MGT411 2010

Question No: 1 ( Marks: 1 ) - Please choose one

Your browser may not support display of this image. Financial instruments are evolved just as ___________.

► Currency

► Stock

► Bond

► Commodity



Question No: 2 ( Marks: 1 ) - Please choose one

Your browser may not support display of this image. Price of 100 goods under the barter system would be _________.

► 5050

► 19800

► 4950

► 20200



Question No: 3 ( Marks: 1 ) - Please choose one

Your browser may not support display of this image. Wealth can be held in number of other forms but we use to hold money because of which one of the following reason?

► It is the only mode of payment

► It is an asset

► It is most liquid

► It is the only store of value



Question No: 4 ( Marks: 1 ) - Please choose one

Your browser may not support display of this image. A decrease in the number of credit cards issued:

► Has the same impact on the economy as the Federal Reserve supplying less money

► Reduces the money supply since credit cards act like money

► Would probably lower the amount in M3 but likely not M1

► None of the given options



Question No: 5 ( Marks: 1 ) - Please choose one

Your browser may not support display of this image. Risk sharing is the characteristic of which one of the following?

► Checks

► Checking accounts

► Money

► Bonds



Question No: 6 ( Marks: 1 ) - Please choose one

Your browser may not support display of this image. ___________ is the today's value of a payment that is promised to be made in the future.

► None of the given options

► Future value

► Present value

► Agreed value



Question No: 7 ( Marks: 1 ) - Please choose one

Your browser may not support display of this image. Which one of the following is the procedure of finding out the Present Value (PV)?

► Discounting

► Compounding

► Time value of money

► Bond pricing



Question No: 8 ( Marks: 1 ) - Please choose one

Your browser may not support display of this image. Asma deposits funds into a CD account at her bank. The CD account has an annual interest of 4.0%. If Asma leaves the funds in the CD account for entire two years she will have $1081.60. What amount is Asma depositing?

► $960.60

► $900.00

► $1005.00

► $1000.00



Question No: 9 ( Marks: 1 ) - Please choose one

Your browser may not support display of this image. You receive a check for $500 three years from today. The discounted present value of this $500 is ___________.

► $500/(1+i)

► $500*(1+i)

► $500/(1+i)3

► $500*(1+i)3



Question No: 10 ( Marks: 1 ) - Please choose one

Your browser may not support display of this image. What will be the effect on the present value if we double the future value of the payment?

► It will decrease the value by one-half

► It will increase the value by one-half

► It will equally increase the value i.e. doubles the value

► It will have no effect on the value



Question No: 11 ( Marks: 1 ) - Please choose one

Your browser may not support display of this image. The variance is generally less useful than the standard deviation on which of the following reasons?

► Variance is easier to calculate

► Variance is a measure of risk, whereas standard deviation is a measure of return

► Variance isn't calculated in the same units as payoffs where as standarad deviation is

► Both are equally useful



Question No: 12 ( Marks: 1 ) - Please choose one

Your browser may not support display of this image. A risk-averse investor will:

► Always prefer an investment with a lower expected return

► Always prefer an investment with a certain return to one with the same expected return but any amount of uncertainty

► Always require a certain return

► Always focus exclusively on the expected return



Question No: 13 ( Marks: 1 ) - Please choose one

Your browser may not support display of this image. The return on the bond is equal to which of the following?

► Coupon rate + rate of capital gains

► Current yield + rate of capital gains

► Coupon rate - rate of capital gains

► Current yield - rate of capital gains



Question No: 14 ( Marks: 1 ) - Please choose one

Your browser may not support display of this image. An increase in the expected inflation shifts the bond demand to the _________

► Right

► Left

► No change

► None of the given options



Question No: 15 ( Marks: 1 ) - Please choose one

Your browser may not support display of this image. The bond rating of a security refers to which of the followings?

