A. For each of the following four statements, indicate whether the given statement is true, false, or uncertain. You will need to provide an explanation for your choice for each statement. Each statement, if correctly answered, will be worth 1.5 marks.

(i) Derivativesecuritiesplayaprominentroleintransferoffundsbetweensaversandusers of funds.

(ii) If the nominal interest rate rises from 5% to 10% and simultaneously the expected rate of inflation rises from 2% to 8%, corporations will raise more funds by issuing bonds.

(iii)More assets are used to secure a loan, the lender has to worry less about the adverse selection problem.

(iv)If portfolios of two mutual funds consist of the same set of financial securities, then their systematic risks will be the same.

B. What type of risks are faced by a bank from its maturity intermediation activities?(3 marks)

C. Why it is more difficult to value a floating rate preferred stock than a fixed rate preferred

stock? (3 marks)

D. Explain why a - denominated convertible bond is more complex to a Canadian investor

than a C$ - denominated non-convertible bond. (2 marks)