兹维博迪金融学第二版试题库2TB

Chapter TwoFinancial Markets and InstitutionsThis chapter contains 49 multiple-choice questions, 20 short problems and 10 longer problems.Multiple Choice1. A market that has no one specific location is termed a(n) ________ market.(a)over-the-counter(b)geographic location(c)intermediary(d)conceptualAnswer: (a)2. ________ problems arise because parties to contracts often cannot easily monitor or control one another.(a)Payment(b)Counter(c)Incentive(d)ExchangeAnswer: (c)3. Incentive problems take a variety of forms and include:(a)moral hazard(b)adverse selection(c)principal-agent(d)all of the aboveAnswer: (d)4. The ________ problem exists when having insurance against some risk causes the insured party to take greater risk or to take less care in preventing the event that gives rise to the loss.(a)moral hazard(b)adverse selection(c)principal-agent(d)all of the aboveAnswer: (a)5. Life annuities are examples of ________ problems.(a)moral hazard(b)adverse selection(c)principal-agent(d)all of the aboveAnswer: (b)6. ________ means giving the lender the right to seize specific business assets in the event of default.(a)Increasing moral hazard(b)Increasing adverse selection(c)Collateralization of loans(d)All of the aboveAnswer: (c)7. ________ instruments are also called fixed-income instruments.(a)Debt(b)Equity(c)Derivative(d)All of the aboveAnswer: (a)8. The market for short-term debt (less than one year) is called the ________ market, and the market for long-term debt and equity securities is called the ________ market.(a)capital; money(b)money; capital(c)fixed-income; money(d)derivative; equityAnswer: (b)9. ________ securities are financial instruments that derive their value from the prices of one or more other assets.(a)Debt(b)Equity(c)Derivative(d)Fixed-incomeAnswer: (c)10. A call option gives its holder the right to ________ some asset at a specified price on or before some specified expiration date.(a)sell(b)buy(c)loan(d)borrowAnswer: (b)11. A put option gives its holder the right to ________ some asset at a specified price on or before some specified expiration date.(a)sell(b)buy(c)loan(d)borrowAnswer: (a)12. ________ contracts oblige one party to the contract to buy, and the other party to sell, some asset at a specified price on some specified date.(a)Options(b)Uncertainty(c)Money market(d)ForwardAnswer: (d)13.The ________ curve depicts the relation between interest rates on fixed-income instruments issued bythe U.S. Treasury and the maturity of the instrument.(a)long-term(b)short-term(c)yield(d)exchange rateAnswer: (c)14.If the short-term rates are higher than the long-term rates, then the yield curve is ________.(a)upward sloping(b)downward sloping(c)horizontal(d)verticalAnswer: (b)Questions 15 and 16 are intended to be calculated as a pair.15.Suppose you are a French investor, who wants a safe investment in terms of francs. You are investingfor one year and the interest rate on a one-year French government bond is 5% and at the same time it is 9% on a U.S. government bond. The exchange rate is currently 6.15 French francs to the dollar.Suppose you invest $1,000 in a U.S. bond. Also suppose that a year from now the French franc/dollar exchange rate is 6.50 French francs to the dollar. What will be the realized French franc rate of return on the U.S. bond?(a)5.69%(b)9.00%(c)15.2%(d)7.00%Answer: (c)16.In question 15, what would the exchange rate at year’s end have to be in order for the French investorto earn exactly 4% per year on the investment in U.S. bonds?(a)6.20 FF/$(b)5.87 FF/$(c)6.40 FF/$(d)5.42 FF/$Answer: (b)Use the following yield data to answer questions 17 and 18.2/29/98Treasury 1-10 yr 5.58%10+ yr 5.72Corporate 1-10 yr High Qlty 5.98Med Qlty 6.17Corporate 10+ yr High Qlty 6.26Med Qlty 6.5717. Calculate the yield spread for Treasury bonds with maturity 1-10 year and corporate bonds of high quality of the same maturity.(a)11.56%(b)0.68%(c)0.59%(d)0.40%Answer: (d)18. Calculate the yield spread for Treasury bonds with maturity 10+ years and corporate bonds of medium quality of the same maturity.