Financial Markets FIL 241 Exam 2

Which of the following statements is correct?

A. "Pick-a-payment" mortgages helped poor people by allowing them to buy houses they could not afford otherwise. B. One of BB&T principles was never to do anything that in a long run would harm a customer as eventually that would harm the firm. C. Regular banks could not compete with Freddie and Fannie as these two institutions could raise funds at very high interest rates. D. Government actions put many financial institutions in a desperate situation before the financial crisis encouraging them to take less risk in a hope to survive. B

You decided to get an adjustable-rate 20-year mortgage ($200,000). The interest rate is fixed at 5.3% for the first five years. After eight years the interest rate goes up to 8.4% and your loan balance is $130,431. Estimate your ninety-seventh (after eight years) mortgage payment.

A. $1,699.85 B. $1,420.07 C. $1,440.62 D. none of the above C

You want to buy a condo and you need to borrow $440,000. Fixed-rate 30-year mortgages have an interest rate of 4.1%. You decide to obtain this mortgage loan. How much will you have to pay per month?

A. $1,789.49 B. $1,976.22 C. $2,126.07 D. $2,248.18 C

You want to buy a home for $400,000 and you need to borrow 80% of the home price. Fixed-rate 24-year mortgages have an interest rate of 3.3%. You decide to obtain this mortgage loan. Estimate ending balance at the end of the second month.

A. $316,364 B. $318,111 C. $318,538 D. $319,001 C

You borrow $310,000 to buy a house. You obtain 30-year mortgage with 4.3% interest rate. Estimate the repayment amount for the second month.

A. $423.27 B. $424.78 C. $463.59 D. $847.05 B

You decided to get an adjustable-rate 15-year mortgage ($140,000). The interest rate is fixed at 3.3% for the first seven years. After eight years the interest rate goes up to 9.4% and your loan balance is $90,431.87. Estimate your 61st mortgage payment.

A. $613.14 B. $797.63 C. $987.14 D. $1,473.39 C

You bought Canadian dollar call option at a premium of $0.03 per unit. The exercise price is $1.00. The option expires in three months. In three months (right before your option expires) you can buy British pounds for $1.03 per unit in the spot market. What will be your net profit?

A. -$0.03 B. $0.00 C. $0.03 D. $0.06 B

You bought British pound call option at a premium of $0.05 per unit. The exercise price is $1.75. The option expires in three months. In three months (right before your option expires) you can buy British pounds for $1.73 per unit in the spot market. What will be your net profit?

A. -$0.05 B. -$0.03 C. $0.02 D. $0.07 A

You bought British pound put option at a premium of $0.05 per unit. The exercise price is $1.75. The option expires in three months. In three months (right before your option expires) you can buy British pounds for $1.73 per unit in the spot market. What will be your net profit?

A. -$0.05 B. -$0.03 C. $0.02 D. $0.07 B

You decided to buy 100 shares of IBM Corp. Currently it is trading at $83 per share. You think you can get a better price and place a limit order to buy shares at $ 82 per share. The price immediately goes up to $88. What is your profit?

A. -$100 B. $0 C. $500 D. $600 B

You decided to buy 100 shares of TIK Corp... Currently it is trading at $100 per share. You think you can get a better price and place a limited order to buy shares at $98 per share. The price goes down to $80. What is your profit?

A. -$2,000 B. -$1,800 C. $0 D. $200 B

You decided to buy 100 shares of TIK Corp... Currently it is trading at $83 per share. You place a market order. In three days, the price goes down to $81 per share, but later the price goes up to $90. What is your profit?

A. -$200 B. $700 C. $900 D. $1,600 B

You believe that Apple Corp. stock is too high and you short it at $625 per share (100 shares). A month later when you cover your short position the stock price is $700 per share. What is your profit?

A. -$700,000 B. -$7,500 C. $0 D. $7,500 B

You believe that AGN Corp. stock is too high and you short it at $125 per share (1,000 shares). A month later when you cover your short position the stock price is $75 per share. What is your profit?

A. -50,000 B. 0 C. 25,000 D. 50,000 D

The sale of securities to the public via an investment banker by a new corporation raising funds is called

A. A seasoned offering B. A secondary offering C. An initial public offering D. A best efforts offering C

Which of the following statements is incorrect?

A. A swap contract is an agreement to exchange cash flows of different patterns. B. A contract allowing exchanging variable interest payments on a loan for fixed payments is an example of a swap contract. C. A credit default swap is a type of an insurance contract where the buyer makes regular payments and receives money in case of a loan default. D. Credit default swaps caused the last financial crisis in the U.S. which would have been avoided if these securities did not exist. D

Which of the following statements is incorrect?

A. As government provides explicit guarantees to Freddie and Fannie, government has to bail them out. B. Many top employees at the U.S. Treasury are from Goldman Sachs. C. Basel regulations pressured banks to use mathematical models to manage their risk. D. Fed's mathematical models were incapable to predict the 2008 financial crisis. A

Which of the following is not correct?

