兹维博迪金融学第二版试题库2TB

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ChapterTwo

FinancialMarketsandInstitutions

Thischaptercontains49multiple-choicequestions,20shortproblemsand10longerproblems.

MultipleChoice

1.Amarketthathasnoonespecificlocationistermeda(n)________market.

over-the-counter

geographiclocation

intermediary

conceptual

Answer:(a)

2.________problemsarisebecausepartiestocontractsoftencannoteasilymonitororcontroloneanother.

Payment

Counter

Incentive

Exchange

Answer:(c)

3.Incentiveproblemstakeavarietyofformsandinclude:

moralhazard

adverseselection

principal-agent

alloftheabove

Answer:(d)

4.The________problemexistswhenhavinginsuranceagainstsomeriskcausestheinsuredpartytotakegreaterriskortotakelesscareinpreventingtheeventthatgivesrisetotheloss.

moralhazard

adverseselection

principal-agent

alloftheabove

Answer:(a)

5.Lifeannuitiesareexamplesof________problems.

moralhazard

adverseselection

principal-agent

alloftheabove

Answer:(b)

6.________meansgivingthelendertherighttoseizespecificbusinessassetsintheeventofdefault.

Increasingmoralhazard

Increasingadverseselection

Collateralizationofloans

Alloftheabove

Answer:(c)

7.________instrumentsarealsocalledfixed-incomeinstruments.

Debt

Equity

Derivative

Alloftheabove

Answer:(a)

8.Themarketforshort-termdebt(lessthanoneyear)iscalledthe________market,andthemarketforlong-termdebtandequitysecuritiesiscalledthe________market.

capital;money

money;capital

fixed-income;money

derivative;equity

Answer:(b)

9.________securitiesarefinancialinstrumentsthatderivetheirvaluefromthepricesofoneormoreotherassets.

Debt

Equity

Derivative

Fixed-income

Answer:(c)

10.Acalloptiongivesitsholdertherightto________someassetataspecifiedpriceonorbeforesomespecifiedexpirationdate.

sell

buy

loan

borrow

Answer:(b)

11.Aputoptiongivesitsholdertherightto________someassetataspecifiedpriceonorbeforesomespecifiedexpirationdate.

sell

buy

loan

borrow

Answer:(a)

12.________contractsobligeonepartytothecontracttobuy,andtheotherpartytosell,someassetataspecifiedpriceonsomespecifieddate.

Options

Uncertainty

Moneymarket

Forward

Answer:(d)

The________curvedepictstherelationbetweeninterestratesonfixed-incomeinstrumentsissuedbytheU.S.Treasuryandthematurityoftheinstrument.

long-term

short-term

yield

exchangerate

Answer:(c)

Iftheshort-termratesarehigherthanthelong-termrates,thentheyieldcurveis________.

upwardsloping

downwardsloping

horizontal

vertical

Answer:(b)

Questions15and16areintendedtobecalculatedasapair.

SupposeyouareaFrenchinvestor,whowantsasafeinvestmentintermsoffrancs.Youareinvestingforoneyearandtheinterestrateonaone-yearFrenchgovernmentbondis5%andatthesametimeitis9%onaU.S.governmentbond.Theexchangerateiscurrently6.15Frenchfrancstothedollar.Supposeyouinvest$1,000inaU.S.bond.AlsosupposethatayearfromnowtheFrenchfranc/dollarexchangerateis6.50Frenchfrancstothedollar.WhatwillbetherealizedFrenchfrancrateofreturnontheU.S.bond?

5.69%

9.00%

15.2%

7.00%

Answer:(c)

Inquestion15,whatwouldtheexchangerateatyear’sendhavetobeinorderfortheFrenchinvestortoearnexactly4%peryearontheinvestmentinU.S.bonds?

6.20FF/$

5.87FF/$

6.40FF/$

5.42FF/$

Answer:(b)

Usethefollowingyielddatatoanswerquestions17and18.

2/29/98

Treasury1-10yr 5.58%

10+yr 5.72

Corporate1-10yrHighQlty 5.98

MedQlty 6.17

Corporate10+yrHighQlty 6.26

MedQlty 6.57

17.CalculatetheyieldspreadforTreasurybondswithmaturity1-10yearandcorporatebondsofhighqualityofthesamematurity.

