MGT411 Paper 26 May,2010

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MIDTERM EXAMINATION
Spring 2010
MGT411- Money & Banking (Session - 4)
Time: 60 min
Marks: 44

Question No: 1 ( Marks: 1 ) - Please choose one
Financial instruments are evolved just as ___________.
► Currency
► Stock
► Bond
► Commodity

Question No: 2 ( Marks: 1 ) - Please choose one
Banks usually offer lower rates of interest to people willing to keep their funds in the bank for a short time because:
► Banks really do not want these people as customers
► Banks really do not want a lot of people coming into the bank
► Banks realize that time has value
► All of the given options

Question No: 3 ( Marks: 1 ) - Please choose one
Which of the following is a drawback of Fiat money?

► Fewer resources are used to produce money
► The quantity of money can be determined by rational human judgment
► A corrupt Government might issue excessive amount of money thus causing inflation
► Fiat money doesn’t have any drawback

Question No: 4 ( Marks: 1 ) - Please choose one
The Consumer Price Index (CPI):
► Tends to overstate inflation due to substitution bias
► Tends to understate actual inflation
► Is more accurate than the GDP deflator
► Is based on basket of goods that changes monthly with consumer expenditures

Question No: 5 ( Marks: 1 ) - Please choose one
A derivative instrument:
► Gets its value and payoff from the performance of the underlying instrument
► Is a high risk financial instrument used by highly risk averse savers
► Comes into existence after the underlying instrument is in default
► Should be purchased prior to purchasing the underlying security

Question No: 6 ( Marks: 1 ) - Please choose one
If you put $1,000 per year into bank at 4% interest, how much would you have saved after 40 years?
► $90,000
► $98,826
► $82,286
► $85,880

Question No: 7 ( Marks: 1 ) - Please choose one
What will be the Future Value (FV) of $1000 in 5 years at 5% interest rate?
► $1300.00
► $1276.28
► $1999.99
► $1500.52

Question No: 8 ( Marks: 1 ) - Please choose one
Which one of the following is the procedure of finding out the Present Value (PV)?
► Discounting
► Compounding
► Time value of money
► Bond pricing

Question No: 9 ( Marks: 1 ) - Please choose one
The interest rate that is involved in _____________ calculation is referred to as discount rate
► Present value
► Future value
► Intrinsic value
► Discount value

Question No: 10 ( Marks: 1 ) - Please choose one
A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called:
► Simple loan
► Fixed-payment loan
► Coupon bond
► Discount bond

Question No: 11 ( Marks: 1 ) - Please choose one
Which of the following represents the fisher’s equation?
► Nominal interest rate = real interest rate + inflation
► Nominal interest rate + inflation = real interest rate
► Nominal interest rate = real interest rate - inflation
► Nominal interest rate = real interest rate / inflation

Question No: 12 ( Marks: 1 ) - Please choose one
What will be the result of the difference of real and nominal interest rate?
► The cost of borrowing
► The effect of inflation
► The price of bonds
► The return of bonds

Question No: 13 ( Marks: 1 ) - Please choose one
The variance is generally less useful than the standard deviation on which of the following reasons?
► Variance is easier to calculate
► Variance is a measure of risk, whereas standard deviation is a measure of return
► Variance isn't calculated in the same units as payoffs where as standarad deviation is
► Both are equally useful

Question No: 14 ( Marks: 1 ) - Please choose one
_________ measures the probability of worst outcome in any investment project.
► Variance
► Standard deviation
► Value at risk
► Hedging

Question No: 15 ( Marks: 1 ) - Please choose one
What is true about the relationship between standard deviation and risk?
► Greater the standard deviation greater will be the risk
► Greater the standard deviation lower will be the risk
► Greater the standard deviation risk will be remained the same
► No relation between them

Question No: 16 ( Marks: 1 ) - Please choose one
Most of the people among us are ___________.
► Risk lovers
► Risk enhancers
► Risk averse
► Risk tolerating

Question No: 17 ( Marks: 1 ) - Please choose one
When a bond becomes more liquid relative to its alternatives, the demand curve for bonds shifts to the:
► Right
► Left
► No change
► None of the given options

Question No: 18 ( Marks: 1 ) - Please choose one
Which one of the following agencies assesses the default risk of different issuers?
► Insurance companies
► Bond issuing
► Credit rating
► Recruitment agencies

Question No: 19 ( Marks: 1 ) - Please choose one
In the long run, the yield curve tends to be which of the following?
► Upward sloping
► Downward sloping
► Nearly vertical
► Nearly horizontal

Question No: 20 ( Marks: 1 ) - Please choose one
Yield curves show which of the followings?
► The relationship between bond interest rates (yields) and bond prices
► The relationship between liquidity and bond interest rates (yields)
► The relationship between risk and bond interest rates (yields)
► The relationship between time to maturity and bond interest rates (yields)

Question No: 21 ( Marks: 1 ) - Please choose one
Which of the following patterns of term structure occur most frequently?
► Ascending yield curve
► Descending yield curve
► Flat yield curve
► Humped yield curve

Question No: 22 ( Marks: 1 ) - Please choose one
Term structure of interest rate can be explained by which one of the following?
► Tax difference
► Expectation hypothesis
► Liquidity premium theory
► Both by expectation hypothesis and liquidity premium theory

Question No: 23 ( Marks: 1 ) - Please choose one
The concept of limited liability says a stockholder of a corporation:
► Is liable for the corporation's liabilities, but nothing more
► Cannot receive dividends that exceed their investment
► Cannot own more than fiver percent of any public corporation
► Cannot lose more than their investment

Question No: 24 ( Marks: 1 ) - Please choose one
The theory of efficient market states that prices of financial instruments reflect:

► All available information
► Some of the information
► No information
► Imperfect information

Question No: 25 ( Marks: 1 ) - Please choose one
Stock market bubbles can lead to:
► An inefficient allocation of resources
► Stock market crashes
► Patterns of volatile returns from the stock market
► All of the given options

Question No: 26 ( Marks: 1 ) - Please choose one
Financial instruments are used to transfer which of the following?
► Both Risk and Resources
► Risk
► Resources
► Mortgages

Question No: 27 ( Marks: 1 ) - Please choose one
_________ evolved from coffee houses to trading places to electronic networks.
► Financial companies
► Financial markets
► Financial institutions
► Financial intermediaries

Question No: 28 ( Marks: 1 ) - Please choose one
If there is a decrease in the expected future interest rate, what will be its affect on bond?
► Bond will be less attractive
► Bond will be more attractive
► Bond will be less expensive
► Bond will be more expensive

Question No: 29 ( Marks: 3 )
Differentiate between yield to maturity and current yield.

Question No: 30 ( Marks: 3 )
“Stock market plays a crucial role in every modern capitalist economy”. Discuss.

Question No: 31 ( Marks: 5 )
a) Mr. A has a bond of ABC Corporation. Will his return from this bond be affected by tax? Support your answer with reason.

b) Mr. B has a bond of that is issued by Government. Will his return from this bond be affected by tax? Support your answer with reason.

Question No: 32 ( Marks: 5 )
Ahmad purchases a 10 year 8% coupon bond with the face value of $100. He wants to hold this bond for 1-year and then sells a 9-year bond after 1-year.

(i) If interest rate does not change then what will be the rate of return?

(ii) If interest rate falls to 6% then suppose price increases to $109.16. What will be the capital gain after the price rise?

(iii) After the price rise, what will be the one year holding period return?