(a)12.29%(b)0.85%(c)0.54%(d)0.45%Answer: (b)19.You invest in a stock that costs $45.50 per share. It pays a cash dividend during the year of $1.20 andyou expect its price to be $49 at year’s end. What is your expected rate of return if you se ll the stock for $49 at the end of the year?(a)2.64%(b)7.69%(c)10.33%(d)–5.05%Answer: (c)20.You invest in a stock that costs $45.50 per share. It pays a cash dividend during the year of $1.20 andyou expect its price to be $49 at year’s end. What is your expecte d rate of return if you do not sell the stock at the end of the year?(a)2.64%(b)7.69%(c)10.33%(d)–5.05%Answer: (c)21.You invest in a stock that costs $45.50 per share. It pays a cash dividend during the year of $1.20 andyou expect its price to be $49 at year’s end. What is your realized rate of return if the stock’s price is actually $42 at year’s end?(a)–5.05%(b)18.02%(c)10.33%(d)5.05%Answer: (a)22. The ________ the standard deviation, the ________ the volatility of the rate of return.(a)higher, lower(b)lower, higher(c)higher, higher(d)none of the aboveAnswer: (c)23.________ is an investment strategy that seeks to match the returns of a specified stock market index.(a)Indexing(b)Benchmarking(c)Replicating(d)DiversifyingAnswer: (a)24. Suppose the risk-free nominal interest rate on a one-year U.S. Treasury bill is 7% per year and the expected rate of inflation is 3% per year. What is the expected real rate of return on the T-bill?(a)4%(b)3.88%(c)1.34%(d)3.74%Answer: (b)25. Suppose the risk-free nominal interest rate on a one-year U.S. Treasury bill is 6% per year and the expected rate of inflation is 4% per year. What is the expected real rate of return on the T-bill?(a)2%(b)5%(c)1.92%(d)1.89%Answer: (c)26. Suppose that the real rate of interest on a TIPS is 4.5% per year and the expected rate of inflation in the U.S. is 5% per year. What is the expected nominal rate of return on these bonds?(a)0.476%(b)4.75%(c)9.73%(d)9.75%Answer: (c)27. Currently you have a bank account containing $6,000, which earns interest at a rate of 4% per year. You also have an unpaid balance on your credit card of $3,000 on which you are paying an interest rate of 18% per year. If the time frame is one year, the arbitrage opportunity you face is:(a)$420(b)$540(c)$120(d)$300Answer: (a)28. A ________ interest rate is denominated in units of some currency, whereas a ________ interest rate is denominated in units of some commodity or “basket” of goods and services.(a)real, nominal(b)real, treasury(c)nominal, real(d)treasury, realAnswer: (c)29. ________ are firms whose primary function is to help businesses, governments, and other entities raise funds to finance their activities by issuing securities.(a)Closed-end funds(b)Investment banks(c)Asset management funds(d)Open-end fundsAnswer: (b)30. Currently, you have $24,000 in a bank account earning an interest rate of 4% per year. At the same time you have an unpaid balance on your credit card of $12,000 on which you are paying an interest rate of 18% per year. If the time frame is one year, the arbitrage opportunity you face is:(a)$2,160(b)$1,200(c)$480(d)$1,680Answer: (d)31. In the United States, the ________ establishes the precise disclosure requirements that must be satisfied for a public offering of securities.(a)Financial Accounting Standards Board(b)World Bank(c)Federal Reserve(d)Securities and Exchange CommissionAnswer: (d)32. Investment professionals typically use a(n) ________ index as a benchmark for measuring the performance of common stock mutual funds.(a)inflation adjusted(b)firm-size weighted(c)market-weighted(d)book-weightedAnswer: (c)33. The Dow Jones Industrial Index has some major defects, which include:(a)It is not broadly diversified enough to accurately reflect the wide spectrum of stocks in theUnited States.(b)It corresponds to a portfolio strategy that is unsuitable as a performance benchmark.(c)It only includes the 30 largest corporations.(d)(a) and (b)Answer: (d)34. Interest-rate arbitrage is ________ at a lower rate and ________ at a higher rate.(a)borrowing, lending(b)borrowing, defaulting(c)defaulting, lending(d)lending, borrowingAnswer: (a)35. ________ invest their funds in a new businesses and help the management team get the firm to the point at which it is ready to “go public.”