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FIN 310 Final
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Terms in this set (93)
A 5 year security was purchased 2 years ago by an investor who plans to sell it. The security will be sold by the investor in the...
Secondary market
Debt securities issued by a small firm may be ____, meaning that ____ investors want to invest in those securities.
Illiquid ; Not many
Equity securities should normally have a ____ expected return and ____ risk than money market securities
Higher ; Higher
If interest rates are ____, ____ projects will have positive NPV's
Lower ; More
The equilibrium interest rate...
Equated the aggregate demand for funds with the aggregate supply of loanable funds
The equilibrium interest rate should...
Fall, when the aggregate supply for funds exceeds the aggregate demand for funds
If the real interest rate was negative for a period of time then...
Actual inflation was greater than the nominal interest rate
Due to expectations of higher inflation in the future, we would typically expect the supply of loanable funds to ____, and the demand for loanable funds to ____?
Decrease ; Increase
If the real interest rate is expected by a particular person to become negative, then the purchasing power of his/her savings would be ____, as the inflation rate is expected to ____ the nominal interest rate.
Decreasing ; Greater than
A ____ federal government deficit increases the quantity of loanable funds demanded at any prevailing interest rate, causing an ____ shift in the demand schedule.
Higher ; Outward
Holding other factors such as risk constant, the relationship between the maturity and annualized yield of securities is called the...
Term structure of interest rates
Assume that the annualized yields of short term and long term securities are equal. If investors suddenly believe interest rates will increase, their actions may cause the yield curve to...
Become upward sloping
Assume that today, the annualized two-year interest rate is 12%, and the one year interest rate is 9%. A 3 year security has an annualized rate of 14%. What is the one year forward rate, 2 years from now?
None of the above
Assume that the current yield on one year securities is 6% and the yield on a 2 year security is 7%. If the liquidity premium on a 2 year security is .4%, then the one year forward rate is...
7.6%
The annualized yield on a 3 year security is 13%. The annualized 2 year interest rate is 12%. While the one year interest rate is 9%. The forward rate 2 years ahead is ____ percent.
15%
If research showed that all investors attempt to purchase securities that perfectly match their time in which they will have available funds, this would specifically support the argument made by the...
Segmented markets theory
If research showed that anticipation about future interest rates was the only important factor for all investors in choosing short term or long term securities, this would support the argument made by...
Expectations theory
When the fed purchases securities, the total funds of commercial banks ____ by the market value of securities purchased by the fed. This activity initiated by the FOMC's policy directive is referred to as a ____ of money supply growth
Increase ; Loosening
The ____ the reserve requirement ratio, the ___ the effect of any initial increase in the money supply.
Lower ; Greater
Greater ; Less
Assume that the reserve requirements ratio is 15%. An initial injection of $150 million could result in the maximum change in the money supply of...
$1 billion
The form of money consisting of currency held by the public, and checkable deposits at depository institutions is called...
M1
A loose monetary policy tends to ____ economic growth and ____ the inflation rate
Stimulate ; Place upward pressure on
A high budget deficit tends to place ____ pressure on interest rates ; The Feds tightening of money supply tends to place ____ pressure on interest rates
Upward ; Upward
Which of the following is true about money market instruments?
Their yields are highly correlated over time
An investor initially purchased securities at a price of $9,923,418, with an agreement to sell them back at $10,000,000 at the end of a 90 day period. The repo rate is...
3.10
The effective yield of a foreign money market security is ____ when the foreign currency weakens against the dollar.
Reduced
An investor purchases a 6 month (182 day) T-Bill with a $10,000 par value for $9,700. If the T-Bill is held to maturity, the annualized yield is ____ %?
6.20
If economic conditions cause investors to sell stocks because they want to invest in safer securities with more liquidity, this should cause a ____ demand for money market securities, which placed placed ____ pressure on the yields of money market securities.
Weak ; Downward
Weak ; Upward
Strong ; Upward
**
None of the Above - Strong ; Downward
**
LIBOR is...
The interest rate charged on international interbank loans
When an investor purchases a 6 month, (182 day) T-Bill with a $10,000 value for $9,700, the T-Bill discount is ____ %?
5.93
TEST 2
TEST 2
When would a firm most likely call bonds?
After interest rates have declined
Assume US interest rates are significantly higher than german rates. A US firm with a german subsidiary could achieve a lower financing rate, without exchange rate risk, by denominating the bonds in...
