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Unformatted text preview: Version B Student name:__________________________ Business 171a Spring 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 $1,000 Interest Rate Parity : (1+ i d ) = (1+ i w ) F/S. i d = domestic interest rate ; i w = foreign interest rate S= spot exchange rate ($/foreign currency); F= forward exchange rate ($/foreign currency) 1. You hold (i.e., own) a call option on a stock with exercise price X = $30 and expiration time on April 20, 2008. The current price of the stock is p = $35. The value of this option moments before expiration is (a) $0 if p ≤ $30 (b) $5 if p = $25 (c) $5 if p = $35 (d) Both (a) and (b) (e) Both (a) and (c) 2. The federal funds rate refers to (a) The rate of interest on funds the federal government lends to banks (b) The rate of interest on funds the federal reserve lends to banks (c) The rate of interest on funds the federal government pays on its borrowings from other countries (d) None of the above 3. A US bank is holding 100 European euros (€100) in its portfolio. Suppose that the current exchange price is $1 = € 0.8. What would add to the bank’s income (or asset value) in dollars? (a) If the euro rises to $1 = € 0.9 the bank’s asset value rises (b) If the euro rises to $1 = € 0.7 the bank’s asset value rises (c) If the euro falls to $1 = € 0.9 the bank’s asset value rises (d) If the euro falls to $1 = € 0.7 the bank’s asset value falls (e) If the euro falls to $1 = € 0.7 the bank’s asset value remains unchanged 1 4. Yield curve refers to (a) The plot of yield to maturity of expected interest rates against maturity (b) How much you can earn by investing in stocks versus bonds (c) The relationship between spot interest rates and expected interest rates (d) The plot of yield to maturity of spot interest rates against maturity (e) None of the above 5. You buy a bond for $930. The bond pays interest of $100 at the end of year 1, at which time you sell it for $970. The rate of return you expect to earn on this investment is approximately (a) 15.05% (b) 10.75% (c) 10.31% (d) 4.30% 6. Consider two bonds A and B. Both have the same YTM and the same maturity. But A pays a coupon rate of 8% while B pays a coupon rate of 12%.coupon rate of 8% while B pays a coupon rate of 12%....
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This note was uploaded on 09/08/2010 for the course BUS 171A at San Jose State.