(a)Investment banks(b)Venture capitalists(c)Asset management firms(d)Mutual fundsAnswer: (b)36.The case where there is an imbalance in the exchange of information about a business opportunity isknown as ________.(a)information symmetry(b)information asymmetry(c)information assets(d)(a) and (c)Answer: (b)37.Which of the following represents a defined-contribution pension plan?(a) A pension plan into which the employer and employee make regular contributions.(b) A pension plan whose benefit is determined by a formula that takes into account years of service,wages, and salary.(c) A pension plan whose benefit formula is 1% of retirement salary for each year of service.(d)All of the aboveAnswer: (a)38.Which of the following are characteristic of a mutual fund?(a)professional management(b)diversification(c)efficient record keeping and administration(d)all of the aboveAnswer: (d) asset value is defined as the ________.(a)future value of all assets held divided by the number of shares outstanding(b)book value of all securities held divided by the number of shares outstanding(c)market value of all securities held divided by the number of shares outstanding(d)book value of all assets held divided by the number of shares outstandingAnswer: (c)40.Which of the following describes a money market instrument?a.long-termb.liquidc.high-riskd.all of the aboveAnswer: (b)41.A country’s ________ provides the supply of local currency and operates the clearing system for thebanks.(a)stock exchange(b)underwriter(c)central bank(d)investment bankAnswer: (c)42.Which of the following statements is most correct?(a)open-end mutual funds and closed-end funds are identical(b)open-end mutual funds stand ready to redeem or issue shares at NAV(c)closed-end mutual funds stand ready to redeem or issue shares at NAV(d)mutual funds provide a poor means of diversificationAnswer: (b)43.Which of the following statements is most correct?(a)closed-end mutual funds do not redeem or issue shares at NAV(b)closed-end mutual fund prices can differ from NAV(c)shares of closed-end funds are traded through brokers(d)all of the above are correctAnswer: (d)44.In the United States, the ________ prohibited commercial banks from engaging in most underwritingactivities.(a)Investment Bank Act of 1909(b)SEC Act(c)Glass Steagall Act of 1933(d)Commercial Bank Act of 1952Answer: (c)45.Rules for trading securities serve the function of ________.(a)recognizing when government inaction is the best choice(b)standardizing procedures to keep transaction costs low(c)presenting financial information in a standardized format(d)establishing arbitrary rules to ensure the maximum revenue from transaction feesAnswer: (b)46.In Germany, the central bank is called the ________.(a)Riksbank(b)Bundesbank(c)Bank of Germany(d)ExchequerAnswer: (b)47.For the period 1926-2003, which of the following asset classes provided the highest average rate ofreturn?(a)Long-term U.S. Treasury bonds(b)U.S. T-bills(c)Inflation(d)Small stockAnswer: (d)48.For the period 1926-2003, which of the following asset classes provided the lowest volatility of therate of return?(a)Long-term U.S. Treasury bonds(b)U.S. T-bills(c)Inflation(d)Small stockAnswer: (b)49.The ________ is the unit of account for computing the real rate of return.(a)nominal interest rate on stock(b)standardized basket of consumption goods(c)country’s rate of inflation(d)none of the aboveAnswer: (b)Short Problems1. Give a brief definition of financial intermediaries. Provide three examples of financial intermediaries and the products they offer.Answer: Financial intermediaries are defined as firms whose primary business is to provide financial services and products. Among the main types of intermediaries are banks, investment companies and insurance companies. Products offered include checking accounts, commercial loans, mortgages, mutual funds and a wide range of insurance contracts.Consider the following yield data and answer questions 2 and 3:2/29/98Treasury 1-10 yr 5.58%10+ yr 5.72Corporate 1-10 yr High Qlty 5.98Med Qlty 6.17Corporate 10+ yr High Qlty 6.26Med Qlty 6.572. Calculate the yield spread for Treasury bonds with maturity 10+ years and corporate