FINA 350 MCGH HW Q's

Depository institutions include banks. thrifts. finance companies. all of these choices are correct. banks and thrifts.

banks and thrifts.

The Fed funds rate is the rate that banks charge for loans to corporate customers. banks charge to lend foreign exchange to customers. the Federal Reserve charges on emergency loans to commercial banks. banks charge each other on loans of excess reserves. banks charge securities dealers to finance their inventory.

banks charge each other on loans of excess reserves.

Standard revenue bonds are backed by the full taxing authority of the municipality. collateralized by the earnings from a specific project. bonds backed by mortgages. backed by the U.S. Treasury. always offered with a best efforts offering.

collateralized by the earnings from a specific project.

A short-term unsecured promissory note issued by a company is commercial paper. a T-bill. a repurchase agreement. a negotiable CD. a banker's acceptance.

commercial paper.

A corporation seeking to sell new equity securities to the public for the first time in order to raise cash for capital investment would most likely.. conduct an IPO with the assistance of an investment banker. engage in a secondary market sale of equity. conduct a private placement to a large number of potential buyers. place an ad in the Wall Street Journal soliciting retail suppliers of funds. issue bonds with the assistance of a dealer.

conduct an IPO with the assistance of an investment banker.

Financial intermediaries' ability to reduce the average cost of collecting information because of their efficient operations allows them to take advantage of... asset transformation. economies of scale. economies of scope. transformational trading. standardization.

economies of scale.

LIBOR is generally _______________ the Fed funds rate because foreign bank deposits are generally ________________ than domestic bank deposits. greater than; less risky less than; more risky the same as; equally risk greater than; more risky less than; less risky

greater than; more risky

A decrease in reserve requirements could lead to an increase in bank lending. increase in the money supply. increase in the discount rate. increase in bank lending and an increase in the money supply. increase in bank lending and an increase in the discount rate.

increase in bank lending and an increase in the money supply.

A six-year maturity bond has a five-year duration. Over the next year maturity will decline by one year and duration will decline by less than one year. more than one year. one year. N years. N/(N − 1) years.

less than one year.

In the T-bill auction process, the competitive bidder is guaranteed a ______________ and a noncompetitive bidder is guaranteed a _______________. minimum price; maximum price. maximum price; minimum price. maximum price; given quantity. minimum price; maximum quantity. None of these choices are correct.

maximum price; given quantity.

The primary policy tool used by the Fed to meet its monetary policy goals is changing the discount rate. changing reserve requirements. devaluing the currency. changing bank regulations. open market operations.

open market operations.

For large interest rate increases, duration _____________ the fall in security prices, and for large interest rate decreases, duration ______________ the rise in security prices. overpredicts; overpredicts overpredicts; underpredicts underpredicts; overpredicts underpredicts; underpredicts None of these choices are correct.

overpredicts; underpredicts

Interest income from Treasury securities is ________________, and interest income from municipal bonds is always ________________. exempt from federal taxes; exempt from all taxes taxable at the state level only; exempt from state taxes only taxable at federal level only; exempt from federal taxes taxable at the state level; taxed at the federal level totally tax exempt; exempt from state taxes

taxable at federal level only; exempt from federal taxes

The Fed changes reserve requirements from 10 percent to 7 percent, thereby creating $900 million in excess reserves. The total change in deposits (with no drains) would be $3,000 million. $15,625 million. $12,857 million. $3,795 million. None of these choices are correct.

$12,857 million.

The Fed increases bank reserves in the system by $75 million. If there are no drains, the expected change in bank deposits is $82.5 million. $945 million. $750 million. $1,500 million. $655 million.

$750 million.

A bank has $770 million in checkable deposits. The bank has $85 million in reserves. The bank's required reserves are _____________ and its excess reserves are _____________. $85 million; $0 $770 million; $85 million $89 million; $21 million $685 million; $8.5 million $77 million; $8 million

$77 million; $8 million

If the overnight Fed funds rate is quoted as 0.90 percent, what is the bond equivalent rate? Calculate the bond equivalent rate on Fed funds if the quoted rate is 1.15 percent. (Do not round intermediate calculations. Round your answers to 4 decimal places. (e.g., 32.1616))

0.90%: 0.9125% 1.15%: 1.1659%

(Chapter 3) You bought a bond five years ago for $935 per bond. The bond is now selling for $980. It also paid $75 in interest per year, which you reinvested in the bond. Calculate the realized rate of return earned on this bond.

