PART 1.

MULTIPLE CHOICE QUESTIONS  

There are 10 questions in this part. Answer ALL questions. Give ONE answer only for each
question.  
1. Loans made between borrowers and lenders are:  
a. liabilities to the lenders and assets to the borrowers since the borrower obtains the
funds. 
b. assets to the lenders and liabilities of the borrowers since the promises are made to the
lenders. 
c. not part of either parties' assets or liabilities until the loans are repaid. 
d. liabilities to both the lenders and the borrowers. 
e. None of the answers is correct. 
2. Financial instruments and money share which of the following characteristics?  
a. Both can function as a means of payment and a store of value. 
b. Both can function as a store of value and allow for trading of risk. 
c. Both can function by acting as a means of payment and allow for trading of risk. 
d. Both can function as a store of value even though they do not allow for trading of risk. 
e. None of above. 
3. Mutual funds have:  
a. been created for very wealthy individuals with a lot of money to invest. 
b. increased the risks associated with constructing a portfolio. 
c. reduced the costs associated with gathering information on stocks and bonds. 
d. increased the transactions costs associated with participating in financial markets. 
e. None of the above. 
4. Financial instruments used primarily as stores of value include each of the following,
except:  
a. bonds. 
b. futures contracts. 
c. stocks. 
d. home mortgages.
e. None of the above. 
5. Which of the following are long-term financial instruments?  
a. A six-month loan  
b. A negotiable CD  
c. A banker's acceptance 
d. A U.S. Treasury bill 
e. None of the above  
6. Which of the following instruments is not traded in a money market?  
a. Eurodollars  
b. U.S. Treasury Bills  
c. Banker's acceptances  
d. Municipal bonds 
e. None of the above  
7. U.S. Treasury bills _________. 
a. are issued in three-, six-, nine-, and twelve-month maturities.  
 b. are the most liquid of the money market securities.  
c. sell at a discoun3t because they have no interest payments.  
d. are all of the above.  
e. are only (b) and (c) of the above. 
8. What is the effective annual rate of a mortgage rate that is advertised at 8% (APR) over
the next twenty years and paid with quarterly payment? 
a. 8.3% 
b. 8.29% 
c. 1.006% 
d. 8.24% 
e. None of the above 
9. A share of common stock represents a(n):  
a. claim from a lender against a borrower. 
b. share in the company's debts. 
c. share of ownership of the company. 
d. unlimited liability to the owner of the stock. 
e. None of above 
10. The value of a financial instrument rises as:  
a. the size of the payment promised decreases. 
b. the promised payment is made sooner rather than later. 
c. it is less likely the payment will be made. 
d. the payments are made when the prospective investor needs them least. 
e. None of the above 
PART 2. EXERCISES AND SHORT QUESTIONS  
1. You invest $8000 each year in bank with APR = 12.4%, beginning two years from
now. Compute the present value of the amount you receive after twelve years from now. 
……………………………………………………………………………………………………………………………………………………
……………………………………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………………………………… 
 
 
2. What is the price of a 10 years coupon bond with face value $1000 and coupon rate is 7.8%
if the interest payment will be semiannual and the YTM is assumed to be 7.2%? 
…………………………………………………………………………………………………………………………….
……………………………………………………………………………………………………………………………………………………
……………………………………………………………………………………………………………………………………………………
……………………………………………………………………………………………………………………………………………………
……………………………………………………………………………………………………… 
3. Jessica has just graduated with her MBA. Rather than take the job she was offered at a
prestigious investment bank—3As—she has decided to go into business for herself. 
She believes that her business will require an initial investment of $1 million. After that, it
will generate a cash flow of $100,000 at the end of one year, and this amount will grow by
4.5% per year thereafter. What is the IRR of this investment opportunity? 
……………………………………………………………………………………………………………………………………………………
……………………………………………………………………………………………………………………………………………………
……………………………………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………………………… 
 
