Sp08 Final 171

Sp08 Final 171 - Version A Name (please print) :_ Business...

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Version A Name (please print ) :________________________________________ Business 171a Professor Reza Spring 2008 San Jose State University Final Examination Instructions and notes : I. Please put your name on BOTH the scantron and this exam. If your name is missing from either, you will receive ZERO on the exam – no exception and no changes afterwards. II. Please put your test version on the scantron. If the version is missing, your exam will be assigned a version at random and corrected; the result will not be changed. III. This is a closed-book, closed-notes exam. Do not consult others. You may use only a calculator. IV. There is one correct answer to each problem. Multiple answers receive zero point. V. Unless specified otherwise, approximations should be rounded to 2 places after the decimal. Unless specified otherwise, a debt security has a face (par) value of $1,000 VI. Unless specified otherwise, assume that a. investors maximize their net worth (i.e., they are “rational”) and firms maximize their common shareholders’ net worth. b. all markets are efficient. c. firms are typical of the industry in which they operate. S F = W D i i + + 1 1 , where F = forward forex rate (in $ per foreign currency) S =Spot forex rate (in $ per foreign currency) i D = US interest rate i W = foreign interest rate PV of annuity = C + - N i i i ) 1 ( 1 1 where C = regular periodic payment i = the annual rate of interest N = the number of periods payments are made/received Δ E = - [ D A - A L D L ] A Δ r /(1+ r ) ; E = Equity; A =Assets; L = Liabilities; D = duration of A or L ; r = interest rate; the term in the brackets [.] represents duration (or leverage-adjusted duration) gap. Also Δ A = - D A A Δ r /(1+ r ) and Δ L = - D L L Δ r /(1+ r ). 1. Regarding interest rates on 3-month T-bills: (a) The current rate is around 8%-9% (mostly because of the sub-prime issue) , lower than any time in the past 25 years (b) The T-bill rate is always the same as the Fed funds rate (c) The current rate is around 1.5%-2.5% (d) The current rate is around 4%-5%, not much higher than at any time in the past 25 years 1
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2. The relationship between bond price and the rate of interest is best described by: (a) They move in the same directions and convex (b) They move in opposite directions and convex (c) They move in opposite directions along a straight line (d) None of the above 3. Consider the various influences on the overall market rate of interest. (a) When there is less willingness to borrow, interest rates tend to fall (b) When the risk of default by issuers of bonds rises, interest rates tend to rise (c) When the risk of default by issuers of bonds falls, interest rates tend to fall (d) Both (a) and (b) (e) Both (a) and (c) 4. Yield to maturity and the spot interest rate are the same. (a) True
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Sp08 Final 171 - Version A Name (please print) :_ Business...

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