Fin 326 Final Set #7

Front 1

The spot foreign exchange market is where forward and futures contracts and swap agreements are transacted.

Back 1

F

Front 2

Two bonds are issued by the same company and have the same time to maturity, par value, and yield. Bond A only differs from Bond B because its 10% annual coupon is higher than Bond B's 8% annual coupon. Bond B will have a greater duration than Bond A.

Back 2

T
From hw #7, class notes. Bond A has a higher coupon than Bond B. More of its present value is received earlier, thus Bond B has the longer duration.

Front 3

The use of an exchange rate forward contract assures the FI of the opportunity to buy (or sell) the foreign currency at a future time at a known price.

Back 3

T

Front 4

Consider a $1,000 par value bond that has an annual yield of 5.00%, an annual coupon rate of 5.00%, and duration of 10.0 years. Determine the price change of the bond if yields increase by 50 basis points, i.e. by 0.50%. Use the formula: dp / P = - D/(1+R)*dR.
a. - $100
b. - $50
c. $0
d. + $50
e. + $100

Back 4

b. - $50
dp / P = - D/(1+R)*dR

dp = - (10.0 / 1.05) * 0.005*1,000 = - $47.62

Front 5

Buying an asset in one market at one price and selling it immediately in another market at a higher price is called
a. program trading
b. position trading.
c. pure arbitrage trading
d. risk arbitrage trading
e. principal transaction trading

Back 5

c. pure arbitrage trading

Front 6

An investor has $1.0M to invest and has a 1-year investment horizon. She wants to invest in either U.S. government bonds or Canadian government bonds. Suppose that U.S. bonds offer 5.00% annual interest, that Canadian bonds offer 4.00% and that the current spot exchange rate is $US 0.86 per canadian dollar. She also has the ability to lock in a 1-year forward rate of $US 0.89 per canadian dollar. Assume no transaction costs. She should
a. invest in U.S. government bonds
b. invest in Canadian government bonds
c. be indifferent between investing in either U.S. or Canadian government bonds
d. Not enough information available to answer.

Back 6

b. invest in Canadian government bonds

She earns a straight-forward 5.00% return by investing in U.S. government bonds.

If she invests in Canadian bonds, she will translate $US 1M into 1/0.86 = $C 1.162M. This will grow to 1.1629(1.04) = $C 1.209M. In one year, this amount will translate to
$C 1.209M *($US 0.89 per canadian dollar) = $1.076M. That amounts to a 7.6% return, far greater than the 5.00% return available in U.S. government bonds.

Front 7

A bank purchases a 1-year, $1 million Eurodollar deposit at an annual interest rate of 3.5 percent. It invests the funds in a one-year Swedish krone bond paying 8.0 percent per year. The current spot rate is SK5.00 / $US. The one-year forward rate on the Swedish krone is SK5.20 / $US.

Suppose that the bank can cover its foreign exchange exposure using the forward market. How much profit would the bank make on this transaction? Include the change in value of the assets and liabilities as well as interest income and interest expense
a. $60K
b. $40K
c. $20K
d. 0
e. -$20K

Back 7

d. 0

Interest plus principal expense on 1-year CD = $1m x (1 + 0.035) = $1,035,000

Principal of Swedish bond = $1,000,000*5.00 = SK5M

Interest and principle = SK5M * (1 + 0.080) = SK 5.400M

Interest and principle in dollars if hedged:
SK 5,400,000 / [SK5.20 / $US1.00] = $1,038,462

Profit = $1,038,462 - $1,035,000 = $3,462

Front 8

Suppose you participate in a Dutch auction, of the type we discussed in class. You value the auction item at a price of V. Which of the following is the best pricing strategy?
a. Expend some time and effort to get a feel for what other participants will bid. If they are going to bid high, then bid slightly higher than V. If they are going to bid low, then bid slightly lower than V.
b. Bid V.
c. Bid slightly lower than V.
d. Bid slightly higher than V.

Back 8

B

Front 9

A mutual fund’s primary regulator is
a. The Federal Reserve bank in the district in which the mutual fund is headquartered.
b. The U.S. Treasury Dept.
c. The New York Stock Exchange
d. The Securities and Exchange Commission
e. The office of the New York State Attorney General

Back 9

D

Front 10

An open-ended fund has stocks of three companies: 300,000 shares of IBM currently valued at $15/share, 60,000 shares of GE currently valued at $55/share, and 40,000 shares of Google currently valued at $400/share. The fund has 900,000 shares outstanding. What is the net asset value (NAV) of the fund?
a. $55
b. $45
c. $35
d. $25
e. $65

Back 10

d. $25
(300*15 + 60*55 + 40*400 ) / 900 = 23800/900 = $26.44

Front 11

Consider the opinion piece "To Save New York, Learn From London" written by N.Y. Senator Charles Schumer and New York City Mayor Blumenthal. Their main idea is that while New York remains the dominant global-exchange center, it is losing ground as the leader in commercial banking and insurance services.

Back 11

F
The main idea is that NYC has “been losing ground as the leader in capital formation.” Investment banking is the main concern.

Front 12

A high proportion of core deposits often is considered an early warning signal that the bank has above average risk assets, and thus an increased potential for failure in the future.

Back 12

F

Front 13

The ability of the FDIC to place a bank into receivership even though the book value of capital remains positive is an attempt to institute increased stockholder discipline.

Back 13

T

Front 14

Requiring higher capital ratios often is proposed as a method to reduce the incentive to take excessive risk because the moral-hazard risk-taking incentives are thought to decrease as the amount of net worth increases.

Back 14

T

Front 15

The number of bank failures in the U.S. during the decade of the 1980s was less than the number of bank failures in the period of 1933-79.

Back 15

F
There were more U.S. bank failures in the 1980s.