Exam I Study Guide
Exam I Study Guide FIN 3113
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This 5 page Study Guide was uploaded by Addison Harris on Monday February 8, 2016. The Study Guide belongs to FIN 3113 at Mississippi State University taught by Wei He in Summer 2015. Since its upload, it has received 70 views. For similar materials see Financial Systems in Finance at Mississippi State University.
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Date Created: 02/08/16
Financial Systems Exam 1: Chapter 1 & 2 1. An increase in income tax rates: Will decrease the savings rate Will decrease the supply of loanable funds Will increase interest rates 2. Inflation causes the demand curve for loanable funds to shift to the________ and causes the supply curve to shift to the ___________. Right; Left 3. Which of the following would normally be expected to result in an increase in supply of funds? Expected inflation declines Current income and wealth levels increase Near term spending needs of households decline 4. Financial intermediaries (FIs) can offer savers a sager, more liquid investment than a capital market security, even though intermediary invests in risky illiquid instruments because: FIs can diversify away some of their risk FIs closely monitor the riskiness of their assets 5. An investor requires a 3% increase to purchasing power in order to induce them to lend. She expects inflation to be 2% next year. The nominal rate she must charge is about what %? 5% (3% increase in purchasing power + 2% inflation) 6. The relationship between maturity and yield to maturity is called the _____________________. Term Structure 7. Advantages of putting your money in a bank deposit instead of directly buying capital market securities typically include: Delegated monitoring Better liquidity Less price risk 8. Secondary markets help support primary markets because secondary markets: Offer primary market purchasers liquidity for their holdings Update the price or values of the primary market claims Reduce the cost of trading the primary market claims 9. Financial intermediaries (FIs) can offer savers a sager, more liquid investment than a capital market security, even though intermediary invests in risky illiquid instruments because: FIs can diversify away some of their risk FIs closely monitor the riskiness of their assets 10. Which of the following are money market instruments? Negotiable CDs 11. Many households place funds with financial intermediaries (FIs) because many FI accounts provide Lower denominations than money market securities Better liquidity and less price risk than direct securities Shorter maturities than direct securities 12. Depository institutions include: Banks and Thrifts 13. A market that trades financial instruments only after the instruments have been issued is called a/an. Secondary market 14. According to the Unbiased Expectation Theory The long term spot rate is an average of the current and expected future short term interest rates. 15. According to the liquidity premium theory of interest rates Long term spot rates are higher than the average of current and expected future short term rates. 16. You buy an investment today for $9,825. You sell the investment in 90 days for $10,000. The effective annual rate (EAR) on this investment is. 7.42% (10,000/9,825)^(365/90) -1 o 365/90= 4.05556 (y^x) 17. The “yield curve” shows: Interest rates observed at a point in time, on securities of different maturity. 18. In the “loanable funds” framework, which of the following would be associated with a higher interest rate? A leftward shift, or decrease, in the supply of funds 19. William puts $8,000 in the bank today. The quoted interest rate is 8%, and the bank compounds interest quarterly. If William makes no further deposits, how much will he have at the end of 9 years? $16,319 FV= PV(1+r)^t 8,000(1+.08/4)^9(4) 8,000(1.02)^36 20. Julie has $2,000 in her bank right now. In addition, she will be making 4 more deposits of $1,000-at the end of each of the next 4 years. If the bank pays 6% per year, compounded annually, how much will Julie have in her account at the end of 4 years? (To the nearest dollar) $6,900 functions on calculator 21. A bank paid a stated annual interest rate of 12%, with monthly compounding. What was the equivalent (or “effective”) annual rate? 12.68% (1+.12/12)^12-1 22. The amount an investment is worth after 1 or more periods of time is the __________________. Future Value 23. Jim owns a corporate bond issued by Packer Freezers Inc. The company is doing okay, and it pays it coupons in a timely manner. But Jim wants to sell the bond-and his broker is having a hard time finding a willing buyer. Jim appears to be having a first-hand encounter with: Liquidity Risk 24. Assume the unbiased expectation theory is true. The current, 1-year Treasury yield is 4%. Suppose the market expects that the 1-year Treasury yield will be 7% in one year’s time. What is the current 2-year Treasury yield? (nearest tenth of a percent) 5.5% 25. A typical supply curve for funds (in the “Loanable Funds” framework) depicts: More