11.56%

0.68%

0.59%

0.40%

Answer:(d)

18.CalculatetheyieldspreadforTreasurybondswithmaturity10+yearsandcorporatebondsofmediumqualityofthesamematurity.

12.29%

0.85%

0.54%

0.45%

Answer:(b)

Youinvestinastockthatcosts$45.50pershare.Itpaysacashdividendduringtheyearof$1.20andyouexpectitspricetobe$49atyear’send.Whatisyourexpectedrateofreturnifyousellthestockfor$49attheendoftheyear?

2.64%

7.69%

10.33%

–5.05%

Answer:(c)

Youinvestinastockthatcosts$45.50pershare.Itpaysacashdividendduringtheyearof$1.20andyouexpectitspricetobe$49atyear’send.Whatisyourexpectedrateofreturnifyoudonotsellthestockattheendoftheyear?

2.64%

7.69%

10.33%

–5.05%

Answer:(c)

Youinvestinastockthatcosts$45.50pershare.Itpaysacashdividendduringtheyearof$1.20andyouexpectitspricetobe$49atyear’send.Whatisyourrealizedrateofreturnifthestock’spriceisactually$42atyear’send?

–5.05%

18.02%

10.33%

5.05%

Answer:(a)

22.The________thestandarddeviation,the________thevolatilityoftherateofreturn.

higher,lower

lower,higher

higher,higher

noneoftheabove

Answer:(c)

________isaninvestmentstrategythatseekstomatchthereturnsofaspecifiedstockmarketindex.

Indexing

Benchmarking

Replicating

Diversifying

Answer:(a)

24.Supposetherisk-freenominalinterestrateonaone-yearU.S.Treasurybillis7%peryearandtheexpectedrateofinflationis3%peryear.WhatistheexpectedrealrateofreturnontheT-bill?

4%

3.88%

1.34%

3.74%

Answer:(b)

25.Supposetherisk-freenominalinterestrateonaone-yearU.S.Treasurybillis6%peryearandtheexpectedrateofinflationis4%peryear.WhatistheexpectedrealrateofreturnontheT-bill?

2%

5%

1.92%

1.89%

Answer:(c)

26.SupposethattherealrateofinterestonaTIPSis4.5%peryearandtheexpectedrateofinflationintheU.S.is5%peryear.Whatistheexpectednominalrateofreturnonthesebonds?

0.476%

4.75%

9.73%

9.75%

Answer:(c)

27.Currentlyyouhaveabankaccountcontaining$6,000,whichearnsinterestatarateof4%peryear.Youalsohaveanunpaidbalanceonyourcreditcardof$3,000onwhichyouarepayinganinterestrateof18%peryear.Ifthetimeframeisoneyear,thearbitrageopportunityyoufaceis:

$420

$540

$120

$300

Answer:(a)

28.A________interestrateisdenominatedinunitsofsomecurrency,whereasa________interestrateisdenominatedinunitsofsomecommodityor“basket”ofgoodsandservices.

real,nominal

real,treasury

nominal,real

treasury,real

Answer:(c)

29.________arefirmswhoseprimaryfunctionistohelpbusinesses,governments,andotherentitiesraisefundstofinancetheiractivitiesbyissuingsecurities.

Closed-endfunds

Investmentbanks

Assetmanagementfunds

Open-endfunds

Answer:(b)

30.Currently,youhave$24,000inabankaccountearninganinterestrateof4%peryear.Atthesametimeyouhaveanunpaidbalanceonyourcreditcardof$12,000onwhichyouarepayinganinterestrateof18%peryear.Ifthetimeframeisoneyear,thearbitrageopportunityyoufaceis:

$2,160

$1,200

$480

$1,680

Answer:(d)

31.IntheUnitedStates,the________establishestheprecisedisclosurerequirementsthatmustbesatisfiedforapublicofferingofsecurities.

FinancialAccountingStandardsBoard

WorldBank

FederalReserve

SecuritiesandExchangeCommission

Answer:(d)

32.Investmentprofessionalstypicallyusea(n)________indexasabenchmarkformeasuringtheperformanceofcommonstockmutualfunds.

inflationadjusted

firm-sizeweighted

market-weighted

book-weighted

Answer:(c)

33.TheDowJonesIndustrialIndexhassomemajordefects,whichinclude:

ItisnotbroadlydiversifiedenoughtoaccuratelyreflectthewidespectrumofstocksintheUnitedStates.

