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1. Mellon Bank issues S2M of 12-month time deposits at a rate of 6.50%. It invests SIM of these funds in 12- month bonds issued

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1. Mellon Bank issues S2M of 12-month time deposits at a rate of 6.50%. It invests SIM of these funds in 12- month bonds issued by a U.S. corporation at an annual rate of 7% and the other SIM in a 12-month Canadian bonds paying an annual interest rate of 8%. The FX rate at the time of the transaction is C$1/ $1. If the FX rate between the CS and the U.S. dollar remains the same till the end of the year, Which of the following is false: a) The net rate of return on this S2M investment in bonds will be 1.25% b) The total dollar cost of funds to PNC will be S.13M c) The total dollar return on the Canadian bond will be S.ORM d) The total dollar return on the U.S. bond will be S.07M e) b, c, and d are all correct. 2. Suppose in the previous question, all else remains the same except that the exchange rate becomes CS1.1/SI. Which of the following is true? a. Dollar return on the Canadian bond will be 5.096M. b. Dollar return on the Canadian bond declines c. Dollar Cost of funds = S. 10833M d. The net rate of return on the S2M investment by Mellon will rise. e. The net rate of retum on the S2M investment by Mellon will not change 3. A corporate bond has a face value of $200,000 maturity of 2 years, and a coupon of 6% paid in the end of each year. The bond is currently being sold at par. The duration of this bond is: b. c. d. e. 2 years. 1,84 years. 1.94 years 1.44 years. 1.74 years. 4. Which of the following is false? a) Foreign exchange rate is the price at which one currency can be exchanged for another. b) A direct quote in the US gives the price of a unit of a foreign currency expressed in US dollars, e.g., S1.25 for 1 British pound (). c) An indirect quote in the US gives the price of I US dollar in terms of a foreign currency, e.g. C$1.40 per US dollar d) Forward foreign exchange contracts are traded on exchanges (organized markets) c) Forward foreign exchange contracts are traded on the OTC market

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