Capital Markets Midterm Questions and Solutions
SOLUTIONS 1 Multiple Choice Questions (20 percent)
2 percent for each question 1. Liquidity... is the ease with which an asset can be exchanged for money 2. The concept of adverse selection helps to explain... why the financial system is heavily regulated 3. The Fed can influence the fed fund interest rate by selling T-bills, which ____reserves, thereby ____the federal fund rate. removes, raising 4. Standard Repos... are very low risk loans 5. A 4-year bond pays an annual coupon of 3.5%. If the interest rate equals 2.75% per year, how much do you have to pay to buy the equivalent of a $1,000,000 bond face value? $10 0280 000 6. Unanticipated deflation implies a... a decline in net worth, as price levels fall while debt burden remains unchanged. 7. What is the annualized discount rate on a Treasury bill that you purchase for $9,900 and that will mature in 91 days for $10,000? 3.96% 8. Moral hazard is a problem arising from... only A and B of the above 9. A discount loan by the Fed to a bank causes a(n) ____ in reserves in the banking system and a(n) ____ in the monetary base. increase; increase 10. The standard definition of the shadow banking systemt includes... money market funds, hedge funds, and pools of securitized assets
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Comprehensive Questions (30 percent)
6 percent for each question 1) The financial system is important because it channels funds, reduces asymmetric information problems, provides an efficient payment system, and helps to manage risk. Explain the remaining functions that the financial system performs.
Besides these functions, the financial system provides ways for invididuals to pool their resources. For instance, some investment projects generate a positive NPV, but require a large initial down payment. Dividing ownership into many individual shares provides an efficient way to pool individual resources in order to finance these investment projects. The financial system also provides liquidity to market participants. This is
2 percent for each question 1. Liquidity... is the ease with which an asset can be exchanged for money 2. The concept of adverse selection helps to explain... why the financial system is heavily regulated 3. The Fed can influence the fed fund interest rate by selling T-bills, which ____reserves, thereby ____the federal fund rate. removes, raising 4. Standard Repos... are very low risk loans 5. A 4-year bond pays an annual coupon of 3.5%. If the interest rate equals 2.75% per year, how much do you have to pay to buy the equivalent of a $1,000,000 bond face value? $10 0280 000 6. Unanticipated deflation implies a... a decline in net worth, as price levels fall while debt burden remains unchanged. 7. What is the annualized discount rate on a Treasury bill that you purchase for $9,900 and that will mature in 91 days for $10,000? 3.96% 8. Moral hazard is a problem arising from... only A and B of the above 9. A discount loan by the Fed to a bank causes a(n) ____ in reserves in the banking system and a(n) ____ in the monetary base. increase; increase 10. The standard definition of the shadow banking systemt includes... money market funds, hedge funds, and pools of securitized assets
1
2
Comprehensive Questions (30 percent)
6 percent for each question 1) The financial system is important because it channels funds, reduces asymmetric information problems, provides an efficient payment system, and helps to manage risk. Explain the remaining functions that the financial system performs.
Besides these functions, the financial system provides ways for invididuals to pool their resources. For instance, some investment projects generate a positive NPV, but require a large initial down payment. Dividing ownership into many individual shares provides an efficient way to pool individual resources in order to finance these investment projects. The financial system also provides liquidity to market participants. This is