De La Salle University Financial Markets aad lastitutions (ACFINA3) SETB Long Quiz No, 2 - For the 1st Term 2018-2019 Page |2 of NAME____ SECTION Topics: Money Markets Bond Markets Mortgage Markets Stack Markets, 1, ALTERNATE RESPONSE, (20 points) SHADE: A. ~ ithe statementis TRUE B ~ ifthe statement is FALSE 1, Given the functions of the money markets itis necessary for money market securities ta havea maturity ofone year or less and low default risk, because these markets are designed to provide safe investments with litle or no chance of principal loss. 2, Money markets are referred to as retail markets because small individual investors are the primary bust money market securities, 3. Low default risk in the money markets implies that the promised cash flovis will inal! ikelihood be pad in full and on time, The short maturity ensures that the value of these securities will be relatively insensitive to interest rate changes and, also, there is not much time for the issuer's condition to change—this also limits the risk, 4. Commercial paper securities are issued only by the largest and most creditworthy corporations, as they are tunsecured. Uniike most money market securities, commercial paper is not generally traded in 9 secondary market, ie The main purpose of interbank loans (referred toas feeral junds in the United States) is to provide banlss with an immediate infusion of reserves should they be short. 6. In general, money market instruments are low-risk, high-yield securities, 7. ‘T-bills have an original maturity of less than one year. T-bonds have original maturities from 1 to 10 years ‘while T-notes have original maturities from 10 to 30 years. 8 A callable bond is one where the issuer Is requited to retire a certain amount of the outstanding bonds each Year to ensure that all the bond principal is patd by final matucity, 9. With TIPS, che security's coupon rate is changed every six months by the inflation rate as measured by the Cel, 10. STRIPS are useful tools to minimize interest rate risk, Because they are zero coupon bonds, a STRIP held to maturity has no interest rate risk; the investor is certain ofthe wominal rate of return. investors are apparently willing to pay a small premium to eliminate this uncertainty. 11 Discount points (or simply points are interest payments madeat the beginning of aloan. Apoint wna mortgage Joan refers to one monthly payment of principal and interest, 12. On Mortgage Loans, discount points are paid to reduce the down payment required, 13. After mortgages have been originated, it can be sold with recourse or without recourse. Selling with recourse means the buyer of the mortgage can require the mortgage seller to repay the mortgage ifthe homeanner defaults. A sale without recourse means the seller has no legal fibility in the event the homeowner defaults, 14, Mortgage markets differ From stock and bond markets, The usual borrowers in capital markets are businesses and government entities, whereas the usual barrowers in mortgage markets are individuals, 15. Mortgage payments are higher on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage, and less interest is paid om a 15-year mortgage than on a 30-year mortgage: ceteris pari16. 47. 18. 19. 20. I. 2. 22. 23. 24 25, De La Salle University Finaneial Markets and Institutions (ACFINA3) seTB SS | Long Quiz No. 2- For the 1st Term 2018-2019 Poge \zof 4 In the event of bankruptcy, a firm's janitor must be paid all of the salary owed to him before stockholders receive anything, In cumulative voting, a stockholder who owns Si percent of the shares can be assured of the ability to elect the entire board of directors. Instances exist when preferred stock is a better investment choice than common stock or bonds, .¢. when preferred stocks have higher yields than bonds and much higher dividend yields than common stocks. However, one will not get capital gains with preferred stock. Thus, ifsteady high pretax yields are desired, with little or no chance of capital gains, and a tax-sheltered investment vehicle is available, preferzed stock may be an ideal choice. Straight voting gives a small shareholder a better chance of electing a given board member because the shareholder doesn't have to own (or control by proxy) a majority of shares. As a controlling stockholder, you can ensure that you will always be able to elect the entire hoard of your choice if you have cumulative voting. ‘Weak form efficiency implies that all historic price