2003 winter

2003 winter - Money and Banking Economics 160 Dean Baim,...

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Unformatted text preview: Money and Banking Economics 160 Dean Baim, Instructor Winter 2003 First Examination Instructions 1. Place your answers on the answer sheet. 2. This examination consists of 4 sections and is w orth 100 points. The distribution of points is as follows: Points 10 questions @ 2 points ....................... .. 20 10 questions @ 4 points ....................... .. 40 2 question ............................................. .. 20 2 . g 1 C . 2 C TOTAL ........................................ .. 100 4. You will be allowed until 3:15 to complete the exam. 5. Show all your work on problems!! Incorrect answers supported by clear and substantially correct work will receive partial credit. C orrect answers unsupported by work will receive surprisingly little credit. 6. GOOD LUCK!! Winter 2003 First Exam Page 2 §l—True—False. On your scantron answer sheet, indicate if each ofthe follow ing statement is true or false. (two points each) 1. Every recession in the 20th century was preceded by a decline in the growth rate of the money supply. 2. Financial markets and institutions benefit m ore than just those who participate in the financial markets and the institutions. 3. Even those who pay cash for their purchases incur an interest cost. 4. A customer of BaimBank writes a check to herself that she deposits into her sav ings account. This transaction decreases M1 and increases M2. 5. Adverse selection arises from the fact that bad credit risk 5 are more active in the debt market as loan seekers. 6. A bond with a 5% coupon rate, a $1,000 face v alue will pay $35 a year in coupon interest when the market rate is 3.5%. 7. When the liquidity of real estate increases because real estate ag ents accept low er commissions, the demand for US Treasury securities remains the same because US Treasury securities are still m ore liquid than real estate. 8. When the liquidity effect is equally strong as the cumulative impact of the income and price effects, interest rates w ill decrease if the Fed increases the m oney supply. 9. When total assets equal total liabilities, the bank is doing well. 10. If interest rates increase a bank with more variable rate assets than liabilities w ill see its net interest income decrease. §2——Multiple choice~Select the single best answer from the alternatives given and mark the appropriate bubble on your scantron sheet (four points each). 1. The Fed used to classify overnight repurchase agreements as a component of M2. It now classifies all repurchase ag reements as M3. When this change was made: a. M1 remains the same, while M2 decreases, and M3 increases. b. M] and M3 remains the same, while M2 decreases. c. Overall, no new money was created, so there is no chang e in any of the monetary measures. d. None of the above are correct. 2. Which ofthe following can be described as involving direct finance? a. A corporation takes a loan out from a bank. b. People purchase shares funds from a mutual fund. c. A corporation with extra funds buys a short-term bond from a corporation that needs extra funds at the current interest rate. d. All ofthe above are correct. Winter 2003 First Exam Page 3 3. The Community Redevelopment Act (CRA) requires institutions that m ake business loans to make a certain percentage of those loans to small businesses located in low income neighborhoods. The regulatory goal served by the CRA is to: a. provide information. b. encourage confidence in the financial sy stem. c. promote social goals d. increase control over the money supply. 4. An investment you purchased on 17 February 1999 for $20 is now selling for $19. It has paid a $1.20 in interest over the past year. For the past year, the current yield is __ , while the capital gains were , so the total return on this has been __ . The combination of figures that completes this statem ent is: a. 6%, 5%, 1 1%, respectively. b. 5%, 6%, 1 1%, respectively. c. 6%, —5%, 1%, respectively. d. None of the above, if you do not sell the asset. 6. There is not enough information to tell. 5. The conversion of a barter econom y to one that uses money increases efficiency by: a. reducing the transaction costs of a eng aging in an exchange. b. promoting specialization. c. assisting in better decision making. d. guaranteeing a safe method of transporting purchasing power from today to the future. e. All but “(1” are correct. Use the following information to answer questions six and eight Asset A’s returns will increase by 3% to the same stimulus that causes the m arket returns to increase by 3%. When a market shock causes the market returns to decrease by 2%, the asset A returns decrease by 2%. 