Itcorrespondstoaportfoliostrategythatisunsuitableasaperformancebenchmark.

Itonlyincludesthe30largestcorporations.

(a)and(b)

Answer:(d)

34.Interest-ratearbitrageis________atalowerrateand________atahigherrate.

borrowing,lending

borrowing,defaulting

defaulting,lending

lending,borrowing

Answer:(a)

35.________investtheirfundsinanewbusinessesandhelpthemanagementteamgetthefirmtothepointatwhichitisreadyto“gopublic.”

Investmentbanks

Venturecapitalists

Assetmanagementfirms

Mutualfunds

Answer:(b)

Thecasewherethereisanimbalanceintheexchangeofinformationaboutabusinessopportunityisknownas________.

informationsymmetry

informationasymmetry

informationassets

(a)and(c)

Answer:(b)

Whichofthefollowingrepresentsadefined-contributionpensionplan?

Apensionplanintowhichtheemployerandemployeemakeregularcontributions.

Apensionplanwhosebenefitisdeterminedbyaformulathattakesintoaccountyearsofservice,wages,andsalary.

Apensionplanwhosebenefitformulais1%ofretirementsalaryforeachyearofservice.

Alloftheabove

Answer:(a)

Whichofthefollowingarecharacteristicofamutualfund?

professionalmanagement

diversification

efficientrecordkeepingandadministration

alloftheabove

Answer:(d)

Netassetvalueisdefinedasthe________.

futurevalueofallassetshelddividedbythenumberofsharesoutstanding

bookvalueofallsecuritieshelddividedbythenumberofsharesoutstanding

marketvalueofallsecuritieshelddividedbythenumberofsharesoutstanding

bookvalueofallassetshelddividedbythenumberofsharesoutstanding

Answer:(c)

Whichofthefollowingdescribesamoneymarketinstrument?

long-term

liquid

high-risk

alloftheabove

Answer:(b)

Acountry’s________providesthesupplyoflocalcurrencyandoperatestheclearingsystemforthebanks.

stockexchange

underwriter

centralbank

investmentbank

Answer:(c)

Whichofthefollowingstatementsismostcorrect?

open-endmutualfundsandclosed-endfundsareidentical

open-endmutualfundsstandreadytoredeemorissuesharesatNAV

closed-endmutualfundsstandreadytoredeemorissuesharesatNAV

mutualfundsprovideapoormeansofdiversification

Answer:(b)

Whichofthefollowingstatementsismostcorrect?

closed-endmutualfundsdonotredeemorissuesharesatNAV

closed-endmutualfundpricescandifferfromNAV

sharesofclosed-endfundsaretradedthroughbrokers

alloftheabovearecorrect

Answer:(d)

IntheUnitedStates,the________prohibitedcommercialbanksfromengaginginmostunderwritingactivities.

InvestmentBankActof1909

SECAct

GlassSteagallActof1933

CommercialBankActof1952

Answer:(c)

Rulesfortradingsecuritiesservethefunctionof________.

recognizingwhengovernmentinactionisthebestchoice

standardizingprocedurestokeeptransactioncostslow

presentingfinancialinformationinastandardizedformat

establishingarbitraryrulestoensurethemaximumrevenuefromtransactionfees

Answer:(b)

InGermany,thecentralbankiscalledthe________.

Riksbank

Bundesbank

BankofGermany

Exchequer

Answer:(b)

Fortheperiod1926-2003,whichofthefollowingassetclassesprovidedthehighestaveragerateofreturn?

Long-termU.S.Treasurybonds

U.S.T-bills

Inflation

Smallstock

Answer:(d)

Fortheperiod1926-2003,whichofthefollowingassetclassesprovidedthelowestvolatilityoftherateofreturn?

