Fin 326 Final Set #4

Front 1

An IPO is an Initial Placement Offering, which constitutes the “placement,” or sale of a company’s stock, to one or a few large institutional investors.

Back 1

F
Initial *Public* Offering....sold to the public

Private Placement....stock sold to one or a few large institutional investors.

Front 2

Suppose you manage a U.S.-based FI in Rome and you expect the Euro to appreciate in the near future. Would you prefer your FI to be net long or net short in its Euro-denominated asset positions?
a. Net Long
b. Net Short

Back 2

a. Net Long

Front 3

Suppose--for U.S. treasury securities--the one-year spot rate were 9.00%. Suppose the two-year spot rate were 10.00%. One year from now, using the unbiased expectations theory, what is the expected one-year spot rate?
a. 9.0%
b. 10.0%
c. 12.0%
d. 11.0%
e. Not enough information given to solve this problem.

Back 3

d. 11.0%
1.10^2 = (1.09)(1 + E2r1)

E2r1 = 11.01%

Front 4

Consider a three-year maturity, $100,000 face value bond that pays a 10 percent fixed coupon annually.
What is the price of the bond if market interest rates are 10 percent?
a. >= $110,000
b. >=$95,000 and <$100,000
c. >=$100,000 and <$105,000
d. <$95,000
e. >=$105,000 and <$110,000

Back 4

c. >=$100,000 and <$105,000

Front 5

Participation in the activities relating to the underwriting and distribution of new issues of debt and equity by a securities firm involves the function of
a. investment banking.
b. market making.
c. trading.
d. investing.
e. merger and acquisitions.

Back 5

a. investment banking.

Front 6

An increase in interest rates typically
a. has no impact on the market value of the FI's financial assets and liabilities.
b. increases the book value of the FI's financial assets and liabilities.
c. increases the market value of the FI's financial assets and liabilities.
d. decreases the book value of the FI's financial assets and liabilities.
e. decreases the market value of the FI's financial assets and liabilities.

Back 6

e. decreases the market value of the FI's financial assets and liabilities.

Front 7

In the U.S., there are advantages of owning assets subject to the capital gains tax. Which one of the following is not such an advantage?
a. capital gains can be offset by capital losses, in the same year in which they occur.
b. capital gains can be offset by prior year’s capital losses, to some extent.
c. capital gains on assets owned by mutual funds can be deferred at the discretion of the mutual fund shareholder.
d. capital gains tax rates are typically lower than the rate on ordinary income.
e. All of the above are advantages of owning assets subject to the capital gains tax.

Back 7

c. capital gains on assets owned by mutual funds can be deferred at the discretion of the mutual fund shareholder.

Front 8

Consider the economics of insurance examples that we discussed in class, only with different numbers. Suppose that an individual has a 1/10th chance of having a car accident that would cause $40,000 of damage. He has a 9/10ths chance of not having an accident, in which case his wealth would be $102,500. If he has no insurance policy, what is his expected utility? (Use the same utility function from class: U = W1/2.)
a. <= 300.000
b. >= 315.000
c. > 305.000 and <= 310.000
d. > 300.000 and <= 305.000
e. > 310.000 and < 315.000

Back 8

e. > 310.000 and < 315.000
(1/10)250 + 9/10(102,500^0.5) = 313.141

Front 9

The market value of a fixed-rate liability will decrease as interest rates decrease. On the other hand, the market value of a fixed-rate asset will increase as interest rates decrease.

Back 9

F
Any fixed-rate financial instrument will increase in value as interest rates decrease. It doesn’t matter who holds it, or if it’s a bond or a loan, its value will increase.

Front 10

According to our recent guest speakers, board of director members of a bank--as opposed to a credit union--are more likely to have had a career in the banking industry.

Back 10

T
Credit union board members are more likely to be community leaders having a non-banking career path.

Front 11

Suppose that large European pension funds decide to permanently increase their holdings of U.S. Treasury Securities. As a result, interest rates in the U.S. would rise.

Back 11

F
The price of U.S. Treasury securities would--in general--rise. This means that their rates would fall.

Front 12

Insurance companies prefer to insure risks that are uncorrelated, as opposed to risks that are highly correlated.

Back 12

T
Class discussion. Insurance companies can diversify uncorrelated risks. They cannot, however, diversify systematic risks. For this reason, it is difficult to insure against correlated losses, e.g. earthquakes, nuclear accident, war. These risks are correlated. (It is very hard for your neighbor to experience nuclear fallout while you don’t.)

Front 13

For a risk-averse consumer, betting $20 on each of 25 separate coin tosses (i.e. equal chances of winning or losing $20 for each toss of the coin) is more risky than betting $500 on one coin toss.

Back 13

F
The expected winnings of both cases is the same, zero. However, the standard deviation of the 25 separate coin tosses will be much lower.

Front 14

You can get a quantitative assessment of financial market's expectations of changes in the federal funds target rate. All one needs to do is examine the prices of federal funds rate futures contracts.

Back 14

T

Front 15

One of the responsibilities of the OCC, a division of the SEC, is to audit the financial statements of large, nationally chartered banks.

Back 15

F
The OCC is a division of the Treasury. Also, they view themselves as examiners, not auditors.