Financial Institution and Markets
Monash University
Semester One Final Examination 2012
Faculty of Business and Economics
Department of Accounting and Finance
EXAM CODES: AFC2000
TITLE OF PAPER: FINANCIAL INSTITUTIONS AND MARKETS
EXAM DURATION: 3 hours
READING TIME: 10 minutes
SOLUTIONS ONLY
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
Semester One Final Examination 2012
Faculty of Business and Economics
Department of Accounting and Finance
EXAM CODES: AFC2000
TITLE OF PAPER: FINANCIAL INSTITUTIONS AND MARKETS
EXAM DURATION: 3 hours
READING TIME: 10 minutes
SOLUTIONS ONLY
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