Long-termU.S.Treasurybonds

U.S.T-bills

Inflation

Smallstock

Answer:(b)

The________istheunitofaccountforcomputingtherealrateofreturn.

nominalinterestrateonstock

standardizedbasketofconsumptiongoods

country’srateofinflation

noneoftheabove

Answer:(b)

ShortProblems

1.Giveabriefdefinitionoffinancialintermediaries.Providethreeexamplesoffinancialintermediariesandtheproductstheyoffer.

Answer:Financialintermediariesaredefinedasfirmswhoseprimarybusinessistoprovidefinancialservicesandproducts.Amongthemaintypesofintermediariesarebanks,investmentcompaniesandinsurancecompanies.Productsofferedincludecheckingaccounts,commercialloans,mortgages,mutualfundsandawiderangeofinsurancecontracts.

Considerthefollowingyielddataandanswerquestions2and3:

2/29/98

Treasury1-10yr 5.58%

10+yr 5.72

Corporate1-10yrHighQlty 5.98

MedQlty 6.17

Corporate10+yrHighQlty 6.26

MedQlty 6.57

2.CalculatetheyieldspreadforTreasurybondswithmaturity10+yearsandcorporatebondsofhighqualityofthesamematurity.

Answer:YieldSpread=6.26–5.72%

=0.54%

3.CalculatetheyieldspreadforTreasurybondswithmaturity1-10yearsandcorporatebondsofmediumqualityofthesamematurity.

Answer:YieldSpread=6.17–5.58%

=0.59%

4.DiscussthelevelandshapeoftheTreasuryyieldcurvesthathaveappearedinthelatestmedia.

Answer:Answerswillvarydependingonmediaannouncementsatthetime.

5.Youinvestinastockthatcosts$42.50pershare.Itpaysacashdividendduringtheyearof$1.80andyouexpectitspricetobe$45atyear’send.Whatisyourexpectedrateofreturnifyousellthestockfor$45attheendoftheyear?

Answer:Expectedrateofreturn=EndingPrice–BeginningPrice+CashDividend

BeginningPrice

=$45-$42.50+$1.80

$42.50

=10.12%

6.RefertoQuestion5.Whatifyoudonotsellthestockattheendoftheyear?

Answer:Youmeasuretherateofreturnexactlythesameway,whetherornotyousell.Thepriceappreciationisasmuchapartofyourreturnsthedividend.Thatyouchoosetokeepitdoesnotchangethefactthatyoucouldconvertitinto$45cashattheendoftheyear.

7.Youinvestinastockthatcosts$42.50pershare.Itpaysacashdividendduringtheyearof$1.80andyouexpectitspricetobe$45atyear’send.Whatisyourrealizedrateofreturnifthestock’spriceisactually$39atyear’send?

Answer:Realizedrateofreturn=EndingPrice–BeginningPrice+CashDividend

BeginningPrice

=$39-$42.50+$1.80

$42.50

=-4%

8.Supposetherisk-freenominalinterestrateonaone-yearU.S.Treasurybillis5%peryearandtheexpectedrateofinflationis3%.WhatistheexpectedrealrateofreturnontheT-bill?

Answer:Realrate=Nominalinterestrate–RateofInflation

1+Rateofinflation

=0.05–0.03

1+0.03

=0.02

1.03

=1.94%

9.SupposeyouareaDutchinvestor,whowantsasafeinvestmentintermsofGuilders.Youareinvestingforoneyearandtheinterestrateonaone-yearNetherlandsgovernmentbondis6%andatthesametimeitis9%onaU.S.governmentbond.Theexchangerateiscurrently2.05Guilderstothedollar.Supposeyouinvest$1,000inaU.S.bond.AlsosupposeayearfromnowthattheGuilder/dollarexchangerateis2.15Guilderstothedollar.WhatwillbetherealizedDutchrateofreturnontheU.S.bond?

Answer:Dutchrealizedrateofreturn=$1090xFutureGuilderpriceofdollar–2050

2050

=$1090x2.15–2050

2050

=14.32%

10.RefertoQuestion9.Whatdoestheexchangeratehavetobeatyear’sendfortheDutchinvestortoearnexactly12%peryearontheinvestmentinU.S.bonds?

Answer:Dutchrateofreturn=$1090xFutureGuilderpriceofdollar–2050

2050

0.12=$1090xGuilderprice–2050

2050

FuturepriceofGuilder=2.11Guilderperdollar

Distinguishbetweennominalinterestratesandrealinterestrates.

