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RSM230H1_08FALL1_810 - Rotman School of Management...

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Unformatted text preview: Rotman School of Management University of Toronto tb ud dy .c om Exam # __________________ tu de n Mid-Term Exam RSM230 October 2008 to .s Instructions: ut or on You have 1 ½ hours for this exam. Answer all the questions directly on this question sheet. No aids are allowed except an electronic calculator. All cell phones and portable electronic devices must be turned off. Remain in your seats until the exam period is over so that you do not disturb others. The exam is out of 98%; you get 2% for writing your student and section number here: Student number: ______________________________ Section (day and time) ______________________________ Question 1 (50%): These are all equally weighted multiple choice questions. Real assets consist of: a) b) c) d) e) The major assets of the Canadian household sector consists of: Which of the following represents the primary source of capital: a) b) c) d) e) E: de n tu to Direct intermediation is inefficient because of: on D: The foreign (international) sector Households Corporations Government The banking system .s a) b) c) d) e) Search costs; Contracting costs Moral hazard Market illiquidity All of the above or C: Land and pensions & insurance Shares and houses (residential structures) Pensions & insurance and shares Deposits (in banks) and Land None of those combinations tb ud dy .c a) b) c) d) e) ut B: Machinery and equipment Consumer durables Treasury bills Land All of the above om A: Indicate which of the following is incorrect a) b) c) d) e) The Bank of Canada pays the overnight rate minus 0.25% on required reserves The Bank of Canada guarantees settlement through the CPA system The Bank provides short term liquidity to members of the CPA The large value transfer system regularly handles about $150 billion of settlements a day None of the above The current Bank of Canada target overnight rate is a) b) c) d) e) Which of the following is incorrect: Seignorage is a) b) c) d) e) J: de n Which of the following do not represent central bank policy rates: to I: .s d) Putting older people into retirement homes The Bank of Canada earning profits from issuing fiat money The Bank of Canada earning profits from buying pennies from the Royal Canadian Mint The Bank of Canada earning profits from its foreign exchange operations tu a) b) c) on H: om d) e) Monetary policy works through its effect on interest rates Monetary policy works through its effect on the foreign exchange rate The Bank targets both the interest rate and foreign exchange rate channels through the monetary conditions index The Bank no longer uses the monetary conditions index The Bank no longer uses open market operations tb ud dy .c a) b) c) The overnight rate The Prime rate The Bank Rate The Federal Funds rate The Repo rate or G: 3.0% 2.5% 3.5% 2.0% None of the above ut F: Which of the following is not a primary function of the Bank of Canada: a) b) c) d) e) To conduct monetary policy to ensure confidence in the value of money; To enhance and maintain an efficient funds transfer system To act contra-cyclically to maintain employment To promote the efficiency and safety of the financial system To supply quality bank notes and prevent counterfeiting K: The following sets of institutions have all gone bankrupt, been forcibly acquired or bailed out: a) b) c) d) e) WhIch of the following does not describe the Canadian money market: The largest issuer is the federal government through treasury bills It is a highly liquid market Most of the notes are issued in bearer form Most of the notes are promissory notes Most transactions are in large amounts between major institutions om a) b) c) d) e) tb ud dy .c L: Lehman Brothers, TD Bank, Bear Sterns and AIG Wachovia, Washington Mutual, AIG and Citibank Merrill Lynch, Morgan Stanley, Northern Rock, Fannie Mae AIG, Goldman Sachs, UBS (Union Bank of Switzerland) Citibank, Northern Rock, AIG, Lehman Brothers and Bear Sterns M: If a 90 day Canadian promissory note for $1,000 is sold for a 2% discount its effective yield would be quoted as b) c) d) e) O: de n tu The commercial paper market is normally highly liquid and represents securities that can easily be converted into cash Investors in the CP market are sophisticated institutions The critical criteria for a corporation to issue CP in Canada is an investment grade credit rating A flight to quality arises when issuers have trouble rolling over CP except at historically high interest rates Normally CP spreads over treasury bills are 10-20 basis points or a) on to Which of the following is incorrect: ut N: 8% 8.11% 2.04% 8.28% 8.16% .s a) b) c) d) e) Canadian Banker’s Acceptances are: a) b) c) d) Issued as a result of an international trade receivable A way for the banks to lend money directly to borrowers Bank guaranteed commercial paper Fee income for the banks through their stamping fees Indicate which of the following is incorrect a) b) c) d) e) Which of the following is correct? a) b) c) d) f) Tier 1 capital is the primary risk bearing capital in banks Both Canada and the US have adopted Basel I and ll Tier 2 capital includes medium term notes Tier I capital includes term preferred and common equity Tier 1 capital includes common equity and perpetual preferred shares om Q: The higher the money multiplier the larger the credit creation A fractional reserve system means a higher credit multiplier Bank runs are more likely with higher bank liquidity With a riskier loan portfolio a bank needs more capital Banks are special because one bank’s failure can cause contagion or a bank run tb ud dy .c P: tu 7.93% 8.88% 6.45% 8.67% None of the above .s a) b) c) d) e) de n R: The approximate annual yield to maturity on an eight year, semi annual pay, 6% coupon $1,000 par value bond selling for $840 is T: or $33.90 $36.44 $38.81 $39.44 None of the above ut a) b) c) d) e) on to S: How much accrued interest would you have to pay if you purchased a 10%, $1,000 par value bond maturing on June 30, 2010 on February 8 2008 Which of the following bonds should have the least volatility a) b) c) d) e) 9%, 10 year bond 9% 3 year bond 6% 10 year bond 6% 3 year bond Can’t tell with the information provided Question 2 (48%): For each of the following provide a brief explanation or discussion; all sub parts are equally weighted. to .s tu de n tb ud dy .c om A: Briefly discuss the business of the three major types of financial intermediaries in the Canadian financial system and the types of indirect securities they issue. ut or on B. Briefly discuss what inflation targetting means and what the Bank of Canada might do if it judges inflation to be too high tb ud dy .c om C: Why is there a fight to quality whenever investors feel that there is an increase in default risk in the commercial paper market ut or on to .s tu de n D: Discuss what we mean by securitisation and how traditional mortgage lending in the United States changed prior to the current sub-prime crisis. Discuss why we have bank runs and how governments can act to prevent them F: Discuss how Basel I works in determining capital adequacy for a chartered bank ut or on to .s tu de n tb ud dy .c om E: de n tb ud dy .c om G: Briefly discuss three options often found in bond contracts and what triggers them ut or on to .s tu H: Briefly discuss two positive and two negative covenants often found in bond contracts. ...
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