and trading information is contained in current stock price and is of ne value to an investor in predicting future stock prices, Semi-strong efficiency focuses on the speed ‘with which public information is impounded into stack prices. Strong form efficiency implies that public and inside information is of value in predicting tomorrow's price change. Strong form efficiency implies that the markets are also weak and semi-strong form efficient, MULTIPLE CHOICE THEORIES (10 points) ~ Shade the best choice. In a Treasury auction, preferential bidding status (1. bidders always receive a 100 percent allocation of their bids) is granted to A. competitive bidders. C. short sale committed bidders. B, noncompetitive bidders. . commercial bank bidders. tm the T-bill auction process, the competitive bidder is guaranteed a and a noncompetitive bidder is guaranteed a A, mipimum price; maximum price C. maximum price; giver quantity B, maximum price; minimum price D. minimum price; given quantity Which of the following staternents are true of Treasury bills? 1. The market for Treasury bills is extremely deep and liquid. 1. Occasionally, investors find that earnings on T-bills do not compensate them for changes in purchasing power due to inflation, i, By volume, most Treasury bills are sold to individuals who submic noncompetitive bids. AL Landitonly ©. Mand tt only B. Land Ilfonly D. 1)land ll ‘A-Treasury security in which periodic coupon interest payments can be separated from each other and from the principal payment is called 2 STRIP. An 18-year T-bond, paying semannval coupon, canbe stripped into how many separate securities? cs A 8 bar Which one of che following bonds is likely to have the highest required rate of return, ceteris paribus? A. AAfvrated non-callable corporate bond witha sinking fund B. AAA-rated callable corporate bond with a sinking fund. ._ Advrated callable corporate bond without o sinking fund D. High-quality municipal bonder f [ De La Salle University e& Financial Markets and Institutions (A CFINA3) SETB : Long Quiz, No. 2 - For the 1st Term 2018-2019 Page 13 of 4 26. Which of the following is true of mortgage interest rates? A. Mortgage rates are closely tied to Treasury bond rates, but snortgage rates tend to stay below Treasury rates because mortgages are secured with collateral, B. Longer-term mortgages have higher interest rates than shorter-term mortgages. C._ Interest rates are higher on mortgage loans on which lenders charge points D. All of the above are true, 27. With a fixed-rate mortgage, the _bears the interest rate risk and with an ARM the __bears the interest rate risk A. lender; borrower C. borrower; borrower B. borrower; lender D. lender; lender 28. Suppose that over the last 10 to 15 years significantly large numbers of investors have been able to earn abnormal returns from using the firm's publicly available financial information to forecast growth in earnings and dividends. This would be evidence that the markets are not Leak form efficient. Hl semi-strong form efficient. II, strong form efficient. A. Lonly ©. Wonly B. I andionly D. biand Ml 29, Data show that only 11 of 27 recessions prior to 1990 were preceded by a decline in stock prices, Although j stocks are a leading economic indicator, what are some reasons why a stock price decline might wot indicate an upcoming recession? A. Current stock prices are overly optimistic about future growth; when the over-optimisn is corrected, stock prices fail, sometimes sharply. B, Equity risk premiums temporarily rise even ifno change in underlying economic growth takes place ©. Economic growth slower than expected that does not result in a recession D. all of the above. E, Aand only. 30. Ifall preferred dividend payments that have been missed must be paid before any cammon stock dividend car be paid, the preferred stock is called __preterred stock A. cumulative . nonparticipating B. participating D. dus class I, MULTIPLE CHOICE PROBLEMS (20 points, 2 points each) = Shade the best choice, Provide detailed solutions. DOUBLE-RULE or highlight final answers, 31. A.180-day P3 million CD has a 4.25 percent annual rate quote, Ifyou buy the CD, how much will you collect in 180 days? A. 73,047,439 . P3,062,877 B. P3,045.678 D. 3,063,750 32, Suppose that P10 million face value commercial paper with a 270-day manurity s selling for 9,55 is the bond equivalent yield on the paper? A. 637 percent C. 4.50 pervent B. 6.42 percent million. What D. 4.71 pereent