bonds of high quality of the same maturity.Answer: Yield Spread = 6.26 – 5.72%= 0.54%3. Calculate the yield spread for Treasury bonds with maturity 1-10 years and corporate bonds of medium quality of the same maturity.Answer: Yield Spread = 6.17 – 5.58%= 0.59%4. Discuss the level and shape of the Treasury yield curves that have appeared in the latest media.Answer: Answers will vary depending on media announcements at the time.5. You invest in a stock that costs $42.50 per share. It pays a cash dividend during the year of $1.80 and you expect its price to be $45 at year’s end. What is your expected rate of return if you sell the stock for $45 at the end of the year?Answer: Expected rate of return = Ending Price – Beginning Price + Cash DividendBeginning Price= $45 - $42.50 + $1.80$42.50= 10.12%6. Refer to Question 5. What if you do not sell the stock at the end of the year?Answer: You measure the rate of return exactly the same way, whether or not you sell. The price appreciation is as much a part of your returns the dividend. That you choose to keep it does not change the fact that you could convert it into $45 cash at the end of the year.7. You invest in a stock that costs $42.50 per share. It pays a cash dividend during the year of $1.80 and you expect its price to be $45 at year’s end. What is your realized rate of return if the stock’s price is actually $39 at year’s end?Answer: Realized rate of return = Ending Price – Beginning Price + Cash DividendBeginning Price= $39 - $42.50 + $1.80$42.50= -4%8. Suppose the risk-free nominal interest rate on a one-year U.S. Treasury bill is 5% per year and the expected rate of inflation is 3%. What is the expected real rate of return on the T-bill?Answer: Real rate = Nominal interest rate – Rate of Inflation1 + Rate of inflation= 0.05 – 0.031 + 0.03= 0.021.03= 1.94%9. Suppose you are a Dutch investor, who wants a safe investment in terms of Guilders. You are investing for one year and the interest rate on a one-year Netherlands government bond is 6% and at the same time it is 9% on a U.S. government bond. The exchange rate is currently 2.05 Guilders to the dollar. Suppose you invest $1,000 in a U.S. bond. Also suppose a year from now that the Guilder/dollar exchange rate is 2.15 Guilders to the dollar. What will be the realized Dutch rate of return on the U.S. bond?Answer: Dutch realized rate of return = $1090 x Future Guilder price of dollar – 20502050= $1090 x 2.15 – 20502050= 14.32%10. Refer to Question 9. What does the exchange rate have t o be at year’s end for the Dutch investor to earn exactly 12% per year on the investment in U.S. bonds?Answer: Dutch rate of return = $1090 x Future Guilder price of dollar – 205020500.12 = $1090 x Guilder price – 20502050Future price of Guilder = 2.11 Guilder per dollar11. Distinguish between nominal interest rates and real interest rates.Answer: The nominal interest rate is the promised amount of money you receive per unit you lend.The real rate of return is the nominal interest rate you earn corrected for the change in purchasing power of money. A nominal interest rate is denominated in units of some currency; a real interest rate is denominated in units of some commodity or basket of goods and services (commonly, whatever basket is used to compute the CPI).12.Discuss the costs associated with trading stocks and why index funds provide a low-cost advantage.Answer: Costs can come in the form of:1.the fund’s expense ratio (which includes advisory fees, distribution charges,and operating expenses).2.Portfolio transaction costs (brokerage and after trading costs).One of the prime advantages of an index fund should be its low cost. An index fund should pay only minimal advisory fees, keep operating expenses at the lowest possible level, and should keep portfolio transaction costs at minimal levels.13.Discuss the investment approach known as indexing.Answer: Indexing is an investment approach that seeks to match the investment returns of aspecified stock market index. When indexing, an investment manager attempts to replicate theinvestment results of the target index by holding all – or a representative sample – of thesecurities in the