Fin 6320, Fall 2004 - Test 1.                                                             Peter Lewin.

 

Please read the following carefully:

 

Multiple Choice -25 questions.  Please use a 50 question 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. The most prominent role for money is to serve as a
    1. form of credit                       
    2. source of income
    3. means of payment               
    4. standard of value

 

  1. Which of the following is true?
    1. money is a means of payment
    2. money is an evolved unintended outcome of human actions
    3. all moneys evolved, directly or indirectly, from a commodity that was once not money
    4. governments invariably get involved and end up monopolizing the issue of money 
    5. all of the above are true

 

  1. A secondary market is one in which
    1. new securities are issued
    2. financial intermediaries make loans
    3. savers place funds in financial intermediaries
    4. existing securities can be bought and sold

 

  1. Which of the following investments do not make interest payments annually but are sold at a discount with the face value of the security paid at maturity?
    1. preferred stock    
    2. preferred bonds
    3. zero coupon bonds             
    4. convertible preferred stock

 

  1. An investor who anticipates that interest rates will rise should
    1. buy a fixed-rate bond                                         
    2. buy preferred corporate stock
    3. arrange to buy bonds at a future date at a price fixed today
    4. arrange to sell bonds at a future date at a price fixed today

 

  1. A debtor pays the largest total of interest payments if the interest on the loan is compounded
    1. daily      
    2. monthly                
    3. annually                
    4. simply

 

  1. The total amount of interest collected after two years from a $6,000 loan with an annual interest rate of 6 percent compounded annually is equal to
    1. $720.00  
    2. $741.60  
    3. $360.00  
    4. $6,720.00

 

  1. The most widely used measure of interest rates in financial markets is the
    1. coupon rate                          
    2. discount rate
    3. yield to maturity  
    4. current yield

 

  1. Suppose an individual pays $4,000 for a $5,000-face-value coupon-bearing bond that pays $400 per year and will be held until it matures in 10 years. The coupon rate on this bond is
    1. 10 percent                             
    2. 8 percent                               
    3. 6 percent                               
    4. 5 percent

 

  1. If a one year zero-coupon bond has a face value of $1,000 and a discount rate of 8.7 percent, its original selling price is
    1. 900                         
    2. 913                         
    3. 950                                         
    4. 960

 

  1. If the yield on short-term securities is greater than the yield on comparable long-term securities, the yield curve will have a
    1. positive slope      
    2. negative slope
    3. constant slope
    4. zero slope

 

  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. The fact that the yields on short-term securities fluctuate more over the course of the business cycle supports which theory of the term structure?
    1. expectations                         
    2. preferred habitat
    3. supply and demand            
    4. liquidity premium

 

  1. Which of the following assets is subject to price fluctuations?
    1. U.S. Treasury bonds                          
    2. corporate bonds
    3. municipal bonds                  
    4. all of these

 

  1. Which of the following borrowers would pay the lowest interest rate on debt of equal maturity?
    1. Chase Bank                                          
    2. the U.S. government
    3. the city of Boston                               
    4. Yahoo!

 

  1. Modern portfolio analysis assumes that individuals
    1. are risk-averse
    2. attempt to maximize liquidity
    3. attempt to maximize returns regardless of risk
    4. never take risks

 

  1. If asset A is a 30-year U.S. Treasury bond yielding 9 percent and asset B is a 30-year corporate bond issued by General Motors that also yields 9 percent, risk averse investors would
    1. prefer asset A
    2. prefer asset B
    3. be indifferent between the two assets
    4. differ according to their rate of time preference

 

  1. The most fundamental proposition of modern portfolio theory is that
    1. investment risk is reduced by investing in one security
    2. the smaller the standard deviation, the larger the risk of a portfolio
    3. even though an asset is risky in isolation, when combined with other assets the risk of the portfolio is less, perhaps even zero
    4. uncertain outcomes make for risky investments

 

  1. If an investor holds two risky assets with a perfect negative correlation, then risk
    1. falls to zero                           
    2. is increased
    3. is unaffected                        
    4. is reduced by 50 percent

 

  1. The original maturity on U.S. Treasury notes is between
    1. three months and one year                
    2. one and ten years
    3. six months and three years                
    4. ten and thirty years

 

A transportation firm has to transport a precious cargo, which contains 100 pieces of valuable gold bars, from point A to point B. There is a 10% probability that the cargo will get hijacked along the way. The firm has two transportation trucks and two drivers at its disposal. (the next three questions).

 

  1. Which of the following is true? The probability of both trucks getting hijacked is (you may assume that the probability of each truck getting hijacked is independent of the other)

a.        .01

b.       .5

c.        .10

d.       .2%

 

  1. Assume the total cost of running two trucks is the same as the cost of running one truck. Then the firm should
    1. definitely run only one truck
    2. definitely run two tucks
    3. flip a coin to decide what to do
    4. not run any trucks

 

  1. Assume the cost of running two trucks is twice the cost of running one truck. Then the firm should
    1. definitely run only one truck
    2. definitely run two tucks
    3. flip a coin to decide what to do
    4. not run any trucks
    5. it is impossible to say from the information we have

 

  1. The real interest rate is defined as:
    1. the money interest rate plus the expected rate of inflation
    2. the money interest rate minus the expected rate of inflation
    3. the actual rate people pay rather than the advertised rate
    4. the money rate that we observe, inclusive of any expected inflation.

 

  1. Which of the following is NOT intermediation?
    1. lenders lend directly to borrowers
    2. borrowers obtain their loans from banks
    3. businesses obtain their loans from banks
    4. lenders deposit money in banks.

 

GRADE DISTRIBUTION:

 

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

22

A

21

B+

19

B

18

B-

15

C+

else

C

 

 

Solution:

 

  1. c
  2. e
  3. d
  4. c
  5. d
  6. a
  7. b
  8. c
  9. b
  10. b
  11. b
  12. d
  13. a
  14. d
  15. b
  16. a
  17. a
  18. c
  19. a
  20. b
  21. a
  22. b
  23. e
  24. b
  25. a