Unformatted text preview: Rotman School of Management
University of Toronto RSM 230 – Mid Term Exam
February, 2009 om INSTRUCTIONS: de
c You have 90 minutes for this exam.
Complete your Scantron and use it to answer Part A of the exam.
Answer Part B of the exam on this paper in the space provided.
All cell phones and portable electronic devices must be turned off.
This is a closed book exam. No formula sheet is allowed.
Non-programmable calculators are permitted. to .s
tu Please remain in your seats during the last 15 minutes of the exam period
so you do not disturb others. ut
or on PLEASE SUPPLY THE FOLLOWING INFORMATION :
Student #__________________ Student Name___________________ Circle your Instructor’s Name: Will Huggins Maureen Stapleton Indicate your Section:
Monday 8 am – 10 am ____
Monday 10 am – noon ____
Monday 4 pm – 6 pm ____ Wednesday 1pm – 3 pm _____
Wednesday 3pm – 5 pm _____
Wednesday 5pm –7 pm _____ This exam paper has 10 pages including the cover page.
1 PART A – Multiple choice questions. (75% of total grade)
Please answer in pencil on the Scantron provided. All questions have
1. Which of the following is not a primary user of capital? C
Foreign sector om a)
c 2. Which of the following statements is not true about securitization? A de
dd a) Securitization transforms mortgages and other loans into marketable
securities which are sold only to large institutional investors
b) Assets are sold to an SIV which issues commercial paper
c) Credit quality is enhanced by overcollateralization and bank guarantees
d) Most securitizations received strong credit ratings.
3. Primary markets involve _____; while secondary markets involve_____. B ut
or on to .s
tu a) The sale of securities; the sale of derivatives
b) The sale of new securities to investors; trading of previously issued securities
c) The sale of securities of large corporations on a stock exchange; the sale of the
securities of smaller companies on a stock exchange
d) Trading of securities on a stock exchange; trading of securities OTC.
4. Which of the following statements is not true? B
a) OSFI oversees Canadian chartered banks, insurers and pension funds.
b) OSC is the national regulator of the Canadian securities industry
c) CDIC provides up to $100,000 government insurance of Canadian bank
accounts and GIC’s
d) CIPF insures brokerage accounts up to $1 million against fraud
e) Investment advice received from a broker or financial advisor is not guaranteed 2 5. Financial assets include all of the following except: B
e) Stocks and bonds
The value of accumulated pension benefits
Money market securities
Bank accounts a)
d) Royal Bank of Canada (RBC)
Ontario Teachers’ Pension Plan
The Bank of Canada The legal tender or currency of a country
The sale of marketable securities by the Bank of Canada
Net revenue derived from issuing of coins and bank notes
Retiring fiat money
Protection against counterfeiting de
c 7. Seignorage is: C om 6. Which of the following is not a financial intermediary? D 8. Which of the following is not a function of a central bank? B to .s
tu Conducting monetary policy
Making emergency loans to large corporations
Promoting the efficiency and safety of the country’s financial system
Acting as the fiscal agent of the federal government
Supplying quality bank notes that are secure against counterfeiting on a)
or 9. Which of the following statements is not true of Treasury Bills? B
Sold on a discount basis and mature in less than one year
Available in bearer form
Settlement occurs on the trade date
Are traded OTC
Are the most liquid of all money market securities 3 10. Which of the following statements is not true about commercial paper? B
a) Can be purchased directly from the issuing corporation or purchased
through an investment dealer
b) Consists of secured notes issued and guaranteed by large corporations
c) The usual transaction size exceeds $100,000
d) Purchased by institutional investors who usually require an R-1 credit rating
e) Is not very liquid
11. If a 90 day Government of Canada Treasury Bill with a $1000 face value is sold
at a 2% discount, its effective yield is: D om 8%
dd 12. The interest rate that chartered banks charge to their most credit-worthy
customers is called the ____ rate. C
Use the the following bond quotation to anwer the next two questions: to Government of Canada 6% July 1, 2012 100.50 101.20 5.94 a)
or on 13. How much would you receive if you sold this bond on February 9, 2009,
based on the quotation provided above? C
$1,043.30 14. The current yield of this bond is: C
Cannot tell from the information provided 4 15. Which of the following bonds would you prefer to hold if you believe that
interest rates will decrease? D
e) Government of Canada 6% due June 1, 2010
Government of Canada 3% maturing on June 1, 2010
Government of Canada 6% maturing on June 1, 2030
Government of Canada 3% maturing on June 1, 2030
Cannot tell from the information provided 16. Which of the following statements is not true? C y.
c om a) The average default rate on Canadian corporate bonds rated AA is less than 1%
b) Generally speaking, the spread (interest rate differential) between government
and corporate securities increases when the economy is slowing down.
c) Bonds rated BBB or lower are called junk or high yield bonds
d) The trust indenture specifies covenants that protect bondholders
e) Changing the trust indenture requires the approval of bond holders Liquidity risk
Reinvestment rate risk
None of the above .s
dd 17. Which of the following risk factors applies to real return bonds issued by the
Government of Canada? B on Issued by the chartered banks to fund loans made to their corporate clients
A corporate borrowing on which a bank has guaranteed payment
A source of fee income for the banks
Usually issued for terms of only 30 days
Have higher yields than Treasury bills of comparable terms to maturity ut
e) to 18. Which of the following is not true about Canadian bankers acceptances? A 19. The approximate yield to maturity of a bond that has an 8 year term to maturity
and a 6% coupon, paid semi-annually, priced at $840 is: B
None of the above 5 20. The Canadian Bank Rate is currently C
3% 21. Which of the following is not true about the Canadian Payments Association
(CPA)? D de
c om a) The CPA is privately run by the chartered banks to clear and settle cheques and
other inter-bank payments.
