Fin 3080 Final Exam Practice test questions and answers, (Answered 100%)

Fin 3080 Final Exam Practice test questions and answers, (Answered 100%) In October 2009, following the financial crisis the unemployment rate peaked at over __% 10% Give one example of a problem that can occur if people believe that home prices will always raise Homeowners borrow a lot Rating agencies underestimate default rates on MBS Who was the chair of the Federal Reserve in 2008, during the financial crisis Ben Bernake What is the typical denomination of a treasury bill Multiples of 100$ 100, 1000, 5000, 10000 Why do T bills have little liquidity risk Active secondary market Suppose a T-bill matures in 147 days, has a face value of $1,000, and sells for $997.85. Calculate the effective annual rate 0.53585% List one of the differences between T-bills and T-notes/bonds T-bills have shorter maturity, are considered risk free, and do not pay coupons. Give the ranking of secondary market liquidity for the three types of bonds. Treasury bonds (most liquid) Corporate bonds Munis (least liquid) What happens if the convertible bond value falls below the conversion value Arbitrage opportunity List one criticism of rating agencies Slow to react / incentives are not aligned with investors. Common stock has residual claim. What is the implication of this for stocks and bonds of the same firm Common stock is riskier than bonds of the same firm. In the secondary market common stock is typically traded in the _____ while treasury bonds are typically traded in a _______ 1. Centralized market 2. Decentrilized market During the financial crisis, the US unemployment rate peaked at ____ in October 2009, the highest level since ___- 10%; 1983 Which of the following firms was not bailed out by the federal government during the financial crisis of 2008 lehman brothers (they went out of business) Which of the following is NOT caused by the beleif that housing prices will increase every year? Midlevel managers in securitized finance sell their primary homes and chose to rent apartments Select the incorrect statement regarding potential causes of the financial crisis Rating agencies produced accurate ratings of mortgage backed securities, which helped the economy survive the financial crisis Select the incorrect statement regarding CEOs of major financial firms and the financial crisis Most CEOs kept their jobs during and after the financial crisis. Which of the following changes occurred in the commercial banking sector following the financial crisis? I. Banks increased capital and liquidity II. Banks reduced exposure to financial markets (OTC) III. The largest banks were forced to sell their subsidiaries in order to prevent them from being "too big to fail" IV. Bank executives have more long-term compensation I, II, and IV Calculate the discount yield on commercial paper with a face value of $10 Million, 45 days to maturity, and a sales price of $9.89 million 8.8% (10-9.89)/10*360/45 A treasury bill has a $5,000 face value, matures in 37 days, and sells for $4,867. Select the correct statement regarding the discount yield and the bond equivalent yield. The discount yield is less than the bond equivalent yield. Which of the following securities has the shortest original maturity Repurchase agreements Which of the following securities has the least liquid secondary market Commercial paper Select the INCORRECT statement regarding LIBOR and the federal funds rate LIBOR tens to be slightly lower than the federal funds rate In class we discussed table 5-6, which shows money market participants. Which of the following is not one of the main takeaways from this table? Foreign investors are important in the markets for commercial paper and negotiable CDs In class, we studied three types of bond markets. Treasury, municipal, and corporate. Rank these three markets from most liquid to least liquid in the secondary markets Treasury Corporate Munis Select the correct statement regarding treasury Bonds, and Treasury notes Both T-bonds, and T-notes are considered to be default risk free. An investor purchases a Treasury Inflation Protected Security (TIPS) with a $50,000 face value, and a 6% annual coupon rate (3% coupon paid semi-annually).