SECTION A 90 Marks Answer ALL multiple choice questions from this section Each question is worth 5 marks To answer the multiple choice questions, note down the answer on your answer page You also need to offer a brief justification on your answer booklet for each one of your answers in this section (minimum 100 words per question) If an investor buys a T bill with a 90 day maturity and $50,000 par value for $48,500 and holds it to maturity, what is the annualized yield a about 13 4 percent b about 12 5 percent c about 11 3 percent d about 11 6 percent e about 10 7 percent The transaction costs to the issuing firm in an IPO is usually percent of the funds raised a 1 b 3 c 7 d 25 Assume that a yield curve is influenced by interest rate expectations and a liquidity premium Assume the yield curve is initially flat If liquidity suddenly was no longer important, the yield curve would now have a (assuming no other changes) a slight downward slope b slight upward slope c steep upward slope d steep downward slope Assume that the Treasury experiences a large decrease in the budget deficit and purchases a large number of T bills This action will the supply of T bills in the market and places pressure on the yield of T bills a decrease downward b decrease upward c increase upward d increase downward A firm is expected to generate earnings of $2 22 per share next year The mean ratio of share price to expected earnings of competitors in the same industry is 1 Based on this information, the valuation of the firm's shares based on the price earnings (PE) method is a $2 22 b $6 76 c $33 30 d none of the above The Sharpe Index measures the a average return on a stock b variability of stock returns per unit of return c stock's beta adjusted for risk d excess return above the risk free rate per unit of risk The , the higher the call option premium, other things being equal a lower the existing price of the security relative to the exercise price b lower the variability of the security's market price c longer the maturity of the option d A and B Swap transactions are only used to a hedge against upward interest rate movements b hedge against downward interest rate movements c speculate d none of the above The federal government demand for loanable funds is If the budget deficit was expected to increase, the federal government demand for loanable funds would a interest elastic decrease b interest elastic increase c interest inelastic increase d interest inelastic decrease According to the theory of rational expectations, inflationary expectations encourage businesses and households to their demand for loanable funds in order to borrow and make planned expenditures increase a higher reduce b higher increase c lower reduce d lower increase Assume investors are indifferent among security maturities Today, the annualized 2 year interest rate is 12 percent, and the 1 year interest rate is 9 percent What is the forward rate according to the pure expectations theory a 15 08 percent b 3 00 percent c 12 00 percent d 12 62 percent e 11 41 percent Which of the following statements is incorrect a Managers may be tempted to make decisions that are in their own best interests rather than shareholder interests b Directors are responsible for making most of the bank's decisions regarding loans to customers, which encourages a loan department to extend loans with a very high concern for risk c To prevent agency problems, some banks provide stock as compensation to managers d The underlying goal behind the managerial policies of a bank is to maximize the wealth of the bank's shareholders Banks offering non traditional services will incur noninterest expenses and noninterest income a fewer higher higher b more lower higher c more higher higher d fewer lower higher e none of the above Protective covenants impose conditions in which the bank must provide additional loans to a borrower to protect the borrower from going bankrupt a True b False The bonds that are most sensitive to interest rate movements have a no coupon and a short term maturity b high coupons and a short term maturity c high coupons and a long term maturity d no coupon and a long term maturity Bolwork Inc is expected to pay a dividend of $5 per share next year Bolwork's dividends are expected to grow by 3 percent annually The required rate of return for Bolwork stock is 15 percent Based on the dividend discount model, a fair value for Bolwork stock is $ per share a 33 33 b 166 67 c 41 67 d 60 00 A short seller a anticipates that the price of the stock sold short will increase b earns the difference between what they initially paid for the stock versus what they later sell the stock for c makes a profit equal to the difference between the original sell price and the price paid for the stock, after subtracting any dividend payments made d is essentially lending the stock to another investor and will ultimately receive that stock back from that investor e none of the above The is commonly used to determine what a stock's price should have been a Capital Asset Pricing Model b Treynor Index c Sharpe Index d B and C

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SECTION A [90 Marks] Answer ALL multiple-choice questions from this section. Each question is worth 5 marks. To answer the multiple-choice questions, note down the

SECTION A [90 Marks]

Answer ALL multiple-choice questions from this section. Each question is worth 5 marks.