b) Cheques are settled when banks pay what they owe by writing cheques on their
Bank of Canada deposit accounts.
c) Large transactions which average $150 billion a day are settled by wire transfer
Through the Large Value Transfer System (LVTS)
d) Debits, automatic bank payments and payments for large securites transactions
average $20 billion a day and are settled electronically through the Automated
Clearing Settlement System (ACSS)
e) Chartered banks are paid interest on settlement balances held at the Bank of
Canada, based on the target overnight rate less 0.25% on to The Canadian banking system is more consolidated
US banks have made greater use of off balance sheet assets
Canadian bank receive interest on reserves held at the central bank
The Canadian and US banking systems maintain risk-weighted capital as
required by Basel I
e) US banks did not sign on to Basel II ut
tu 22. Which of the following is not true about the Canadian and US banking systems?
C 23. Canadian banks have recently issued the following securities to improve their
Tier 1 capital ratios. B
e) Common shares and cumulative preferred shares
Common shares and non cumulative preferred shares
Common shares and subordinated debentures
Cumulative preferred shares and subordinated debentures
Subordinated debentures and mid term notes 6 24. Which of the following is not true about monetary policy? A om a) The Bank of Canada has ultimate authority over Canadian monetary policy.
b) The objective of monetary policy is to ensure low and stable inflation, and
stabilize the economy.
c) The Monetary Conditions Index (MCI) is a monetary policy indicator that
incorporates the weighted average of short term interest rates and the exchange
d) Central banks have changed from targeting money supply to targeting inflation
e) Inflation targeting uses the CPI less the volatile food and energy components y.
c 25. If the Bank of Canada decides to reduce interest rates, it will do all of the
following except: C on to .s
dd a) Reduce the target overnight rate
b) Change the rate on a date which has been previously announced to market
c) Move Government of Canada deposits from the chartered banks to its own
d) Purchase Treasury bills from the chartered banks using PRA’s ut
or Please continue to short answer questions…. 7 PART B – Short Answer Questions. (25% of total grade)
Please answer briefly on this paper in the space provided. All questions
have equal weight.
1. What are three features of the Canadian banking system today which help protect
it from the bank runs that caused thousands of US banks to fail in the 1930’s.
(5 MARKS) Students can give any 3 of the following 4 points for full marks: om Identify three of the five difficulties of non-market intermediation. For each,
describe how chartered banks reduce this risk for their clients. (5 MARKS) on to 2 .s
tu o y.
c o CDIC - the government insures deposits up to $100,000
SLF & ELF - The Bank of Canada exists now and it can act as the lender of last
Branch banking network- banks have larger pools of capital to draw on for
Capital adequacy - Banks are required to maintain minimum levels of capital
(Students may mention Tier 1 & Tier 2, Basel, risk weighted capital) de
or Students can list any 3 of the following 5 points for full marks
o Search costs: Both borrowers and lenders are served by the same institution
o Double co-incidence of wants: A large number of borrowers and lenders
using the same institution allows for capital to be re-partitioned.
o Contracting costs: The bank acts as the counter-party to both the borrower
and lender and acts according to an existing set of regulations
o Default: Lenders are only indirectly exposed to the defaults of borrowers AND
their deposits are insured by the government
o Liquidity: Bank deposits are available on demand - cash is kept on hand to
ensure this 8 3. What is a “flight to quality”? (5 MARKS)
o When the probability of default by debt issuers is rising, the expected payoff
associated with holding their debt falls. om o As the risk of default rises (or the perception of it), investors often seek safer
investments. They buy only very high quality debt instruments or Default-free
(risk free) Government T Bills. de
c o This change in the pattern of demand depresses the price of debt securities
with any default risk (raises yields) and increases the price of risk-free
government securities (reduces yields). Spreads widen .s
tu 4. Briefly explain what Basel 1 requires banks to do. (5 MARKS) on to Basel I requires banks to:
• Maintain a minimum capital ratio
Capital requirements must be based on their risk weighted asset values
(Cooke ratio may be mentioned) • Include both assets on the balance sheet and off balance sheet items that are
guarantees (ie BA’s & lines of credit) • Tier 1 capital must be common shares or non-cumulative perpetual
preferreds. Tier 2 capital must be subordinated debentures cumulative
perpetual preferreds ut
or • 9 5. (a) Why did the Bank of Canada switch from targeting money supply to
targeting inflation? 3 MARKS Targeting the money supply assumes that the velocity of money is constant
(which it isn't) and that increases in the money supply cause inflation
(students may mention the quantity theory of money MV=PQ) o Financial innovations( ie credit cards) distorted the measurement of monetary
aggregates om o y.
c o Instead of trying to control the amount of economic activity by controlling the de
dd money supply, the Bank of Canada now controls inflation. .s
tu (b) How does the Bank of Canada use inflation targets to manage
monetary policy. 2 MARKS
The Bank of Canada keeps inflation on target (2%) within an operating band
(currently 1 to 3%). o The Bank controls interest rates as they represent the "cost" of money.
Inflation is kept on target (within the operating band) by raising interest rates
if inflation gets too high and lowering them if it gets too low ut
or on to o o Interest rates are adjusted by changing the overnight rate, and by shifting
government deposits between the chartered banks and the Bank of Canada. Thank you…You are all done! 10 ...
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