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Unformatted text preview: , -" - i,!r r, \ Y Lt'- . - to.' tQ.11* L,'ti ' (t)r'\Version,,4Business 171aSpring 2008Midterm Examination IInstuctions and notes:I. Please put your name on BOTH the scantron and this exam. If your name is missing from either, youwill receive ZERO on the final exam - no exception and no changes afterwards.II. This is a closed-boolg closed-notes exam, Do not consult others. You may use a calculator.III. There is one correct answer to each problem. Multiple answers receive zero point.IV. Fl=financial institution; Fed=Federal Reserve System; YTM: yield to maturityV. Unless specified otherwise,a. investors maximize their net worth (i.e., they are "rational") and firms maximize theircommon shareholders' net worth.b. all mukets are effrcient.c. firms are typical of the industry in which they operate.d. approximations should be rounded to 2 digits after the decimal.e. a debt security has a face (par) value of$1,0001. A US bank is holding European euros (€) in its portfolio. Suppose that the current exchangeprice is $1 : € 0.8. What would add to the bank's income?(a). the euro to rise in value to $1 : € 0.9(b),theeurotoriseinvaluetoSl:€0.7 i1:. ,,. f.- :-.;..(O the euro to fall in value to S1 : € 0.9(d) the euro to fall in value to $1 : € 0.72. Maturity intemrediation means(a) FIs lending fiutds to borrowers(b) FIs borrowing firnds from lenders(c) FIs (e.g., banks) opening checking accounts for clients(d) None of above3. Bp€arding interest rates on T-bills: i i' :1(a) The current rate is around 2o/o-3VoO) The current rate is around 8%o-9o/o (mostly because of the sub-prime issue) , lower tlanany time in the past 25 years(c) The T-bill rate is always the sarne as the Fed funds rate(d) The current rate is around 4o/o-5%o, not much hrgher than any time in the past 25 yearc4. You are offered $5,000 today or $6,000 in 2 years. If you can invest your firnds at l}Vopwyear, which alternative is better (assurne no taxes)?(a) Take $5,000 today since a "bird in the hand is better than two birds in the bushes"(b) Take 56,000 in 2 years since it has a higher FV(c)-'Take $5,000 today since it has the higher PV(O Both (b) and (c)(e) None ofthe above5. Youcaninvesttna2-yeu bondthatcosts$980;youwillreceivecouponsin l year andn?years, respectively, and you sell the bond at maturity (the day you receive the secondcoupon). The coupon rate is 10%. You require a rate of return of r:8o/o on this bond. Theappropriate formula to use to decide whether,you should buy this bond or not is,i ' 't*:_j L - /.1: iStudent name:(a)(b)6.78.100 1100(c) 980: _*.---_\-/;--- l+r'(l+r)2(d) None ofthe aboveThe relationship between bond price and the rate of interest:(alfrey move in opposite directions and convex'O) They move in the sarne directions and convex(c) They move in opposite directions along a staight line(d) None ofthe aboveConsider the various influences on the overall market rale of interest.Consider the various influences on the overall market rale of interest....
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This note was uploaded on 09/08/2010 for the course BUS 171A at San Jose State University .