profit on the spread.
B) the issuing company underpriced its securities.
C) the issue fails to occur.
D) the SEC rescinds the issue.
E) None of these choices are correct.

31. The preemptive right is designed to:

A) allow management to diffuse stock ownership of any voting power.
B) allow managers to preempt a stock offering if they do not like the terms of the deal.
C) allow existing shareholders the right to sell their existing shares before the new offer.
D) allow existing shareholders to buy shares of the new offering if they desire.
E) None of these choices are correct.

32 Suppose that over the last 10 to 15 years significantly large numbers of investors have been
able to earn abnormal returns from using the firm's publicly-available financial information to
forecast growth in earnings and dividends. This would be evidence that the markets are not:1.I.
weak form efficient.
2.II. semistrong form efficient.
3.III. strong form efficient.

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A) I only
B) I and II only
C) III only
D) II and III only
E) I, II, and III

33. A 180-day $3 million CD has a 4.25 percent annual rate quote. If you buy the CD, how much
will you collect in 180 days?
Answer: _____________

34. A Chinese exporter sells $200,000 of toys to a French importer. The Chinese exporter
requires the French importer to obtain a letter of credit. When the bank accepts the draft, the
exporter discounts the 90-day note at a 4 percent discount. What is the exporter's true effective
annual financing cost?
Answer: _____________

35. You find the following quote for a corporate bond ($1,000 par, paying interest
semiannually):

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Issue Symbo Coupo Maturit Moody's/S&P/Fitc High Low Last Chang Yield

r ln y h e%

Name

Home HD.GF 4.625 August Baal/BBB+/BBB+ 98.28 97.36 97.72 0.286 5.49%

Depot % 2015 126

a.What was the range of the price for the given day?
b.How many dollars would you receive from each coupon payment?
c.Approximately what risk level is implied by the bond rating?
d.What would have been the closing price on the day before?

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