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f726_mid1_s04_ans

f726_mid1_s04_ans - Finance 726 Midterm 1 Professor Helwege...

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Finance 726 Professor Helwege Midterm 1 Spring, 2004 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. For each of the following expectations, write next to it whether it is consistent with a flat (F), inverted (I) or upward-sloping (U) yield curve: a. A drop in the FF rate __I___ b. A recession __I___ c. Rates will stay fairly constant __F___ d. A sharp increase in inflation __U___ e. The appointment of a new chairman who is a dove __U___ (5 pts.) 2. Consider each of the following statements about forwards and futures. Circle ALL that are true. a) Future contracts can be used for non-standard contracts whereas forward contracts are standardized. b) A forward contract has a greater degree of default risk than a futures contract. c) You can identify the counterparty to your futures contract. d) Futures are marked to market daily whereas forward contracts are not. e) When either a future or forward contract is executed, the price is agreed upon today, but the asset is exchanged at some later date. (2 pts.) 3. Circle the firm that is likely to have the highest average recovery rate if it were to default: a) A grocer that did a recapitalization (to 90% debt) just prior to the onset of a mild recession. b) A cellphone provider that uses a system of low flying satellites to provide worldwide service. c) The same cellphone provider, except that it has only secured debt in the capital structure. (2 pts.) 4. Circle the institution below which engages in asset transformation to the greatest degree: a) An electric utility b) A mutual fund c) A commercial bank (4 pts.) 5. Company A and Company B enter a swap agreement with a notional principal of $200 m. B recieves 8% for the next five years, in exchange for payments to A that are LIBOR +50 bp. B owes $200 m. on a bond with a 7.5% coupon. What is the effective rate B pays on its liabilities? __LIBOR_______ B receives 8% in the swap, pays L +50 bp, and pays 7.5 to bondholders. So 8- 7.5 - (LIBORl+.5)=LIBOR
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(9 pts.) 5. Your neighbor, Dr. Brown, invents a time machine and you use it to travel to the year 2034. In your trip you go to a public library that has a copy of the Economic Report of the President and use the copy machine to copy the appendix, which has many tables reporting historical data on economic and financial variables.) Circle ONE answer in each of the following questions (a – c). a. Upon your return, you read your materials and observe that inflation over the next 8 years will average 6 percent per year. Which of the following actions is most lucrative?
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