► The size of the coupon payment relative to the face value

► The return a holder is likely to receive

► The likelihood the lender/borrower will be repaid by the borrower/issuer

► The years until the bond matures



Question No: 16 ( Marks: 1 ) - Please choose one

Your browser may not support display of this image. The____________ are an assessment of the creditworthiness of the corporate issuer.

► Bond yield

► Bond ratings

► Bond risk

► Bond price



Question No: 17 ( Marks: 1 ) - Please choose one

Your browser may not support display of this image. Which of the following statement is true for the given sentence, "that tax affects the bond return"?

► Because only interest income they receive from bond is taxable

► Because principal amount and interest income they receive from bond is taxable

► Because bond holders are taxpayers

► Because all bond is sold with a condition that tax will be deducted from its return



Question No: 18 ( Marks: 1 ) - Please choose one

Your browser may not support display of this image. Which one of the following is true for the relationship between the yield of taxable and tax exempt bond?

► Higher the tax rate wider the gap between the yield of taxable and tax exempt bond

► Taxable bond yield is always greater than tax exempt bond

► Higher the tax rate shorter the gap between yield of taxable and tax exempt bond

► Lower the tax rate wider the gap between yield of taxable and tax exempt bond



Question No: 19 ( Marks: 1 ) - Please choose one

Your browser may not support display of this image. If the tax rate is higher than gap between yield on taxable and tax exempt bond?

► Shorter

► Wider

► No gap

► Any thing can be possible



Question No: 20 ( Marks: 1 ) - Please choose one

Your browser may not support display of this image. The liquidity premium theory suggests that yield curves should usually be:

► Up-sloping

► Inverted

► Flat

► Up-sloping through year 1, then flat thereafter



Question No: 21 ( Marks: 1 ) - Please choose one

Your browser may not support display of this image. A share of common stock represents ___________.

► A claim from a lender to a borrower

► A share in the company's assets

► A share of ownership of the company

► An unlimited liability to the owner of the stock



Question No: 22 ( Marks: 1 ) - Please choose one

Your browser may not support display of this image. You start with a $1000 portfolio; it loses 40% over the next year, the following year it gains 50% in value; At the end of two years the worth of your portfolio will be:

► $900

► $600

► $1000

► $1100



Question No: 23 ( Marks: 1 ) - Please choose one

Your browser may not support display of this image. If information in a financial market is asymmetric, this means:

► Borrowers and lenders have the same information

► Lenders lack any information

► Borrowers and lenders have perfect information

► Borrowers would have more information than lenders



Question No: 24 ( Marks: 1 ) - Please choose one

Your browser may not support display of this image. Which of the following is NOT an example of financial institutions?

► Bank

► Securities firm

► Stock exchange

► Insurance company



Question No: 25 ( Marks: 1 ) - Please choose one

Your browser may not support display of this image. Components of M1 DO NOT include which one of the following?

► Currency in the hands of public

► Demand deposits

► Small denominations time deposit

► Checkable deposits



Question No: 26 ( Marks: 1 ) - Please choose one

Your browser may not support display of this image. Mr. Ghazanfar obtains a home improvement loan from Allied Bank.This loan is:

► Mr. Ghazanfar's asset and the bank's liability

► Mr. Ghazanfar 's asset, but the liability belongs to the bank's depositors

► Mr. Ghazanfar 's liability and an asset for the bank

► Both Mr. Ghazanfar's and bank's liability



Question No: 27 ( Marks: 1 ) - Please choose one

Your browser may not support display of this image. The interest rate used in the present value calculation is often referred as:

► Discount rate

► Inflation rate

► Nominal rate

► Deflation rate



Question No: 28 ( Marks: 1 ) - Please choose one

Your browser may not support display of this image. If there is a decrease in the expected future interest rate, what will be its affect on bond?

► Bond will be less attractive

► Bond will be more attractive

► Bond will be less expensive

► Bond will be more expensive



Question No: 29 ( Marks: 3 )

Your browser may not support display of this image. Find out YTM of 1 year 10% coupon bond selling at $120. (Face value of bond = $100).