8.83%

Which of the following is the major monetary policy-making body of the U.S. Federal Reserve System? FOMC OCC FRB bank presidents U.S. Congress Group of Eight

FOMC

A 10-year maturity zero coupon bond will have lower price volatility than a 10-year bond with a 10 percent coupon. T or F?

False

Commercial paper is a short-term obligation of the U.S. government issued to cover government budget deficits and to refinance maturing government debt. T or F?

False

The average cost incurred by financial institutions to collect information is larger than that of individuals. T or F?

False

With TIPS, the security's coupon rate is changed every six months by the inflation rate as measured by the CPI. T or F?

False

A repo is in essence a collateralized banker's acceptance. certificate of deposit. Fed funds loan. commercial paper loan. Eurodollar deposit.

Fed funds loan.

For the purposes for which they are used, money market securities should have which of the following characteristics? I. Low trading costs II. Little price risk III. High rate of return IV. Life greater than one year

I and II

In the area of bank supervision, which of the following are functions of the Federal Reserve Banks? I. Examinations of state member banks II. Approval of member bank and bank holding company acquisitions III. Deposit insurance I only I and II only II and III only I and III only I, II, and III

I and II only

Money markets trade securities that I. mature in one year or less. II. have little chance of loss of principal. III. must be guaranteed by the federal government. I only II only I and II only I and III only I, II, and III

I and II only

If the Fed wishes to stimulate the economy, it could I. buy U.S. government securities. II. raise the discount rate. III. lower reserve requirements. I and III only II and III only I and II only II only I, II, and III

I and III only

Which of the following is/are true about callable bonds? I. Must always be called at par II. Will normally be called after interest rates drop III. Can be called by either the bondholder or the bond issuer IV. Have higher required returns than non-callable bonds I and II only II and IV only II and III only I, II, and III only I, II, III, and IV are true.

II and IV only

The Federal Reserve does all but which one of the following? Conducts monetary policy Supervises and regulates bank activities Serves as the commercial bank for the U.S. Treasury Operates check clearing and wire transfer facilities Insures deposits

Insures deposits

_________ and __________ allow a financial intermediary to offer safe liquid liabilities such as deposits while investing the depositors' money in riskier illiquid assets. Diversification; high equity returns Price risk; collateral Free riders; regulations Monitoring; diversification Primary markets; foreign exchange markets

Monitoring; diversification

A client in the 30 percent marginal tax bracket is comparing a municipal bond that offers a 4.8 percent yield to maturity and a similar risk corporate bond that offers a 6.75 percent yield. Which bond will give the client more profit after taxes?

Municipal Bond.

Which of the following is/are money market instrument(s)? Negotiable CDs Correct Common stock T-bonds 4-year maturity corporate bond Negotiable CDs, common stock, and T-bonds

Negotiable CDs

If the FOMC wished to generate faster economic growth, they could issue a policy directive to the Federal Reserve Board Trading Desk to purchase U.S. government securities. T or F?

True

In the T-bill secondary market the ask yield will normally be less than the bid yield. T or F?

True

Money markets are the markets for securities with an original maturity of one year or less. T or F?

True

The greater a security's coupon, the lower the security's price sensitivity to an interest rate change, ceteris paribus. T or F?

True

Households are increasingly likely to both directly purchase securities (perhaps via a broker) and also place some money with a bank or thrift to meet different needs. Match up the given investor's desire with the appropriate intermediary or direct security. I. Money likely to be needed within six months II. Money to be set aside for college in 10 years III. Money to provide supplemental retirement income IV. Money to be used to provide for children in the event of death Depository institutions Insurer Pension fund Stocks or bonds 2, 3, 4, 1 1, 4, 2, 3 3, 2, 1, 4 1, 4, 3, 2 4, 2, 1, 3

1, 4, 3, 2

Chapter 3 You have discovered that when the required rate of return on a bond you own fell by 0.5 percent from 8.3 percent to 7.8 percent, the fair present value rose from $955 to $975. The bond pays interest annually. What is the duration of this bond? Assume annual payments.

4.5 Years

Chapter 3 a. What is the duration of a two-year bond that pays an annual coupon of 11.2 percent and has a current yield to maturity of 13.2 percent? Use $1,000 as the face value. (Do not round intermediate calculations. Round your answer to 4 decimal places. (e.g., 32.1616)) b. What is the duration of a two-year zero-coupon bond that is yielding 11.5 percent? Use $1,000 as the face value.

