RSM230H1_09SPRING1_414 - Rotman School of Management...

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Unformatted text preview: Rotman School of Management University of Toronto RSM 230 – Mid Term Exam February, 2009 om INSTRUCTIONS: de nt bu dd y. 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 equal weight. 1. Which of the following is not a primary user of capital? C Government sector Business sector Households Foreign sector om a) b) c) d) y. c 2. Which of the following statements is not true about securitization? A de nt bu 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 among investors 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 a) b) c) d) e) Stocks and bonds Residential property The value of accumulated pension benefits Money market securities Bank accounts a) b) c) d) Royal Bank of Canada (RBC) Ontario Teachers’ Pension Plan Manulife Financial 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 nt bu dd a) b) c) d) e) y. 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) b) c) d) e) a) b) c) d) e) ut 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% 8.11% 2.04% 8.28% 8.16% y. c a) b) c) d) e) .s tu de nt bu dd 12. The interest rate that chartered banks charge to their most credit-worthy customers is called the ____ rate. C a) Discount b) Bank c) Prime d) LIBOR e) Call 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) b) c) d) e) ut or on 13. How much would you receive if you sold this bond on February 9, 2009, based on the quotation provided above? C $1,005 $1,012 $1,011.58 $1,018.58 $1,043.30 14. The current yield of this bond is: C a) b) c) d) 5.94% 6.00% 5.97% 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 a) b) c) 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 Inflation risk Default risk None of the above .s tu a) b) c) d) e) de nt bu 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 or a) b) c) d) 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 a) b) c) d) e) 7.93% 8.88% 6.45% 8.67% None of the above 5 20. The Canadian Bank Rate is currently C a) b) c) d) e) 0.75% 1% 1.25% 1.5% 3% 21. Which of the following is not true about the Canadian Payments Association (CPA)? D de nt bu dd y. 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 or a) b) c) d) .s 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 a) b) c) d) 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 rate. 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 tu de nt bu dd a) Reduce the target overnight rate b) Change the rate on a date which has been previously announced to market participants c) Move Government of Canada deposits from the chartered banks to its own account 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 resort Branch banking network- banks have larger pools of capital to draw on for liquidity Capital adequacy - Banks are required to maintain minimum levels of capital (Students may mention Tier 1 & Tier 2, Basel, risk weighted capital) de nt bu dd o o ut 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 nt bu dd y. 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 nt bu 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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