PART 3. Short questions  
a. If an investor wants to compare commercial paper to a corresponding default-free
investment, which security would he/she use and why?
For those that are risk averse, those that are retired already or very close to doing so, and
those that cannot afford to lose any of their invested capital, treasury bill will be more
appropriate choice. However, for the risk lovers, the younger investors with time on their
hands, and those that do not mind as much if they lose any part of their invested capital,
taking the additional risk of for a couple basis points of added return from commercial
paper may be a better choice.
…………………………………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………… 
 
b. What kinds of asymmetric information problems do the life insurance companies have
to deal with? Give a solution that helps to reduce that problem. 
……………………………………………………………………………………………………………………………………………………
……………………………………………………………………………………………………………………………………………………
……………………………………………………………………………………………………………………………………………………
……………………………………………………………………………………………………………………………………………………
………………………………………………………………………………………………………… 

PART 1. MULTIPLE CHOICE QUESTIONS  

1)  Every financial market has the following characteristic:  
A) It allows loans to be made.  
B) It channels funds from lenders-savers to borrowers-spenders. / 
C) It allows common stock to be traded.  
D) It determines the level of interest rates.  
 
2)  Which of the following can be described as involving direct finance?  
A) A corporation buys commercial paper issued by another corporation. / 
B) People buy shares in a mutual fund.  
C) An insurance company buys shares of common stock in the over-the-counter markets.  
D) A corporation takes out a loan from a bank.  
E) None of the above.  
 
3)  Which of the following are securities?  
A) A share of Texaco common stock  
B) A Treasury bill  
C) A certificate of deposit 
D) Each of the above / 
E) Only (a) and (b) of the above  
 
4)  Financial markets improve economic welfare because  
A) they allow funds to move from those without productive investment opportunities to those
who have such opportunities.  
B) they allow consumers to time their purchase better. / 
C) they weed out inefficient firms.  
D) they do each of the above.  
E) they do (a) and (b) of the above.  
 
5)  Which of the following are long-term financial instruments? 
 A) A six-month loan  
B) A negotiable certificate of deposit  
C) A bankers acceptance 
 D) A U.S. Treasury bill 
 E) None of the above / 
 
6)  Which of the following are short-term financial instruments?  
A) A bankers acceptance  
B) A U.S. Treasury bill  
C) A negotiable certificate of deposit  
D) A six-month loan  
E) All of the above / 
 
7)  Which of the following are primary markets?  
A) The options markets  
B) The U.S. government bond market  
C) The over-the-counter stock market  
D) The New York Stock Exchange  
E) None of the above / 
 
8)  Which of the following are secondary markets?  
A) The over-the-counter stock market  
B) The options markets  
C) The U.S. government bond market  
D) The New York Stock Exchange  
E) All of the above / 
 
9)  Which of the following instruments is not traded in a money market?  
A) Eurodollars  
B) U.S. Treasury Bills  
C) Banker's acceptances 
D) Commercial paper  
E) None of the above / 
 
10)  Which of the following instruments are traded in a capital market?  
A) Banker's acceptances  
B) U.S. Government agency securities / 
C) Negotiable bank CDs  
D) Repurchase agreements  
E) None of the above  
 
PART 2. EXERCISES AND SHORT ANSWER:
1. A local bank advertises the following deal: “Pay us $100 a year for 10 years and then we
will pay you (or your beneficiaries) $100 a year forever”. Is this a good deal if the interest
rate available on other deposit is 6%? 
 
 
  
 
2. Suppose that you invest $20,000 in an account paying 8% interest. You plan to withdraw
$2000 at the end of each year for 15 years. How much money will be left in the account
after 15 years? 
 
 
 
3. You have an investment opportunity that requires an initial investment of $9500 today
and will pay $10,500 in one year. What is the IRR of this opportunity? 
 
  
 
4. Consider a  five-year, $1000 bond with a 5% coupon rate and semiannual coupons
presented. Suppose you are told that its yield to maturity has increased to
6.30% (expressed as an APR with semiannual compounding). What price is the bond
trading for now?