A. 1.8977 Years B. 2 Years

The FOMC has instructed the FRBNY Trading Desk to purchase $670 million in U.S. Treasury securities. The Federal Reserve has currently set the reserve requirement at 10 percent of transaction deposits. Assume U.S. banks withdraw all excess reserves and give out loans. a. Assume also that borrowers eventually return all of these funds to their banks in the form of transaction deposits. What is the full effect of this purchase on bank deposits and the money supply? b. What is the full effect of this purchase on bank deposits and the money supply if borrowers return only 90 percent of these funds to their banks in the form of transaction deposits?

A. Increase, $6.70 Billion B. Increase, $3.35 Billion

The FOMC has instructed the FRBNY Trading Desk to purchase $480 million in U.S. Treasury securities. The Federal Reserve has currently set the reserve requirement at 4 percent of transaction deposits. Assume U.S. banks withdraw all excess reserves and give out loans. a. Assume also that borrowers eventually return all of these funds to their banks in the form of transaction deposits. What is the full effect of this purchase on bank deposits and the money supply? b. What is the full effect of this purchase on bank deposits and the money supply if borrowers return only 96 percent of these funds to their banks in the form of transaction deposits?

A. Increase, 12 Billion B. Increase, 6 Billion

Chapter 3 Consider a(n) Five-year, 11 percent annual coupon bond with a face value of $1,000. The bond is trading at a rate of 8 percent. a. What is the price of the bond? b. If the rate of interest increases 1 percent, what will be the bond's new price? c. Using your answers to parts (a) and (b), what is the percentage change in the bond's price as a result of the 1 percent increase in interest rates? (Negative value should be indicated by a minus sign.) d. Repeat parts (b) and (c) assuming a 1 percent decrease in interest rates.

A. PV = $1,119.78 B. PV = $1,077.79 C. −0.0375 or −3.75 percent. D. PV = $1,164.01

Which of the following are capital market instruments? 10-year corporate bonds 30-year mortgages 20-year Treasury bonds 15-year U.S. government agency bonds All of these choices are correct

All of these choices are correct

Accrued interest owed to the bond seller increases as the next coupon payment date approaches. T or F?

True

A $2,100 face value corporate bond with a 6.0 percent coupon (paid semiannually) has 15 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 6.5 percent. The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BB. The new appropriate discount rate will be 7.6 percent. What will be the change in the bond's price in dollars and percentage terms? (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 3 decimal places. (e.g., 32.161))

Change in the bond's price in dollars $(198.038) Change in the bond's price in percentage (9.900)%

If interest rates increase, the value of a fixed income contract decreases and vice versa. T or F?

True

Financial intermediaries (FIs) can offer savers a safer, more liquid investment than a capital market security, even though the intermediary invests in risky illiquid instruments because..? A. FIs can diversify away some of their risk. B. FIs closely monitor the riskiness of their assets. C. The federal government requires them to do so. D. FIs can diversify away some of their risk and closely monitor the riskiness of their assets. E. FIs can diversify away some of their risk and the federal government requires them to do so.

D. FIs can diversify away some of their risk and closely monitor the riskiness of their assets.

Chapter 3 A $1,000 par value bond with Seven years left to maturity pays an interest payment semiannually with an 8 percent coupon rate and is priced to have a 7.5 percent yield to maturity. If interest rates surprisingly increase by 0.5 percent, by how much would the bond's price change? State the amount and if it is a decrease or increase.

Decreased Before the change in Interest Rates PV = $1,026.85 After the change in Interest Rates PV = $1,000.00. So its by $26.85

A Treasury security in which periodic coupon interest payments can be separated from each other and from the principal payment is called a STRIP. T-note. T-bond. GO bond. Revenue bond.

STRIP

Which of the following is not a goal of monetary policy? Moderate long-term interest rates. Stable interest rates. High employment. Stable prices. All of these choices are correct.

Stable interest rates.

The most liquid of the money market securities are commercial paper. banker's acceptances. T-bills. Fed funds. repurchase agreements.

T-bills.

