f726_midterm2_a03_ans - Finance 726 Midterm 2 Fall 2003...

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Finance 726 Fall 2003 Professor Helwege Midterm 2 Instructor Damsel You have the entire class period to finish this quiz. You may use a calculator, scrap paper, and a writing tool to complete the test. 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) (10 pts.) 1. For each of the following characteristics of a mortgage pool, state whether the characteristic would make the bonds have a high (H) or low (L) option-adjusted spread (OAS) (holding constant all other features)? a. The WAL of the mortgage pool is 3 years ___L___ b. The WAC is 200 bp above the current rate on a new mortgage with the same maturity.___H__ c. The mortgages are located in a state with high housing appreciation. ___H__ d. The mortgages belong to members of a credit union who are all English majors. ___L__ e. The LTVs of the mortgages in the pool have increased 10% in the last year ___L___ (20 pts.) 2. Below are ten statements referring to the process of completing an IPO. Some of the statements are steps that are part of the IPO process and some are actually false statements that do not occur when completing an IPO. Mark the false statements as such (“False” or “Skip”) and put the remaining in order. The order of the true statements should be from earliest in the process (first step is marked with a 1) until the last step (highest number in your list). a. Decide on the price of the offering. __6___ b. Show that your firm has five years of positive operating profits. __False_ c. Sell the shares to investors. __8___ d. Revise the red herring if bookbuilding shows high demand for the stock. __5__ e. Find a venture capitalist that will engage in price support. _False__ f. Sign an underwriting agreement with an investment banker stating the price. __7___ g. Agree on the fee structure and greenshoe option for the underwriter. _2___ h. Do a roadshow. __4___ i. File a registration statement with the SEC. __3___ j. Create a business plan. __1___ (6 pts.) 3. A money market mutual fund is unlikely to generate large losses or profits to an investor because they invest in ___Tbills___________, which have no credit risk and ___low_________ duration. (8 pts.) 4. Walmart’s bond has a modified duration of 4.61 years and trades at a YTM of 9%. The price of the bond is currently 97.26. The bond is callable at par and immediately. What is the interest rate that would be necessary for Walmart to consider calling its bond? (Show your work and interest rate to the nearest basis point.) _8.39_____ (100-97.26)/97.26 = 2.817% use this with %change in P = -md* rate change 2.817% = -4.61* rate change so rate change=-61 bp
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(14 pts.) 5. Please answer true or false to the following questions: a. If the MBS market did not exist, then Countrywide and other servicers would either not exist or have to find cheap funding sources. _T___
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f726_midterm2_a03_ans - Finance 726 Midterm 2 Fall 2003...

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