6. The beta for asset A is a. l b. 2 c. 3 d. None of the above. 7. Given the information above, Asset A’s returns will duplicate the market returns for any given period. This statement is: a. true b. false Winter 2003 First Exam Page 4 8. If the risk-free rate is 4%, and the risk premium on the market is 8%, the expected return on asset A is: a. 8%. b. 10%. c. l2%. d. 20% 6. there is not enough information to answer this question. 9. Loans, reserves, and investment in US Treasury bills. Place these in the correct order, g oing from most liquid to least liquid: a. loans, reserves, investments in US Treasury bills. b. investments in US Treasury bills, reserves, loans. c. investments in US Treasury bills, loans, reserves. d. reserves, investments in US Treasury bills, loans 10. Which of the following serve(s) as a bank’s protection against unexpected deposit outflows: a. excess reserv es b bank capital c. very liquid assets like US Treasury bills. :1 all ofthe above. Economics 160, Money and Banking First Examination 4.1 4.2 4.3 4.4 Name: Winter 2003 Answer Sheet §4—Choice Essay Question: Answer two of the following two essay questions. If you answer both, only the first two answers will be graded. (ten points) The following statement was made recently by a speaker to a conference held for members of board of directors and executives of credit unions: Credit unions need to make loans in order to survive. It should be no problem loaning out more than 90% of your deposits in today’s environment. When dealing with your members (credit unions call their customers members, since you have to join the credit union to deposit funds at the credit union)., you have to encourage them to borrow from the credit union, because you can do it fast, easily, and they have to act now to take advantage of the low interest rates before the rates increase. If abank or credit union felt interest rates truly were at their lowest point, what would be the impact on the bank’s net interest income if it were to commit 90% of its deposits to loans with a four and five year lives (such as car loans) and interest rates increased? Right after the Civil War, the United States began to buy back the reenback currency it had printed to finance the war so that the US currency could return to t e gold standard. The result of this policy was to reduce the money supply in the US steadily declined over the years 1865— 1895. As might be expected, the reduction in the money supply over these years caused the price level to decrease as well. Alaskan gold discoveries in the late 19th century reversed this trend. Many of the veterans of the Civil War took the opportunity of the war’s end to begin farms. This required them to make sizable long term loans to finance the purchases and improvements which were necessary in entering and maintaining farms. The unexpected decision by the US Treasury to redeem the greenbacks is often mentioned as one of the factors contributing to the rural unrest during the last half of the 19th century leading up to the Populist movement in American politics, culminating in William Jennings Bryan’s famous “Cross of Gold” speech. In a clearly written essay, which uses whatever appropriate tools of analysis that ou have been exposed to in this class, explain wh the decision to redeem the reenbacks wou d create hardships on the farmers, and wou d lead the farmers to brand tfiose who supported the redemption as “friends of the bankers.” On 17 December 1990, the Wall Street oumal reported that the Resolution Trust Corporation (RTC) had sold a resort in Indian We ls for $65.5 million. Construction of the loan was financed by Gibraltar Savings and Loan, a failed S&L in 1986 for $73 million. a. How would such a sale affect the owner equity of Gibraltar had it still been in business? Defend your answer with an explanation. b. When the RTC sells the resort for less than its book value, whose wealth declines? Again, an explanation would be an important part of your answer. You purchased abond on 21 March 2002 for $900. The bond has a face value of $1,000, and has a 4.5% coupon, and a maturity date of 21 March 20 04. The market rate today (21 March 2003) is 5.55%. How much of a return have you earned on the bond over the past year? Show the work you used to get this answer. YOUR ANSWER TO SECTION FOUR SHOULD BEGIN ON THE NEXT PAGE Name: r Economics 160 First Exam Winter 2003 Answer Sheet Privacy Box: C] This here is aprivacy box. If you would like your exam returned directly to you, and not left in alphabetical order for you to pick up on stage