On October 5, 2019, you purchase a $12,000 T-note that matures on August 15, 2031 (settlement occurs two days after purchase, so you receive actual ownership of the bond on October 7, 2019). The coupon rate on the T-note is 4.386 percent and the current price quoted on the bond is 105.59375 percent. The last coupon payment occurred on May 15, 2019 (145 days before settlement), and the next coupon payment will be paid on November 15, 2019 (39 days from settlement). a. Calculate the accrued interest due to the seller from the buyer at settlement. b. Calculate the dirty price of this transaction.

a. Accrued interest due $207.38 b. Dirty price $12,878.63

Hilton Hotels Corp. has a convertible bond issue outstanding. Each bond, with a face value of $1,000, can be converted into common shares at a rate of 61.2989 shares of stock per $1,000 face value bond (the conversion rate), or $16.3135 per share. Hilton's common stock is trading (on the NYSE) at $15.90 per share and the bonds are trading at $975. a. Calculate the conversion value of each bond. (Round your answer to 2 decimal places. (e.g., 32.16)) b. State whether it is currently profitable for bond holders to convert their bonds into shares of Hilton Hotels common stock.

a. Conversion value $974.65 b. Exercise the conversion option? No

Consider an investor who, on January 1, 2019, purchases a TIPS bond with an original principal of $110,000, an 12 percent annual (or 6 percent semiannual) coupon rate, and 15 years to maturity. a. If the semiannual inflation rate during the first six months is 0.3 percent, calculate the principal amount used to determine the first coupon payment and the first coupon payment (paid on June 30, 2019). b. From your answer to part a, calculate the inflation-adjusted principal at the beginning of the second six months. c. Suppose that the semiannual inflation rate for the second six-month period is 1.3 percent. Calculate the inflation-adjusted principal at the end of the second six months (on December 31, 2019) and the coupon payment to the investor for the second six-month period.

a. Coupon payment $6,619.80 b. Inflation-adjusted principal $110,330.00 c.Inflation-adjusted principal at the end of the second six months $111,764.29 Coupon payment $6,705.86

You have just purchased a four-month, $630,000 negotiable CD, which will pay a 4.5 percent annual interest rate. a. If the market rate on the CD rises to 5 percent, what is its current market value? b. If the market rate on the CD falls to 4.25 percent, what is its current market value? (For all requirements, do not round intermediate calculations. Round your answers to 2 decimal places. (e.g., 32.16))

a. Current market value $628,967.21 b. Current market value $630,517.67

You can purchase a T-bill that is 71 days from maturity for $15,965. The T-bill has a face value of $16,000. a. Calculate the T-bill's quoted yield. (Use 360 days in a year. Do not round intermediate calculations. Round your answer to 3 decimal places. (e.g., 32.161)) b. Calculate the T-bill's bond equivalent yield. (Use 365 days in a year. Do not round intermediate calculations. Round your answer to 3 decimal places. (e.g., 32.161)) c. Calculate the T-bill's EAR. (Use 365 days in a year. Do not round intermediate calculations. Round your answer to 3 decimal places. (e.g., 32.161))

a. T-bill's quoted yield 1.109% b. T-bill's bond equivalent yield 1.127% c. T-bill's EAR 1.132%

A municipal bond you are considering as an investment currently pays a yield of 6.80 percent. a. Calculate the tax equivalent yield if your marginal tax rate is 28 percent. b. Calculate the tax equivalent yield if your marginal tax rate is 21 percent.

a. Tax equivalent yield 9.444% b. Tax equivalent yield 8.608%

Suppose a bank enters a repurchase agreement in which it agrees to buy Treasury securities from a correspondent bank at a price of $26,950,000, with the promise to buy them back at a price of $27,000,000. a. Calculate the yield on the repo if it has a 6-day maturity. b. Calculate the yield on the repo if it has a 18-day maturity. (For all requirements, use 360 days in a year. Do not round intermediate calculations. Round your answers to 5 decimal places. (e.g., 32.16161))

a.Yield on the repo 11.13173% b.Yield on the repo 3.71058%

Liquidity risk at a financial intermediary (FI) is the risk that promised cash flows from loans and securities held by FIs may not be paid in full. incurred by an FI when the maturities of its assets and liabilities do not match. that a sudden surge in liability withdrawals may require an FI to liquidate assets quickly at fire sale prices. incurred by an FI when its investments in technology do not result in cost savings or revenue growth. risk that an FI may not have enough capital to offset a sudden decline in the value of its assets.

that a sudden surge in liability withdrawals may require an FI to liquidate assets quickly at fire sale prices.