Euros, and making payments from its German subsidiary
Assume you purchased bonds one year ago that have no protective covenants. Today, it is announced that the firm that issued the bonds plans a leveraged buyout. The market value of your bonds will likely ____, as a result of the buyout.
Decline
When firms issue ____, the amount of principle and interest to be paid is based on specified market conditions. The amount of the repayment may be tied to a treasury bond price index, or even to a stock index.
Structured notes
If a firm believes that it will have sufficient cash flows to cover interest payments, it may consider using ____ debt, and ____ equity, which implies a ____ degree of financial leverage.
More ; Less ; Higher
Paul can purchase bonds with 15 years remaining until maturity, a par value of $1,000 and a 9% annual coupon rate for $1,100. Paul's yield to maturity is...
7.84%
Steven, a private investor, can purchase $1000 par value bonds for $980. The bonds have a 10% coupon rate, pay interest annually, and have 20 years remaining until maturity. Steven's yield to maturity is ____%?
10.24%
An insurance company purchases bonds in the secondary market with 6 years to maturity. The total par value is $55 million. The coupon rate is 11%, with annual interest payments. If the expected required rate of return in 4 years is 9%, what will the market value of the bonds be then?
$56,935,022
Zero coupon bonds with a par value of $1,000,000 have a maturity of 10 years, and a required rate of return of 9%. What is the current price?
$422,400
If analysts expect that the demand for loanable funds will increase, and the supply for loanable funds will decrease , they would most likely expect interest rates to ____, and prices of existing bonds to ____?
Increase ; Decrease
Consider a coupon bond that sold at par value 2 years ago. If interest rates are much lower now than when this bond was issued, the coupon rate of that bond will likely be ____ the prevailing interest rates, and the present value of the bonds will be ____ it's par value.
Above ; Above
Sioux Financial Corp has forecasted their bond portfolio value for 1 year ahead to be $105 million. In one year, it expects to receive $10,000,000 in coupon payments. The bond portfolio today is worth $101 million. What is the forecasted return of this bond portfolio?
13.86%
Hurricane Corp. recently purchased corporate bonds in the secondary market with a par value of $11 million, a coupon rate of 12% with annual coupon payments and 4 years until maturity. If they intend to sell the bonds in 2 years, and investors required rate of return on similar investments at that time to be 14%, what is the expected market value of the bonds in 2 years?
$10.64 million
In the ____ strategy, funds are allocated to bonds with a short term to maturity, and bonds with a long term to maturity.
Barbell
Which of the following is not a factor effecting the market price of a foreign bond held by a US investor?
Foreign interest rate movements
Credit Risk
Exchange rate fluctuations
**
All of the above are factors effecting the market price of a foreign bond
**
A bond with a $1000 par value, has an 8% annual coupon rate. It will mature in 4 years and annual coupon payments are made at the end of each year. Present annual yields on similar bonds are 6%. What should be the current price?
$1069.31
An institution that originates and holds a fixed rate mortgage is adversely affected by ____ interest rates, and the borrower who was provided the mortgage is adversely affected by ____ interest rates?
Increasing ; Decreasing
From the perspective of the lending financial institution, interest rate risk is...
Lower on a 15 year fixed rate mortgage than on a 30 year fixed rate mortgage.
Mortgage prices would normally be expected to ____ when the interest rates ____, holding other factors constant.
Increase ; Decrease
Mortgage prices are subject to...
Interest rate risk
Credit risk
Prepayment Risk
**
All of the above
**
During the early years of a mortgage...
Most of the monthly payment reflects interest
____ economic growth will probably ____ the risk premium on mortgages and probably ____ the price of mortgages.
Strong ; Decrease ; Increase
Collateralized Mortgage Obligations (CMO's) are generally perceived to have...
A high degree of prepayment risk
A ____ mortgage allows the borrower to initially make small payments on the mortgage. They payments then increase over the first 5-10 years then level off.
Graduated payment mortgage
Consider a 3 year balloon mortgage for $150,000. The bank requires a monthly payment equal to that of a 20 year fixed rate mortgage with an annual interest rate of 12%. How much will the borrower owe when the balloon payment is due?
$143,468
Compute the required monthly payment on a $100,000, 30 year fixed rate mortgage with an interest rate of 6%. How much payment goes toward interest on the first year?
$599.55 ; $5966.60
Consider a 20-year fixed rate mortgage for $100,000 at an interest rate of 9%. If the borrower wants to pay the remaining balance on the mortgage after making the 12th payment, what is the remaining balance on the mortgage?