To answer the multiple-choice questions, note down the answer on your answer page. You also need to offer a brief justification on your answer booklet for each one of your answers in this section. (minimum 100 words per question)

If an investor buys a T-bill with a 90-day maturity and $50,000 par value for $48,500 and holds it to maturity, what is the annualized yield?

a. about 13.4 percent

b. about 12.5 percent

c. about 11.3 percent

d. about 11.6 percent

e. about 10.7 percent

The transaction costs to the issuing firm in an IPO is usually ____ percent of the funds raised.

a. 1

b. 3

c. 7

d. 25

Assume that a yield curve is influenced by interest rate expectations and a liquidity premium. Assume the yield curve is initially flat. If liquidity suddenly was no longer important, the yield curve would now have a ____ (assuming no other changes).

a. slight downward slope

b. slight upward slope

c. steep upward slope

d. steep downward slope

Assume that the Treasury experiences a large decrease in the budget deficit and purchases a large number of T-bills. This action will ____ the supply of T-bills in the market and places ____ pressure on the yield of T-bills.

a. decrease; downward

b. decrease; upward

c. increase; upward

d. increase; downward

A firm is expected to generate earnings of $2.22 per share next year. The mean ratio of share price to expected earnings of competitors in the same industry is 1 Based on this information, the valuation of the firm's shares based on the price-earnings (PE) method is

a. $2.22.

b. $6.76.

c. $33.30.

d. none of the above

The Sharpe Index measures the

a. average return on a stock.

b. variability of stock returns per unit of return

c. stock's beta adjusted for risk.

d. excess return above the risk-free rate per unit of risk.

The ____, the higher the call option premium, other things being equal.

a.	lower the existing price of the security relative to the exercise price
b.	lower the variability of the security's market price
c.	longer the maturity of the option
d.	A and B

Swap transactions are only used to

a.	hedge against upward interest rate movements.
b.	hedge against downward interest rate movements.
c.	speculate.
d.	none of the above

The federal government demand for loanable funds is ____. If the budget deficit was expected to increase, the federal government demand for loanable funds would ____.

a.	interest elastic; decrease
b.	interest elastic; increase
c.	interest inelastic; increase
d.	interest inelastic; decrease

According to the theory of rational expectations, ____ inflationary expectations encourage businesses and households to ____ their demand for loanable funds in order to borrow and make planned expenditures increase.

a.	higher; reduce
b.	higher; increase
c.	lower; reduce
d.	lower; increase

Assume investors are indifferent among security maturities. Today, the annualized 2-year interest rate is 12 percent, and the 1-year interest rate is 9 percent. What is the forward rate according to the pure expectations theory?

a.	15.08 percent
b.	3.00 percent
c.	12.00 percent
d.	12.62 percent
e.	11.41 percent

Which of the following statements is incorrect?

a.	Managers may be tempted to make decisions that are in their own best interests rather than shareholder interests.
b.	Directors are responsible for making most of the bank's decisions regarding loans to customers, which encourages a loan department to extend loans with a very high concern for risk.
c.	To prevent agency problems, some banks provide stock as compensation to managers.
d.	The underlying goal behind the managerial policies of a bank is to maximize the wealth of the bank's shareholders.

Banks offering ____ non-traditional services will incur ____ noninterest expenses and ____ noninterest income.

a.	fewer; higher; higher
b.	more; lower; higher
c.	more; higher; higher
d.	fewer; lower; higher
e.	none of the above

Protective covenants impose conditions in which the bank must provide additional loans to a borrower to protect the borrower from going bankrupt.

a. True

b. False

The bonds that are most sensitive to interest rate movements have

a. no coupon and a short-term maturity.

b. high coupons and a short-term maturity.

c. high coupons and a long-term maturity.

d. no coupon and a long-term maturity.

Bolwork Inc. is expected to pay a dividend of $5 per share next year. Bolwork's dividends are expected to grow by 3 percent annually. The required rate of return for Bolwork stock is 15 percent. Based on the dividend discount model, a fair value for Bolwork stock is $____ per share.

a.	33.33
b.	166.67
c.	41.67
d.	60.00

A short seller

a.	anticipates that the price of the stock sold short will increase.
b.	earns the difference between what they initially paid for the stock versus what they later sell the stock for.
c.	makes a profit equal to the difference between the original sell price and the price paid for the stock, after subtracting any dividend payments made.
d.	is essentially lending the stock to another investor and will ultimately receive that stock back from that investor.
e.	none of the above