before class, then check this box. If you check the box, you will onl be able to pick up the midterm during office hours (Wednesda between noon an 1:30 PM). Honesty Box When you have finished the exam, please read the following pledge. If it applies to you, lease complete the pledge by signing y ur name. If you can not 0 so honestly, then leave it b ank and a score of “0” will be assigned to this exam, but no other sanctions will be imposed. If, however, you sign the pledge and it is determined that the pledge is not applicable the maximum sanctions possible will be pursued. On my honor, I have neither given nor received unauthorized aid in this exam. §I True False In the following spaces, circle whether you think the corresponding statement is true or false. (two ?2 Multiple Choice 11 the following spaces circle the alternative that represents the single best alternative for the ' multile choice examination. Economics 160, Money and Banking Name: First Examination Winter 2003 Answer Sheet §3-Mandatory Essay Question: You must answer all questions inthis section. pllaces restrictions on investments that its citizens can make 3.1 The Japanese government reportedly overseas. Begin with a market in equi brium that represents the Japanese bond market with no restrictions. If the restrictions are imposed and they are successful in eliminating all, or some, of the international alternatives Japanese savers would have, what is the impact on the Japanese bond market, including the equilibrium interest rates? (10 points) The restrictions pat on Japanese investors, would mean there are not as many investment options for the Japanese investor. in turn, that means the demand would be higher for the bonds in which the Japanese investors may invest. These will include Japanese government bonds. This will cause the price ofjapanese hands to increase, and the interest rates to decrease. A graphical example of the Japanese bond market would be: 3.2 In a proposal to alter banking regulation, the US Treasury suggested that well capitalized banks be allowed to carry stocks as an asset. How does such a proposal reflect a more modern view of risk when compared to the existing regulations that prohibit banks from holding stock because it was thought stock prices fluctuate too muc to be safe for banks to hold? The proposed regulations recognize that it is not the variability of the individual asset that is the relevant measure of risk, but rather the degree. of variability that the asset brings to a portfolio of risk. Stock, by itself, may have a great deal of variation to its returns, when added to a portfolio of other assets, the portfolio may have lower variability. For example, if a portfolio is made up of ponds and loans, stocks may reduce the variability of a portfolio’s returns if the stocks ‘ returns move in the opposite direction of bonds. Economics 160, Money and Banking Name: First Examination Winter 2003 Answer Sheet Question # 4. Answer to 4.1 ’ ' rates were going to increase in the future, 9 term loans. As the interest id have to pay their depositors more, but would be getting no more interest income from their loans if the rates were fixed. 50 encouraging members to take out loans now, while interest rates are low would "f the credit union felt rates would increase. rates increased, they won Answer to 4.2 If interest rates were fixed on the loans that were made to the farmers, and if es to be higher than they were due to the both parties expected inflation rat n the real rate of interest on the loans was redumption of the greenbacks, the higher than expected. This would mean that the bankers would receive a higher than expected real rate, Which was paid by the farmers. Answer to 4.3 a) The decrease in value from $73 million to $65.5 million would be represented as a decrease in owner equity. This is because there is no other reduction in assets, and creditors and depositors are not expected to share in the bank’s loss. Therefore, the reduction of $ 7.5 million would have to be absorbed by the owners. b) When the RTC sells the bank, the taxpayers’ wealth d taxpayers that are funding the RTC. eclines since it is the Answer to 4.4 The investor paid $900 for the bond. Over the year he or she received $45 in cash (interest). The bond now has a price of $990.05 (=51,045/(1.055)). This a $45 in cash and ad $90.05 capital gain. This means means the investor receive the investor received $135.05 from a $900 investment. This is a 15% (=$135.05/$900) return. ...
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2003 winter - Money and Banking Economics 160 Dean Baim,...

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