Question No: 30 ( Marks: 3 )

Your browser may not support display of this image. Discuss briefly the facts about term Structure.



Question No: 31 ( Marks: 5 )

Your browser may not support display of this image. You are the founder of an automobile company. Describe the idiosyncratic & systematic risks that your company faces.



Question No: 32 ( Marks: 5 )

Your browser may not support display of this image. Discuss bubbles in your own word.

Question No: 1 ( Marks: 1 ) - Please choose one
Financial instruments are evolved just as ___________.
► Currency
► Stock
► Bond
► Commodity

Question No: 2 ( Marks: 1 ) - Please choose one
Banks usually offer lower rates of interest to people willing to keep their funds in the bank for a short time because:
► Banks really do not want these people as customers
► Banks really do not want a lot of people coming into the bank
► Banks realize that time has value
► All of the given options

Question No: 3 ( Marks: 1 ) - Please choose one
Which of the following is a drawback of Fiat money?

► Fewer resources are used to produce money
► The quantity of money can be determined by rational human judgment
► A corrupt Government might issue excessive amount of money thus causing inflation
► Fiat money doesn’t have any drawback

Question No: 4 ( Marks: 1 ) - Please choose one
The Consumer Price Index (CPI):
► Tends to overstate inflation due to substitution bias
► Tends to understate actual inflation
► Is more accurate than the GDP deflator
► Is based on basket of goods that changes monthly with consumer expenditures

Question No: 5 ( Marks: 1 ) - Please choose one
A derivative instrument:
► Gets its value and payoff from the performance of the underlying instrument
► Is a high risk financial instrument used by highly risk averse savers
► Comes into existence after the underlying instrument is in default
► Should be purchased prior to purchasing the underlying security

Question No: 6 ( Marks: 1 ) - Please choose one
If you put $1,000 per year into bank at 4% interest, how much would you have saved after 40 years?
► $90,000
► $98,826
► $82,286
► $85,880

Question No: 7 ( Marks: 1 ) - Please choose one
What will be the Future Value (FV) of $1000 in 5 years at 5% interest rate?
► $1300.00
► $1276.28
► $1999.99
► $1500.52

Question No: 8 ( Marks: 1 ) - Please choose one
Which one of the following is the procedure of finding out the Present Value (PV)?
► Discounting
► Compounding
► Time value of money
► Bond pricing

Question No: 9 ( Marks: 1 ) - Please choose one
The interest rate that is involved in _____________ calculation is referred to as discount rate
► Present value
► Future value
► Intrinsic value
► Discount value

Question No: 10 ( Marks: 1 ) - Please choose one
A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called:
► Simple loan
► Fixed-payment loan
► Coupon bond
► Discount bond

Question No: 11 ( Marks: 1 ) - Please choose one
Which of the following represents the fisher’s equation?
► Nominal interest rate = real interest rate + inflation
► Nominal interest rate + inflation = real interest rate
► Nominal interest rate = real interest rate - inflation
► Nominal interest rate = real interest rate / inflation

Question No: 12 ( Marks: 1 ) - Please choose one
What will be the result of the difference of real and nominal interest rate?
► The cost of borrowing
► The effect of inflation
► The price of bonds
► The return of bonds

Question No: 13 ( Marks: 1 ) - Please choose one
The variance is generally less useful than the standard deviation on which of the following reasons?
► Variance is easier to calculate
► Variance is a measure of risk, whereas standard deviation is a measure of return
► Variance isn't calculated in the same units as payoffs where as standarad deviation is
► Both are equally useful

Question No: 14 ( Marks: 1 ) - Please choose one
_________ measures the probability of worst outcome in any investment project.
► Variance
► Standard deviation
► Value at risk
► Hedging

