COURSE/MODULE NAME OF EXAMINERS

ACC1103: Financial Markets & Institutions Mr. Ali Al Tareef

Mid-term test

Year I-Accounting and Finance Diploma

EXAMINATION DATE / TIME EXAMINATION DURATION

Thursday 29th April 2021 2 hour

12:00-2:00

MATERIALS/EQUIPMENT MATERIALS/EQUIPMENT
SUPPLIED BY CENTRE PERMITTED (candidate’s own)

One Answer booklet Non-programmable calculator

Instructions to candidates
This is a 2 hour examination

There are four (4) pages in this examination paper including the coversheet.

Answer all questions on the answer booklet

Show all working as part of the solution.

Maximum marks available per question

SECTION 1 20 marks
SECTION 2 20 marks
Total 40 marks

Page 1 of 4
SECTION 1- ANSWER ALL QUESTIONS: (Total 20 marks)

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

2. Secondary markets help support primary markets because secondary markets

I. offer primary market purchasers liquidity for their holdings.
I. update the price or value of the primary market claims.
III. reduce the cost of trading the primary market claims.

a) I only
b) II only
c) I and II only
d) II and III only
e) I, II, and III

3. Of the following, the most likely effect of an increase in income tax rates would be to
a) decrease the savings rate.
b) decrease the supply of loanable funds.
c) increase interest rates.
d) all of these choices are correct.

4. The basic principle of valuation states that the value of any asset is

a) the present value of all future cash flows generated by the asset.
b) the sum of all future cash flows generated by the asset.
c) the present value of next year's cash flow only.
d) the degree of cash flow riskiness is not a relevant factor in valuation.
e) None of these choices are correct.

5. An investor requires a 3 percent increase in purchasing power in order to induce her to

lend. She expects inflation to be 2 percent next year. The nominal rate she must charge is
about
a) 3 percent.
b) 2 percent.
c) 1 percent.
d) 5 percent.
e) 7 percent.

Page 2 of 4
6. A preferred stock is expected to pay a constant quarterly dividend of $1.25 per quarter
into the future. The required rate of return, Rs, on the preferred stock is 13.5 percent.
What is the fair value (or price) of this stock?

a) $37.04
b) $24.36
c) $52.36
d) $18.65
e) None of these choices are correct.

7. Which of the following bond terms are generally positively related to bond price
volatility?

a) Coupon rate
b) Maturity
c) YTM
d) Payment frequency

8. A security has an expected return less than its required return. This security is
a) selling at a premium to par.
b) selling at a discount to par.
c) selling for more than its PV.
d) selling for less than its PV.
e) a zero coupon bond.

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

10. If the Federal Reserve wishes to stimulate the economy, it could

I. buy U.S. government securities.

II. raise the discount rate.
III. lower reserve requirements.

a) I and III only

b) II and III only
c) I and II only
d) II only
e) I, II, and III

Page 3 of 4
SECTION 2- ANSWER ALL QUESTIONS: (Total 20 marks)

1. a) Johnson Motors’ bonds have 10 years remaining to maturity. Interest is paid annually, the
bonds have a $1,000 par value and the coupon rate is 8 percent. The bonds have a yield to
maturity of 9 percent. What is the current market price of these bonds? (5 marks)

b) Paychex Inc. recently paid a $0.84 dividend. The dividend is expected to grow at a 15
percent rate. At a current stock price of $40.11, what return are shareholders expecting?

(5 marks)

2. a) If the Fed wishes to expand the money supply, what three things can it do? Which has the

most predictable effects? Be specific. (5 marks)

b) Explain with reasons which of the monetary policy tools available to the Federal Reserve is

most often used. (5 marks)

End of Question paper

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