index. Indexing is a passive investment approach emphasizing broaddiversification and low portfolio trading activity.14.Outline the purpose of a mutual fund and describe the advantages of investing with a mutual fund.Answer: A mutual fund is one that pools the financial resources of many small savers and invests their money in securities. A mutual fund has substantial economies of scale in record keeping and in executing purchases and sales of securities and offers its customers a more efficient way ofinvesting in securities than the direct purchase and sale of securities in the markets. It alsoprovides an efficient means of diversification.15.Define interest-rate arbitrage.Answer: Interest-rate arbitrage is borrowing at a lower rate and lending at a higher rate.16.Describe the main features of the IMF and the Bank for International Settlements.Answer: The Bank for International Settlements (BIS) promotes uniformity of regulations. The IMF monitors economic and financial conditions in member countries, provides technicalassistance, establishes rules for international trade and finance, provides a forum forinternational consultation and provides individual members a lengthened time (if necessary) tocorrect imbalances in their payments to other countries.17.You invest in a stock costing $60 per share. It pays a cash dividend during the year of $2.50, and youexpect its price to be $85 at year’s end. Calculate your expected rate of return. If the stock price at the end of the year is actually $50, calculate your realized rate of return.Answer: Expected rate of return = ($2.50 + $85 - $60)/$60 = 45.8%Realized rate of return = ($2.50 + $50 - $60)/$60 = -12.5%18.You invest in a stock costing $45 per share. It pays a cash dividend of $3.20 during the year, and youexpect its price to be $60 at the end of the year. If the price is actually $42 at the end of the year, calculate your realized rate of return.Answer: Realized rate of return = ($3.20 + $42 - $45)/$45 = 0.4%19.Suppose you have $15,000 in a bank account earning an interest rate of 5% per year. At the same timeyou have an unpaid balance on your credit card of $8,000 for which you are paying 18% interest.What is the arbitrage opportunity you face?Answer: If you take $8,000 out of your bank account and pay off the credit card you give up0.05% x $8,000 = $400, but you can save 0.18 x $8,000 = $1,440 in interest expenses. So thearbitrage opportunity is worth $1,040 per year.20.Suppose the real rate of interest on a TIPS is 4% per year, and the expected U.S. inflation rate is 3.5%per year. What is the expected nominal rate of return on these bonds?Answer: (1+ nominal rate) = (1 + real rate) x (1 + inflation)= (1.04) x (1.035)= 1.0764nominal rate = 7.64% per yearLonger Problems1.Discuss the four main factors that determine rates of return in a market economy.Answer: The four main factors that should be discussed are:∙The productivity of capital goods – expected rates of return on mines, dams, roads, bridges, factories, machinery and investments∙The degree of uncertainty regarding the productivity of capital goods∙The time preferences of people∙Risk aversion2.Discuss the role of the financial intermediary and give two examples.Answer: A financial intermediary is an entity whose primary business is to provide customers with financial products that cannot be obtained more efficiently by transacting directly in securitiesmarkets.Examples include banks, insurance companies, mutual funds, investment companies, venture capital firms, asset management firms, and pension and retirement funds.3.Suppose that you have $30,000 in a bank account earning an interest rate of 6% per year. At the sametime you have an unpaid balance on your credit card of $14,000 on which you are paying an interest rate of 18% per year. What is the arbitrage opportunity you face?Answer: You could take $14,000 out of your bank account and pay down your credit card balance.You would give up 6% per year in interest earnings ($840 per year), but you would save 18% per year in interest expenses ($2,520 per year). Therefore, the arbitrage opportunity is $1,680 per year.e the data in the table below to compute both the DIJ-type