726midtermanswers

726midtermanswers - Finance 726 Midterm 1 Professor Helwege...

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Finance 726 Professor Helwege Midterm 1 Instructor Huston 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) if you think it will 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) (5 pts.) 1. You are the president of a bank with $100 million in assets, which have an average duration of 12 years. Besides $10 million in equity, all of the funds for these assets come from checking account deposits. You have decided to reduce the bank’s interest rate risk by changing the mix of assets in which the bank invests. Rank the following assets in terms of their desirability for this purpose. In your rankings, use 1 for the best asset type to solve the problem, 2 for the next best, etc. a. Floating rate C&I (commercial and industrial) loans that mature in 6 years ___1___ b. Five year auto loans ___2___ c. Treasury STRIPS (zero coupon Treasury bonds) that mature in 12 years. ___5___ d. 12 year semi-annual coupon Treasury bonds with a 10% coupon trading at a discount ___4___ e. 12 year semi-annual coupon Treasury bonds with a 10% coupon trading at par ___3___ (3 pts.) 2. Circle the institution below which engages in asset transformation to the greatest degree: a) A grocery store b) A mutual Fund c) A Hedge Fund d) A commercial bank (4 pts.) 3. For each pair of bonds below, circle the one which has the lower yield in the U.S.: A ten-year Treasury bond issued in 2000 A ten-year Treasury bond issued in 1980 A two-year Treasury bond on date t when inflation A ten-year Treasury bond on date t when is expected to increase over the next decade inflation is expected to increase over the next decade An inflation-indexed two-year Treasury note An inflation-indexed two-year Treasury note issued when the U.S. budget is running issued during a large budget deficit period a large surplus A ten-year Treasury on date x when the next Fed A ten-year Treasury on date x when the next Chairman to be appointed is announced and he Chairman to be appointed is announced and is a dove is a hawk
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(5 pts.) 4. Consider the following points on the Treasury yield curve: Three months = 3%; Two years = 2%; Five years = 5%; ten years= 10%. Circle ALL statements below that are true: a) It is very likely that the Treasury will increase the Fed Funds rate at the next FOMC b) Inflation is perceived to be higher in the future c) Interest rates are very likely to increase over the next two years d) Investors perceive that the economy will be weak over the short term. e)
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This note was uploaded on 07/17/2008 for the course FIN 726 taught by Professor Helwege during the Spring '04 term at Ohio State.

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726midtermanswers - Finance 726 Midterm 1 Professor Helwege...

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