funds supplied as the interest rate rises 26. We might call this a market for “used” securities-the securities trading here were issued sometime earlier. This is the: Secondary market 27. The key distinguishing feature of the __________________ is that securities of up to a year in maturity are traded there. Money market 28. With a ________________transaction, no new funds are generated for the original issuer of the security. Secondary market 29. Suppose a financial institution issues securities of 1 maturity, and uses the proceeds to buy securities of a different maturity. This sort of activity would be described as: Maturity intermediation 30. If an asset can be more readily converted into cash, we would say that this is: More liquid 31. The process of accumulating interest on an investment over time to earn more interest is called: Compounding 32. An annuity stream of cash flow payments is: A set of level cash flows occurring each time period for a fixed length of time 33. The interest rate expressed as if it were compounded once per year is called the: Effective annual rate 34. The process of finding the present value of some future amount is often called: Discounting 35. An investor wants to buy 4% more goods and services in the future in order to induce her to invest today. During the investment period prices are expected to rise by 2%. 4% is the desired real rate of interest 6% is the approximate nominal rate of interest required 2% is the expected inflation rate over the period 36. The primary policy tool used by the Fed to meet its monetary policy goals is: Open market operations 37. Which of the following is the major monetary policy making body of the U.S. Federal Reserve System? FOMC 38. The fed funds rate is the rate that Banks charge each other on loans of excess reserves. 39. The discount rate is that rate that The Federal Reserve charges on loans to commercial banks 40. A decrease in reserve requirements could lead to a(n) Increase in bank lending Increase in the money supply 41. If the Fed wishes to stimulate the economy, it could: Buy U.S. government securities Lower reserve requirements 42. If the Federal Reserve were to buy dollars by selling yen the result would be to _________ the supply of U.S. dollars and _______ the exchange rate in terms of the number of yen per U.S. dollar. Decrease, Raise 43. Currently the Fed sets monetary policy by targeting The Fed funds rate 44. The Federal Reserve System is charged with Conducting monetary policy Providing payment and other services to a variety of institutions 45. The major asset of the Federal Reserve is U.S. Treasury Securities 46. An 8-year corporate bond ($1,000 Par) pays has a 7% coupon rate. What should be the bond’s price if the required return is 6% and the bond pays interest semiannually? $1,062.81 47. A 15-year corporate bond ($1,000 par) pays $40 interest every 6 months. What is the bond’s price if the bond’s promised ytm is5.5%? $1,261.32 48. The common stock of ACME just paid a $1.00 dividend per share, but its dividend is expected to grow at 4% per year forever. It has a 12 % required return. How much should you be willing to pay for a share of the stock? $13 49. The possibility that a bond issuer will not pay back the investor in a timely manner is the essence of: Default risk 50. You want to have $5 million when you retire in 40 years. You believe you can earn 9% per year on your investment. How much must you invest each year to achieve your goal when you retire? (Ignore all taxes) $14,798 Functions on calculator 51. * Bonus * A bank manager lends a corporate client $1,000,000 for 6 months. The bank charges a $1,000 fee to set up the loan. The corporate borrower repays $1,050,000 in 6 months. What is the effective annual rate (EAR) on the loan? 10.47% 52. * Bonus * You just received $225,000 from an insurance settlement. You have decided to set this money aside and invest it for your retirement. Currently, your goal is to retire 25 years from today. How much more will you have in your account on the day you retire if you can earn an average return of 10.5%? $1,189,576 53. You go to the Wall Street Journal and notice that yields on almost all corporate and Treasury bonds have decreased. The yield decreases may perhaps be explained by which one of the following: A decrease in U.S. inflationary expectations 54. * Bonus * You are trying to compare the desirability of 2 alternative investments with rates of return quoted using different compounding periods. To make the proper decision you should: Convert each quoted return to an effective annual rate 55. * Bonus * Which of the following statements is FALSE? When comparing investments, it is best not to rely solely on quoted rates Compounding typically leads to differences between quoted and effective rates The APR on a loan with monthly payments is less than the annual interest you actually pay. The APR is the interest rate per period multiplied by the number of periods per year With monthly compounding, the APR will be larger than the effective annual rate.
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