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Fall08 midterm 2 Version B

# Fall08 midterm 2 Version B - Version,B Business l71a...

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( Version,B Student name: Business l71a Fall2008 Midterm Examination 2 Instructions and notes: I- Please put your name on BOTH the scantron and this exam. lf your name is rnjssing from either. r,ou wiil receive ZERO on the final exam - no exception and rro changes afterwards. Il. This is a closed-book, closed-notes exam. Do not consult others. You may use a calculator. lll. There is one correct answerto each problem. Multiple answers receive zero point. IV. Fl=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. a// markets are efficient. c. firms are typica) of the industry in which they operate. d. approximations sliould be rounded to 2 digits after the decinral. e. a debt security has a face (par) value of\$1,000 4\J 1. A bank (owned by Americans and based in the US) has lent f 12 million and also has f 10 million in deposit in its ou,n account in a British bank. The bank wouid benefit from a drop in the value of the pound a-sainst the dollar. (a) True :irrrslLtrtruur,4r' i1- lc @ Fuls" 2. A U.S. investor has borrowe<i pounris (f), converteci them to cioiiars anci invesieci the cioiiars in the U.S. to take advanta-9e of interest rate differentials. To cover the currency risk the investor r r should ll (a) Sell pounds forward @ guy 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 12o/o while B pays a coupon rate of 8%. '@ nonA B has the longe. duration (b) Without knowing the exact YTM we cannot determine the bonds' durations (c) Without knowing the exact mafurity we camot determine the bonds' durations \ i (d) Bond A has the lon-9er duration t4. Among the reasons the loanable funds theory offers why interest rate! in the US have recentiy fallen is that the risk of investing in the US has increased relative to the risk of investing d JiG-rvhere I -. - ' (a.) lrue (\$ rrse

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5. A U.S. bank converted \$l 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 malurity and when the loan was repaid the exchange rate was 1.4 francs per doliar- What was the bank's dollar rate of return? 0 @) 6.00% t @ r'r'fJ/l (d) 7.14% (e) -2.00% [, ?M l'{i, i ' 6. Bond A has duration 3 years; Bond B has duration 3.2 years. @ If interest rates rise, Bond A's price falls by a greater percentage than the fall in the price ofB (b) Interest rates have nothing to do with duration; coupon rates do (c) The percentage changes in bond prices have nothing to do with duration (d; If interest rates rise, Bond A's price falls by a smaller percentage than the fati in the price of B
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Fall08 midterm 2 Version B - Version,B Business l71a...

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