Fin 6320, Fall 2003 - Test 1.                             Peter Lewin.

 

Please read the following carefully:

 

Multiple Choice -25 questions.  Please use a half page scantron (882-ES) with a pencil.  Hand in only the scantron (you may keep this question paper). 

 

This is a closed book exam.  Cheating will result in a zero (among other possible sanctions).

 

Among the possibilities given in each question select the best  alternative.

 

Solution and grade distribution at end.

 

 

  1. Which of the following would be the most preferred outcome all things considered?
    1. one single unified currency for the whole world controlled by a world monetary authority
    2. multiple currencies for the whole world controlled by a world monetary authority
    3. just a few currencies for the whole world controlled by a world monetary authority
    4. just a few currencies for the whole world controlled by a few monetary authorities

 

  1. Which of the following are benefits of money?
    1. it facilitates exchange
    2. it facilitates production
    3. both of the above
    4. none of the above

 

  1. Which of the following is the most dangerous to a market economy?
    1. insufficient cash liquidity
    2. moderately high interest rates
    3. inflation
    4. deflation

 

  1. Which of the following is not correct?
    1. surplus spending units = savers
    2. deficit spending units = borrowers
    3. surplus spending units = borrowers
    4. deficit spending units = savers
    5. c and d of the above

 

  1. Which of the following do financial intermediaries do?
    1. help coordinate the disparate needs and desires of savers and lenders
    2. take advantage of economies of scale in information processing
    3. take advantage of economies of scale in the reduction of risk
    4. all of the above
    5. none of the above

 

  1. Which of the following is the largest group of financial intermediaries by total assets?
    1. Commercial banks
    2. Private non-insured pension funds
    3. Mutual funds (stocks and bonds)
    4. Life insurance companies
    5. Money market mutual funds

 

  1. Which of the following is the largest category of financial assets by total value?
    1. Residential mortgages
    2. U.S. government securities (marketable long term)
    3. Corporate bonds
    4. State and local government bonds
    5. Corporate stocks

 

  1. Which of the following distinctions is most closely associated with the question of the incentives for monitoring a business firm’s behavior?
    1. debt versus equity
    2. primarily versus secondary markets
    3. direct versus indirect financing
    4. intermediation versus investing

 

  1. Which of the following most likely had the lowest marginal rate of time preference?
    1. a sixteen year old student with rich parents
    2. a forty five year old breadwinner
    3. an eighty nine year old retired gentleman
    4. my dog

 

  1. According to Lewin what is the most plausible explanation of positive time preference?
    1. the nature of time and its connection with uncertainty
    2. the logic of present value
    3. human greed
    4. human need

 

  1. An increase in the supply of money will decrease interest rates in which of the following circumstances?
    1. always
    2. never
    3. when it increases the supply of loanable funds and the demand for loanable funds remains unaffected
    4. when it increases the supply of loanable funds and the demand for loanable funds goes up because people expect higher inflation

 

  1. An investor who anticipates that interest rates will rise should
    1. buy a variable-rate bond          
    2. buy preferred corporate stock
    3. buy long on a bond futures contract      
    4. sell short on a bond futures contract

 

  1. The total amount of interest collected after two years from a $12,000 loan with an annual interest rate of 6 percent compounded annually is equal to
    1. $1440.00        
    2. $1483.20        
    3. $720.00          
    4. $6,720.00

 

  1. When interest rates are low relative to what they have been, investors generally expect these rates to _____________ and thus investors prefer to hold __________ securities.
    1. fall, long-term
    2. fall, short-term
    3. rise, long-term
    4. rise, short-term

 

  1. Which of the following is most reliably correlated with the interest elasticity of the price of an asset?
    1. the term to maturity of the asset
    2. the time horizon of the investor
    3. the duration of the asset
    4. the risk class of the asset

 

16.   Assume a bond earns $100 a year for the next three years and then returns the $4,000 principle. What is the present value of this bond when the relevant interest rate is 10% (to the nearest dollar)?

a.       $350   

b.      $3503

c.       $35,020          

d.      $4,000

e.       $2,000

 

17.   Consider the present value of a perpetual stream of $100. What happens to this present value when the discount rate is cut in half?

a.       the present value gets cut in half

b.      the present value doubles

c.       the present value more than doubles

d.      the present value rises by less than 100%

 

 

 

 

18.   Consider the previous question, which answer would you pick if the payment of $100 a year continued for only ten years?

a.       the present value gets cut in half

b.      the present value doubles

c.       the present value more than doubles

d.      the present value rises by less than 100%

 

19.   The minimum condition for the working of the principle of diversification of investments among assets is

a.       that the returns are perfectly negatively correlated

b.      that the returns are positively correlated

c.       that the returns are uncorrelated

d.      that the returns are less than perfectly correlated

 

20.   In which of the following situations does the principle of diversification apply?

a.       commercial banking

b.      insurance

c.       stock market investing

d.      pension fund management

e.       all of the above

 

21.   Consider investing in safe (“risk free”) assets. If the one year rate today is 8% and the three year rate today is 5%, then it is probably true that short term rates are expected to

a.       rise

b.      fall

c.       remain the same

d.      it is impossible to say

 

22.   Consider the previous question. Which of the following future short rates, for year two and three respectively, are consistent with the pure expectations theory?

a.       4%, 4%

b.      4%, 3%

c.       3%, 4%

d.      3%, 2%

e.       b and c of the above

 

23.   Consider investing in safe (“risk free”) assets. If the one year rate today is 5% and the three year rate today is 8%, which of the following future short rates, for year two and three respectively, is consistent with the pure expectations theory?

a.       4%, 4%

b.      9%, 10%

c.       10%, 9%

d.      10%, 10%

e.       b and c of the above

 

24.   Consider investing in safe (“risk free”) assets. If the one year rate today is 5% and the three year rate today is 8%, which of the following future short rates, for year two and three respectively, is consistent with the pure expectations theory plus a liquidity premium?

a.       4%, 4%

b.      9%, 10%

c.       10%, 9%

d.      10%, 10%

e.       any of the above

 

25.   Which of the following is most likely to exhibit systematic (market) risk?

a.       general motors stock

b.      stock in a rare raw materials company in Australia

c.       electric utilities stock

d.      commercial paper

 

GRADE DISTRIBUTION:

 

If you score is greater than or equal to:       your grade is

 

19

A

17

B

15

B-

ELSE

C

 

 

Solution:

 

1.      d

2.      c

3.      c

4.      e

5.      d

6.      a

7.      e

8.      a

9.      b

10.  a

11.  c

12.  d or a

13.  b

14.  d

15.  c

16.  b

17.  b

18.  d

19.  d

20.  e

21.  b

22.  e

23.  e

24.  d

25.  a