Answer:Thenominalinterestrateisthepromisedamountofmoneyyoureceiveperunityoulend.Therealrateofreturnisthenominalinterestrateyouearncorrectedforthechangeinpurchasingpowerofmoney.Anominalinterestrateisdenominatedinunitsofsomecurrency;arealinterestrateisdenominatedinunitsofsomecommodityorbasketofgoodsandservices(commonly,whateverbasketisusedtocomputetheCPI).

Discussthecostsassociatedwithtradingstocksandwhyindexfundsprovidealow-costadvantage.

Answer:Costscancomeintheformof:

thefund’sexpenseratio(whichincludesadvisoryfees,distributioncharges,andoperatingexpenses).

Portfoliotransactioncosts(brokerageandaftertradingcosts).

Oneoftheprimeadvantagesofanindexfundshouldbeitslowcost.Anindexfundshouldpayonlyminimaladvisoryfees,keepoperatingexpensesatthelowestpossiblelevel,andshouldkeepportfoliotransactioncostsatminimallevels.

Discusstheinvestmentapproachknownasindexing.

Answer:Indexingisaninvestmentapproachthatseekstomatchtheinvestmentreturnsofaspecifiedstockmarketindex.Whenindexing,aninvestmentmanagerattemptstoreplicatetheinvestmentresultsofthetargetindexbyholdingall–orarepresentativesample–ofthesecuritiesintheindex.Indexingisapassiveinvestmentapproachemphasizingbroaddiversificationandlowportfoliotradingactivity.

Outlinethepurposeofamutualfundanddescribetheadvantagesofinvestingwithamutualfund.

Answer:Amutualfundisonethatpoolsthefinancialresourcesofmanysmallsaversandinveststheirmoneyinsecurities.Amutualfundhassubstantialeconomiesofscaleinrecordkeepingandinexecutingpurchasesandsalesofsecuritiesandoffersitscustomersamoreefficientwayofinvestinginsecuritiesthanthedirectpurchaseandsaleofsecuritiesinthemarkets.Italsoprovidesanefficientmeansofdiversification.

Defineinterest-ratearbitrage.

Answer:Interest-ratearbitrageisborrowingatalowerrateandlendingatahigherrate.

DescribethemainfeaturesoftheIMFandtheBankforInternationalSettlements.

Answer:TheBankforInternationalSettlements(BIS)promotesuniformityofregulations.TheIMFmonitorseconomicandfinancialconditionsinmembercountries,providestechnicalassistance,establishesrulesforinternationaltradeandfinance,providesaforumforinternationalconsultationandprovidesindividualmembersalengthenedtime(ifnecessary)tocorrectimbalancesintheirpaymentstoothercountries.

Youinvestinastockcosting$60pershare.Itpaysacashdividendduringtheyearof$2.50,andyouexpectitspricetobe$85atyear’send.Calculateyourexpectedrateofreturn.Ifthestockpriceattheendoftheyearisactually$50,calculateyourrealizedrateofreturn.

Answer:Expectedrateofreturn=($2.50+$85-$60)/$60=45.8%

Realizedrateofreturn=($2.50+$50-$60)/$60=-12.5%

Youinvestinastockcosting$45pershare.Itpaysacashdividendof$3.20duringtheyear,andyouexpectitspricetobe$60attheendoftheyear.Ifthepriceisactually$42attheendoftheyear,calculateyourrealizedrateofreturn.

Answer:Realizedrateofreturn=($3.20+$42-$45)/$45=0.4%

Supposeyouhave$15,000inabankaccountearninganinterestrateof5%peryear.Atthesametimeyouhaveanunpaidbalanceonyourcreditcardof$8,000forwhichyouarepaying18%interest.Whatisthearbitrageopportunityyouface?

Answer:Ifyoutake$8,000outofyourbankaccountandpayoffthecreditcardyougiveup0.05%x$8,000=$400,butyoucansave0.18x$8,000=$1,440ininterestexpenses.Sothearbitrageopportunityisworth$1,040peryear.

SupposetherealrateofinterestonaTIPSis4%peryear,andtheexpectedU.S.inflationrateis3.5%peryear.Whatistheexpectednominalrateofreturnonthesebonds?