index and the market-weighted index fora hypothetical two-stock index. Discuss which index more accurately reflects the reality of the market.Answer:DJI type index = Average of current stock prices x 100Average of stock prices in base year= (30 + 2)/2 x 100(20 + 10)/2= 106.67, indicating an increase of 6.67%market-weighted index = (0.8 x 30/20) + (0.2 x 2/10) x 100= (1.2 + 0.04) x 100= 124, indicating an increase of 24%The market-weighted index shows a 24% increase, which reflects what has actually happened to the total market value of all stocks: 2.5 billion to 3.1 billion is growth of 0.6 billion, which as a percent is(0.6)/(2.5) = 24%5.You invest in a stock that pays $2 per quarter and costs you $50.50 per share. At the end of the yearyou expect the stock price to be $59.50. What is the expected rate of return on this stock? What is the realized rate of return if the price of the stock is $52 at the end of the year?Answer:Expected rate of return = $2(4) + $59.50 - $50.50$50.50= 33.66% per yearRealized rate of return = $2(4) + $52 - $50.50$50.50= 18.81% per year6.Outline the six core functions performed by the financial system.Answer:The six core functions performed by the financial system are:1.To provide ways of managing risk.2.To provide ways to transfer economic resources through time, across borders, and amongindustries.3.To provide ways of clearing and settling payment to facilitate trade.4.To provide a mechanism for the pooling of resources and for the subdividing of shares in variousenterprises.5.To provide ways of dealing with the incentive problems created when one party to a transactionhas information that the other party does not, or when one party acts as an agent for another.6.To provide price information to help coordinate decentralized decision making in various sectorsof the economy.7. Outline the basic types of financial assets that are traded in the markets.Answer:Debt instruments – issued by anyone who borrows money – firms, government, and households.Equity – the claim of the owners of a firm. Corporations who issue equity securities are issuingcommon stock.Derivatives – such as options and futures contracts that derive their value from the prices of one or more other assets.8.Describ e how a banking panic can cause a “contagion” to set in the economy.Answer:If there is a banking panic and if a bank does not have sufficient funds to pay off its depositors, then “contagion” can set in, and other banks are faced with a run. If there is a “flight to currency,” then a contagion problem occurs for the banking system as a whole, and the people refuse to hold deposits of any bank and insist on having currency.9. Discuss the rates of return and volatility of U.S. T-bills, U.S. Treasury bonds, and large stock overthe period of 1926-2003.Answer:From a historical perspective, T-bills have proved to be the least risky asset class, whereas large stock has proved to be the most risky asset class.Large stocks (as measured in the S&P 500 stock portfolio) have provided an average rate of return of12.25% between 1926 and 2003, whereas T-bills have provided an average rate of return of 3.79%and 5.64% for U.S. Treasury bonds.Large stock returns, with a standard deviation of 20.5%, have also been the most volatile asset class between 1926 and 2003. U.S. Treasury bonds had a standard deviation of 8.19% over the sameperiod and U.S. bills have been the least volatile asset class, with a standard deviation of 3.18%.e the data in the table below to compute both the DIJ-type index and the market-weighted index fora hypothetical two-stock index. Discuss which index more accurately reflects the reality of the market.Answer: DJI type index = Average of current stock prices x 100Average of stock prices in base year= (60 + 120)/2 x 100(110 + 60)/2= 105.88, indicating an increase of 5.58%market-weighted index = (0.79 x 60/100) + (0.21 x 120/60) x 100= (0.43 + 0.42) x 100= 85, indicating a decrease of 15%The market-weighted index shows a 15% decrease, which more accurately reflects what has actually happened to the total market value of all stocks: 28 to 24 billion is a loss of 4 billion, which as a percent is -4/28 =-14.29%.2-21。