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F08_ex2 B - Business 171a Fall 2008 Midterm Examination 2...

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Business 171a Fall 2008 Midterm Examination 2 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 final exam – no exception and no changes afterwards. II. This is a closed-book, 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. FI=financial institution; Fed=Federal Reserve System; YTM = yield to maturity V. Unless specified otherwise, 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. d. approximations should be rounded to 2 digits after the decimal. e. a debt security has a face (par) value of $1,000 1. A bank (owned by Americans and based in the US) has lent £12 million and also has £10 million in deposit in its own account in a British bank. The bank would benefit from a drop in the value of the pound against the dollar. (a) True (b) False 2. A U.S. investor has borrowed pounds (£), converted them to dollars and invested the dollars in the U.S. to take advantage of interest rate differentials. To cover the currency risk the investor should (a) Sell pounds forward (b) Buy pounds forward (c) Sell pounds spot (d) Buy dollars forward (e) None of the above 3. Consider two bonds A and B. Both have the same YTM and the same maturity. But A pays a coupon rate of 12% while B pays a coupon rate of 8%. 4. Among the reasons the loanable funds theory offers why interest rates in the US have recently fallen is that the risk of investing in the US has increased relative to the risk of investing elsewhere (a) True (b) False 1
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5. A U.S. bank converted $1 million to Swiss francs to make a Swiss franc loan to a valued corporate customer when the exchange rate was 1.5 francs per dollar. The borrower agreed to repay the principal plus 5% in francs interest in 1 year. The borrower repaid Swiss francs at loan maturity and when the loan was repaid the exchange rate was 1.4 francs per dollar. What was the bank's dollar rate of return?
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