$98,127.29
The portfolio manager of Ludwig Company has excess cash that is to be invested for four years. He can purchase four-year Treasury notes that offer a 9 percent yield. Alternatively, he can purchase new 20-year Treasury bonds for $2.9 million that offer a par value of $3 million and an 11 percent coupon rate with annual payments. The manager expects that the required return on these same 20-year bonds will be 12 percent four years from now.
...
What is the forecasted market value of the twenty-year bonds in four years?
$2,790,720
How much would the manager be willing to pay for the bond assuming he sells it after four years? Which investment provides a better yield?
$3,046,047 ; The bonds provide a better yield.
A seven-year $1,000 par bond has an 8% annual coupon. The bond is callable after two years at a call price of $ 1,010. What is the bond yield assuming it will be called?
7.018%
TEST 3
TEST 3
The Sharpe Index measures the...
Excess return above the risk free rate per unit of risk
A stocks average return is 11%. The average risk free rate is 9%. The stocks beta is 1, and its standard deviation of returns is 10%. What is the Sharpe index?
.2
A stocks average return is 10%. The average risk free rate is 7%. The standard deviation of the stocks return is 4% and the stocks beta is 1.5. What is the Treynor index for the stock?
.02
A stocks beta is estimated to be 1.3. The risk free rate is 5%, and the market return is expected to be 9%. What is the expected return on the stocks based on the CAPM?
10.2%
A higher beta of an asset reflects...
Higher covariance between the assets returns and the market returns
The Capital Asset Pricing Model (CAPM) suggests that the required rate of return on a stock is directly influenced by the stocks...
Beta
Stock X has a lower beta than Stock Y. The market return for next month is expected to be either −1 percent, +1 percent, or +2 percent with an equal probability of each scenario. The probability distribution of Stock X returns for next month is
Less dispersed than that of Stock Y
Fabrizio, Inc. is expected to generate earnings of $1.50 per share this year. If the mean ratio of share price to expected earnings of competitors in the same industry is 20, then the stock price per share is $____.
$30.00
The ____ is not a measure of a stocks risk
Stocks return
Steam Corp. has a beta of 1.5. The prevailing risk-free rate is 5 percent and the annual market return in recent years has been 11 percent. Based on this information, the required rate of return on Steam Corp. stock is ____ percent.
14%
Bolwork Inc. is expected to pay a dividend of $5 per share next year. Bolwork's dividends are expected to grow by 3 percent annually. The required rate of return for Bolwork stock is 15 percent. Based on the dividend discount model, a fair value for Bolwork stock is $____ per share.
14.67%
The market risk premium is...
The return of the market in excess of the risk free rate.
A stock has a standard deviation of daily returns of 3 percent. We want to determine the lower boundary of its probability distribution of returns, based on 1.65 standard deviations from the expected outcome. The stock's expected daily return is .1 percent. The lower boundary is
−4.85 percent.
Boris stock has an average return of 15 percent. Its beta is 1.5. Its standard deviation of returns is 25 percent. The average risk-free rate is 6 percent. The Sharpe index for Boris stock is
.36
A higher beta of a stocks reflects
A higher covariance between the assets returns and the markets returns
The main use for bank funds is for...
Loans
Bank loans designed to support a firms ongoing business operations are called
Working capital loans
Which of the following is most appropriate for a business that may experience a sudden need for funds but does not know exactly when?
Informal line of credit
A ____ loan may be most appropriate when a bank wants to avoid adding more debt to it's balance sheet
Direct lease
The interest rate banks charge their most creditworthy customers is called the...
Prime rate
Deposit insurance has a limit of...
$250,000
For any given bank, federal funds ____ represent an ____?
Purchased ; Liability
An "off-balance-sheet commitment" that provides the bank's guarantee on the financial obligations of a borrower to a specific party is a
Standby letter of credit
Obtaining funds through ____, is not a common source of funds for banks to satisfy a temporary deficiency of funds
Issuing bonds
The potential risk that financial problems can spread through financial institutions and the financial system is referred to as systemic
Systemic
Mutual funds that are willing to repurchase their shares from investors at any given time are referred to as
Open end funds
____ funds do not normally repurchase their shares from investors
Closed end funds
Hedge funds differ from mutual funds in the sense that
Their investors cannot sell shares back to the fund at any time they desire
Money market funds invest mostly in...
Short term securities
If investors sell their mutual fund shares after the net asset value of the fund increases, the return is called
Share price appreciation
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