A. Bailing out Greece at the beginning of Greece crisis helped to solve problems with European financial system B. At the time of the creation of euro, it is assumed that the countries involved will have common monetary policy but independent fiscal policies C. Floating exchange rate system including the U.S. exists since about 1970 D. Making innocent people pay for mistakes of other people encourages the latter to continue their mistakes A

Which of the following statements is incorrect?

A. Banks take long-term deposits and make short-term loans. B. Everything else being equal, banks are more likely to get into problems when interest rate are increasing rather than when they are decreasing. C. Low interest rate that last for a long time make financial system to accumulate many low paying assets and increase the risk they face when interest rates increase. D. The SEC has motivation to create higher leverage in financial system than what we would have without any government interference. A

Which of the following statements is incorrect?

A. Call option allows the buyer to buy an asset at the specified price during the specified period. B. Put option allows the writer to sell an asset at the specified price during the specified period. C. Option premium is the price the buyer pays to obtain an option. D. Exercise price is the price at which option holders can buy or sell the underlying asset. B

Which of the following statements is incorrect?

A. Call options allow the option holder to buy the specified asset at the predetermined price during the specified period if they wish to do so. B. Put option writers have an obligation to buy if the option holder wants to sell. C. One can expect higher profit on a well-diversified portfolio of options and futures contracts than on a well-diversified portfolio of stocks. D. Call option writers have an obligation to sell if the option holder wants to buy. C

Which of the following is not correct?

A. Currency exchange rates are determined by supply and demand B. If foreigners buy more T-Bonds, the dollar value will go down C. If Americans buy more goods from abroad, the dollar value will go down D. If foreigners buy more goods from the U.S., the dollar will go down B

Which of the following statements is incorrect?

A. Derivatives can be used to hedge the following risk factors: interest rates, commodity prices, stock market prices, and foreign exchange prices. B. The forward price is the price at which the forward contract will be executed. C. The spot price is the price at which the futures contract will be executed. C

Which of the following statements is incorrect?

A. Differently from American options, European options can be exercised only on the specified day. B. Volatility of the underlying asset price increases the value of the option. C. Longer time to expiration increases the value of the option. D. Option buyers potentially can lose much more than option premiums. D

Which index is likely to be better at reflecting the whole U.S. stock market performance?

A. Dow Jones B. Standard and Poor's 500 B

Which of the following was not likely to make the last financial crisis worse?

A. Fed's encouragement of leverage in the banking system. B. Fed's lowering of interest rates before the crisis. C. Fed's over-pessimism about managing the financial system. D. Fed's low requirements for bank capital. C

Which of the following was not likely to make the last financial crisis worse?

A. Federal deposit insurance made it easier for risky financial institutions to raise money. B. The US government encouraged Americans to own their homes and worked to find creative ways to make the houses seem affordable. C. Financial markets punished some financial institutions that made bad decisions. D. Government bailed out some failing financial institutions. C

Which of the following can be used to hedge exchange rate risk?

A. Future or forwards B. Options C. Money Market D. All of the above D

Which of the following statements is incorrect?

A. Futures contracts are standardized. B. Clearinghouse participation eliminates counterparty risk. C. Margin requirements reduce risk for the clearinghouse but increase risk for investors. D. Margin requirements make investing safer to investors who are subject to these requirements. D

Which of the following statements is incorrect?

A. Futures market instruments can be used for hedging or speculating. B. Creation and survival of futures market instruments is affected by customer demand. C. Exchanges develop new products that they expect to be wanted by their customers. D. None. D

Which of the following statements is incorrect?

A. If a company expects receivables in British pounds in one year, the company could hedge this risk by selling British pound futures contracts or buying call option for British pound. B. Call option is a right to buy a specific asset at a predetermined price during predetermined period. C. Writing options is typically not used in risk management since option writer cannot control whether option is exercised or not. D. Companies often use forward contracts to hedge their exchange rate risk. A

Which of the following statements is incorrect?

A. If a country has high inflation, its currency value is likely to go down B. Dow-Jones Industrial Average is a price weighted stock index C. Stocks with betas less than one tend to have more price variability than the market D. We are better off when other countries are being productive and prospering economically C

Which of the following statements is incorrect?

A. If you have a long position on a forward contract, you have a contract to buy the asset. B. In futures contracts you face a counterparty risk. C. The forward price is the price which makes the net present value of the contract equal to zero. D. Futures contracts are traded on exchanges. B

Which of the following statements about the theory of comparative advantage is incorrect?

A. In free markets the maximum prosperity is achieved when people engage in businesses where they maximize their wealth. B. To maximize total production, countries should specialize in producing goods and services where they have a comparative advantage. C. Increasing tariffs protects domestic industries and thus increases the prosperity of the country. D. This theory can be applied at the level of individuals. C

Which of the following were not the consequences of government bailout of uninsured depositors at the Washington Mutual at the expense of bondholders?

A. Increased trust in the rule of law in the U.S. B. Washington Mutual bondholders experiencing larger than expected losses. C. Reduced people willingness to buy bonds of any financial institution. D. Washington Mutual uninsured depositors getting more than they deserve. A

The bid-ask spread for equity securities tends to be ________ for more frequently traded stocks and _______ for stocks which have more traders with inside information

A. Narrower, wider B. Narrower, Narrower C. Wider, wider D. Wider, narrower A

You have a futures contract to buy euros (long position) in six months for $1.37 per euro. Contract value is $1,370,000. The inital margin is $100,000 and the maintenance margin is $75,000. Will you need to bring more money to your margin account if euro price changes to $1.42.

