Financial Institution and Markets

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Monash University
Semester One Final Examination 2012

Faculty of Business and Economics
Department of Accounting and Finance




READING TIME:10 minutes


SECTION A (20 Marks)

In questions requiring a day count convention, assume 365 days unless otherwise stated.

1. The term structure of interest rates:

*a. describes the relationship between maturity and yield for similar securities. b. ranks security yield according to the default risk structure. c. describes how interest rates vary over time.

d. describes the pattern of interest rates over the business cycle.

2. The liquidity premium theory of the term structure of interest rates is best supported by what type of yield curve?

a. A decreasing curve over time.
b. A flat yield curve.
*c. An increasing yield curve over time.
d. None of the above.

3. Maturity gap analysis is:

a. a measure of the difference between the duration of a bank's assets and the duration of its liabilities. *b. a comparison of the value of assets that will either mature or be repriced within a given time interval with the value of liabilities that will either mature or be repriced during the same time period. c. when a bank adjusts its asset and liability durations to zero. d. how much the cumulative gap will change during a future interval.

4. Banks participate in the markets for interest rate and currency forwards, futures, options and swaps because:

*a. they may use derivatives to speculate on the direction of changes in interest rates or currency exchange rates. b. they may use derivatives to earn higher profits.
c. derivatives are bank's source of fund.
d. b and c.

5. Which of the following statements is not true about repurchase agreements?

a. These are a form of secured borrowing by a bank.
b. They are settled in federal funds.
*c. These are seldom used by the Federal Reserve for making temporary reserve positions adjustments. d. Treasury securities are often used in this type of transaction.

6. When firms issuing commercial paper use a backup line of credit, it:

a. increases the credit risk for investors.
*b. decreases the credit risk for investors.
c. has no impact on investors.
d. decreases the marketability of commercial paper.

7. A firm buys $1,000,000 of a 30-day commercial paper issue $995,450. The yield on this commercial paper is:

*a. 5.56%
b. 5.46%
c. 5.49%
d. 5.54%

8. The sale of securities to the public via an investment banker by a new corporation raising funds is called

a. a seasoned offering.
b. a secondary offering.
*c. an initial public offering.
d. a best efforts offering.

9. The security market line represents:

a. the amount of risk demanded for each unit of return. *b. the rate of return for each unit of risk.
c. the sum of the systematic and unsystematic risks.
d. the risk/return tradeoff over time.

10. A farmer growing wheat is ______ in wheat and may hedge price risk by ______ wheat futures.

a. short; long
b. buying; selling
c. selling; buying
*d. long; selling

11. The value of an option varies directly with:

a. the price variance of the underlying commodity.
b. the time to expiration.
c. the level of interest rates.
*d. all of the above.

12. Index arbitrageurs:

*a. buy and sell huge quantities of shares whenever the value of a share-index futures contract is not equal to the value of its underlying shares. b. buy and sell huge quantities of shares whenever the value of a share-index futures contract is equal to the value of its underlying shares. c....
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