Question No: 15 ( Marks: 1 ) - Please choose one
What is true about the relationship between standard deviation and risk?
► Greater the standard deviation greater will be the risk
► Greater the standard deviation lower will be the risk
► Greater the standard deviation risk will be remained the same
► No relation between them

Question No: 16 ( Marks: 1 ) - Please choose one
Most of the people among us are ___________.
► Risk lovers
► Risk enhancers
► Risk averse
► Risk tolerating

Question No: 17 ( Marks: 1 ) - Please choose one
When a bond becomes more liquid relative to its alternatives, the demand curve for bonds shifts to the:
► Right
► Left
► No change
► None of the given options

Question No: 18 ( Marks: 1 ) - Please choose one
Which one of the following agencies assesses the default risk of different issuers?
► Insurance companies
► Bond issuing
► Credit rating
► Recruitment agencies

Question No: 19 ( Marks: 1 ) - Please choose one
In the long run, the yield curve tends to be which of the following?
► Upward sloping
► Downward sloping
► Nearly vertical
► Nearly horizontal

Question No: 20 ( Marks: 1 ) - Please choose one
Yield curves show which of the followings?
► The relationship between bond interest rates (yields) and bond prices
► The relationship between liquidity and bond interest rates (yields)
► The relationship between risk and bond interest rates (yields)
► The relationship between time to maturity and bond interest rates (yields)

Question No: 21 ( Marks: 1 ) - Please choose one
Which of the following patterns of term structure occur most frequently?
► Ascending yield curve
► Descending yield curve
► Flat yield curve
► Humped yield curve

Question No: 22 ( Marks: 1 ) - Please choose one
Term structure of interest rate can be explained by which one of the following?
► Tax difference
► Expectation hypothesis
► Liquidity premium theory
► Both by expectation hypothesis and liquidity premium theory

Question No: 23 ( Marks: 1 ) - Please choose one
The concept of limited liability says a stockholder of a corporation:
► Is liable for the corporation's liabilities, but nothing more
► Cannot receive dividends that exceed their investment
► Cannot own more than fiver percent of any public corporation
► Cannot lose more than their investment

Question No: 24 ( Marks: 1 ) - Please choose one
The theory of efficient market states that prices of financial instruments reflect:

► All available information
► Some of the information
► No information
► Imperfect information

Question No: 25 ( Marks: 1 ) - Please choose one
Stock market bubbles can lead to:
► An inefficient allocation of resources
► Stock market crashes
► Patterns of volatile returns from the stock market
► All of the given options

Question No: 26 ( Marks: 1 ) - Please choose one
Financial instruments are used to transfer which of the following?
► Both Risk and Resources
► Risk
► Resources
► Mortgages

Question No: 27 ( Marks: 1 ) - Please choose one
_________ evolved from coffee houses to trading places to electronic networks.
► Financial companies
► Financial markets
► Financial institutions
► Financial intermediaries

Question No: 28 ( Marks: 1 ) - Please choose one
If there is a decrease in the expected future interest rate, what will be its affect on bond?
► Bond will be less attractive
► Bond will be more attractive
► Bond will be less expensive
► Bond will be more expensive

Question No: 29 ( Marks: 3 )
Differentiate between yield to maturity and current yield.

Question No: 30 ( Marks: 3 )
“Stock market plays a crucial role in every modern capitalist economy”. Discuss.

Question No: 31 ( Marks: 5 )
a) Mr. A has a bond of ABC Corporation. Will his return from this bond be affected by tax? Support your answer with reason.

b) Mr. B has a bond of that is issued by Government. Will his return from this bond be affected by tax? Support your answer with reason.

Question No: 32 ( Marks: 5 )
Ahmad purchases a 10 year 8% coupon bond with the face value of $100. He wants to hold this bond for 1-year and then sells a 9-year bond after 1-year.

(i) If interest rate does not change then what will be the rate of return?

(ii) If interest rate falls to 6% then suppose price increases to $109.16. What will be the capital gain after the price rise?

(iii) After the price rise, what will be the one year holding period return?