A. No B. Yes A

Which of the following statements about speculation is incorrect?

A. Speculation makes markets less efficient. B. Speculation improves liquidity. C. Speculation tends to bring asset prices to correct prices. D. Speculators make money when they buy underpriced assets and sell overpriced assets. A

Investors with 30% of the voting stock of a corporation, interested in a seat on the board of directors, had better have __________ voting privileges

A. Straight B. Cumulative C. Proxy D. Limited B

Which of the following statements is incorrect?

A. TARP transferred wealth from bad banks to good banks. B. TARP did not use the same principles as the free market. C. Bailing out failing financial institutions weakens financial system. D. Forcing innocent people to pay for the mistakes of other people encourages bad behavior. E. Encouraging bad behavior in people is immoral A

Which of the following is not correct?

A. The Fed helped to create that last financial crisis by keeping interest rates low before the crisis. B. FDIC made the crisis worse by making it easy for very risk depository institutions to raise money before the crisis C. Financial institutions serve primarily by obtaining long-term loans and lending short-term D. Government housing policy helped to create the last crisis in real estate markets C

Which of the following did not contribute to creating the financial crisis of 2008?

A. The Fed. B. The U.S. Securities and Exchange Commission. C. The Federal Deposit Insurance Corporation. D. Housing policy before the crisis. E. All of the above contributed to creating the crisis. E

Which of the following is not correct?

A. The theory of comparative advantage suggests that the total production in the world can be increased by each country specializing in producing goods when they have comparative advantage and buying other goods from foreigners. B. Country A is less efficient at producing all goods than Country B. It is still likely that Country has a comparative advantage in producing some goods. C. The theory of comparative advantage cannot be applied to individuals. D. Interfering with international business is likely to leave all affected countries poorer. C

Which of the following statements is incorrect?

A. Too high money supply causes inflation and devaluation of the currency. B. Purchasing power parity reduces exchange rate risk in a long run. C. According to the purchasing power parity, prices of the same goods in two countries should be the same when expressed in the same currency. D. Higher prices of goods in one country increases demand for those goods. D

The following are differences between futures and forward contracts, except for the following

A. Trading on organized exchanges B. Margin requirements C. Clearinghouse participation D. Contract execution in the sport vs. futures market D

Which of the following statements is incorrect?

A. When investing in bond markets, many investors rely on bond credit ratings to evaluate the default risk of these securities. B. Government can reduce the negative effect of financial crises by protecting large financial institutions that they deem to be essential for the economy. C. When interest rates in the market go up, the asset value of a typical bank declines more than the value of their liabilities. D. When government provides help to companies or individuals whenever they get into trouble, companies and individuals are encouraged to behave less responsibly and take more risk. B

Which of the following statements is incorrect?

A. When the risk in financial system significantly increases, people start paying more attention to whom they give their money and are more likely to transfer their money to financial institutions with good reputation. B. Mark-to-market accounting increased the risk in financial system and made it harder for institutions needing cash to sell their illiquid financial assets. C. Government interference in credit rating system weakened the quality of this system, leading to the loss of confidence in credit ratings during the financial crisis. D. Loss of the confidence in the credit rating system significantly affected only securities related to mortgages. D

Which of the following statements is incorrect?

A. While currencies of developing countries are very volatile, currencies of developed countries are very stable. B. Exchange rate is a price of one currency in terms of another, and like all prices it is governed by the laws of demand and supply. C. Writing contracts in foreign currencies can subject companies to significant exchange rate risk. D. Using forward and futures contracts can lead to over-hedging. A

Which of the following statements is incorrect?

A. With futures and forward contracts we agree on all conditions of the transaction today but the transactions is executed on a predetermined day in the future. B. Forward contracts are standardized while futures contracts are custom made. C. A derivative is a financial instrument whose value depends on the value of the underlying asset. B

Euro was introduced because paper money unbacked by any real assets worked very well in the past

T or F F

The expected return on a well-diversified portfolio of derivatives is higher than the expected return on a well-diversified portfolio of bonds and stocks.

T or F F

Buying option contracts is a common way to hedge risk when the amount of payables is very uncertain

T or F T

Conditional offers are executed at the price mentioned in the conditional offer

T or F T

Futures and forward contracts can lead to over hedging

T or F T

Government decision to pay unsecured depositors at the expense of bondholders helped to freeze debt markets during the financial crisis

T or F T

Oil companies that use futures contracts to sell oil, reduce their losses caused by the drop in oil prices

T or F T

Too big to fail policy creates moral hazard problems

T or F T

Worldwide regulation of the risk management of financial institutions reduces diversification and increases systematic risk in this industry

T or F T

Which of the following is not correct?

a. A put option gives a right to the option holder to sell the underlying asset at a predetermined price. b. Writing options is more risky than buying options c. A strike price is the price one pays to acquire an option d. An exercise price is the price at which option contract is executed C