f826_final_f02_ans

f826_final_f02_ans - Finance 826 Final Professor Helwege...

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Finance 826 Professor Helwege Final Fall 2002 You have the entire class period to finish this exam. You may use a calculator, scrap paper, and a writing tool to complete this exam. You may hand in the scrap paper (with your name on it) to help you receive partial credit for incorrect answers. Total points=100. Part I. Answer all questions in this section to receive full credit. (80 points) (4 pts.) 1. You have a taste for risk-taking and rather than placing $100,000 on red in Las Vegas, you have decided to bet on Federal Reserve behavior. For simplicity, assume that only one of two events can happen: either the Fed eases to avoid a prolonged recession and the yield curve shifts down 50 bp over the next year or the Fed does nothing. You are convinced the Fed will ease, but you might be wrong. Which of the three following bets would gain the most in value if the Fed eased? (Circle the ONE with the highest potential gain). a. Mortgage backed securities with a Macauley duration of 10 years and a WAC of 6% b. Writing a call option on a 10-year Treasury bond c. Treasury bonds with a Macauley duration of 10 years and a coupon of 6% (6 pts.) 2. For each pair of bonds below, circle the one which should have the lower yield: A Baa1-rated corporate bond maturing in A Baa2-rated corporate bond maturing in 5 years when the Treasury curve is exactly 10 years when the Treasury curve is exactly flat flat A bond issued by American Airlines that is secured A bond issued by American Airlines that is by airplanes (equipment trust certificates) senior subordinated. A 30 noncall 10 bond maturing in 2015 issued by A 30 noncall 10 bond maturing in 2015 issued a firm whose rating has gone from Ba2 to Baa1 by a firm whose rating has dropped from AAA to BBB+
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(14 pts.) 3. Answer True or False to the following questions: a. Finance companies generally have lower costs of funding their auto loans compared to banks because they do not have to pay deposit insurance nor are they required to keep cash and reserves to meet liquidity needs. __F___ b. Factors mainly buy receivables that have high seniority according to absolute priority rule in the event of bankruptcy. _F___ c. Prudent man laws prevent defined benefit pension plans from investing a large fraction of their assets in speculative-grade bonds.__T__ d. Term life insurance, whole life insurance, and endowment life insurance are policies with no savings element. __F__ e. Cash on hand at a mutual fund never exceeds 20 percent, as withdrawals never exceed 20% in a month. __F___ f. Long-term returns on IPOs average 20 percent, or about 5 percent more than the return on the S&P 500. __F___ g. The number of banks in the U.S. fell during the Great Depression, but has since been stable. __F__
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f826_final_f02_ans - Finance 826 Final Professor Helwege...

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