Answer:(1+nominalrate)=(1+realrate)x(1+inflation)

=(1.04)x(1.035)

=1.0764

nominalrate=7.64%peryear

LongerProblems

Discussthefourmainfactorsthatdetermineratesofreturninamarketeconomy.

Answer:Thefourmainfactorsthatshouldbediscussedare:

Theproductivityofcapitalgoods–expectedratesofreturnonmines,dams,roads,bridges,factories,machineryandinvestments

Thedegreeofuncertaintyregardingtheproductivityofcapitalgoods

Thetimepreferencesofpeople

Riskaversion

Discusstheroleofthefinancialintermediaryandgivetwoexamples.

Answer:Afinancialintermediaryisanentitywhoseprimarybusinessistoprovidecustomerswithfinancialproductsthatcannotbeobtainedmoreefficientlybytransactingdirectlyinsecuritiesmarkets.

Examplesincludebanks,insurancecompanies,mutualfunds,investmentcompanies,venturecapitalfirms,assetmanagementfirms,andpensionandretirementfunds.

Supposethatyouhave$30,000inabankaccountearninganinterestrateof6%peryear.Atthesametimeyouhaveanunpaidbalanceonyourcreditcardof$14,000onwhichyouarepayinganinterestrateof18%peryear.Whatisthearbitrageopportunityyouface?

Answer:Youcouldtake$14,000outofyourbankaccountandpaydownyourcreditcardbalance.Youwouldgiveup6%peryearininterestearnings($840peryear),butyouwouldsave18%peryearininterestexpenses($2,520peryear).Therefore,thearbitrageopportunityis$1,680peryear.

UsethedatainthetablebelowtocomputeboththeDIJ-typeindexandthemarket-weightedindexforahypotheticaltwo-stockindex.Discusswhichindexmoreaccuratelyreflectstherealityofthemarket.

StockPrice MarketValue

Company

Baseyear

Now

NumberofShares

BaseYear

Now

Stock1

$20

$30

100million

$2billion

$3billion

Stock2

$10

$2

50million

$500million

$100million

Total

$2.5billion

$3.1billion

Answer:

DJItypeindex=Averageofcurrentstockpricesx100

Averageofstockpricesinbaseyear

=(30+2)/2x100

(20+10)/2

=106.67,indicatinganincreaseof6.67%

market-weightedindex=(0.8x30/20)+(0.2x2/10)x100

=(1.2+0.04)x100

=124,indicatinganincreaseof24%

Themarket-weightedindexshowsa24%increase,whichreflectswhathasactuallyhappenedtothetotalmarketvalueofallstocks:2.5billionto3.1billionisgrowthof0.6billion,whichasapercentis(0.6)/(2.5)=24%

Youinvestinastockthatpays$2perquarterandcostsyou$50.50pershare.Attheendoftheyearyouexpectthestockpricetobe$59.50.Whatistheexpectedrateofreturnonthisstock?Whatistherealizedrateofreturnifthepriceofthestockis$52attheendoftheyear?

Answer:

Expectedrateofreturn=$2(4)+$59.50-$50.50

$50.50

=33.66%peryear

Realizedrateofreturn=$2(4)+$52-$50.50

$50.50

=18.81%peryear

Outlinethesixcorefunctionsperformedbythefinancialsystem.

Answer:

Thesixcorefunctionsperformedbythefinancialsystemare:

Toprovidewaysofmanagingrisk.

Toprovidewaystotransfereconomicresourcesthroughtime,acrossborders,andamongindustries.

Toprovidewaysofclearingandsettlingpaymenttofacilitatetrade.

Toprovideamechanismforthepoolingofresourcesandforthesubdividingofsharesinvariousenterprises.

Toprovidewaysofdealingwiththeincentiveproblemscreatedwhenonepartytoatransactionhasinformationthattheotherpartydoesnot,orwhenonepartyactsasanagentforanother.

Toprovidepriceinformationtohelpcoordinatedecentralizeddecisionmakinginvarioussectorsoftheeconomy.

Outlinethebasictypesoffinancialassetsthataretradedinthemarkets.

Answer:

Debtinstruments–issuedbyanyonew