~) De La Salle University | Financial Markets and Institutions (ACFINA3) SETB | Long Quiz No. 1 - For the 1st Term 2018-2019 Page |1 of 5 NAME__ SECTION [22 L__ ALTERNATE RESPONSE. (20 points) SHADE: ‘A. ~ if ONLY statement A is TRUE C - if BOTH statements A & Bare TRUE BR - If ONLY statement Bis TRUE D - if BOTH statements A & B are FALSE A. Primary markets are markets in which users of funds raise cash by selling securities to funds’ suppliers. B. Secondary markets help support primary markets because secondary markets: offer primary market purchasers liquidity for their holdings, update the price or value of the primary market claims; and reduce {the cost of trading the primary market claims. 2 A. Depository institutions (Dis) play an important role in the transmission of monetary policy from the Monetary Authority to the rest of the economy because DI deposits are a major portion of the money supply. / B, Commercial paper is a marketable bank issued time deposit that specifies the interest rate earned and a fixed maturity date. (negotiate COs) x A. Corporate security issuers are always directly involved in funds transfers in the secondary market. Financial intermediaries (Fls) can offer savers a safer, more liquid investment than a capital market VJ security, even though the intermediary invests in risky iliquid instruments because Fis can diversity away some of their risk and closely monitor the riskiness of their assets. v 4. A. Change in open market operations of a Monetary Authority can affecta new college graduate. V7 creaye) YB, Ifthe Monetary Authority acts tol fife paticy interest rates, corporations wil ikely have more projects \y__ With positive NPVs, leading ta more spending and more jobs, A college graduate is then more likely to get hired. 5. A. Bangko Sentral ng Pilipinas (BSP) interest rate decisions can be vetoed by the President or the Congress. ai ence ‘The primary policy tol used by the BSP to meetits monetary policy gals is changing bank regulations. < Comoe 6. A. Adiscount Joan Jeads to an expansion of reserves, which can be lent out as deposits, thereby leading to an / expansion of the monetary base and the money supply. When a bank repays its discount loan and so reduces the total amount of discount iending, the amount of reserves decreases along with the monetary base and the money supply. A. Federal Reserve Banks (FRB) were made quasi-private institutions overseen by directors from the private sector living in each district. Each PRE represent views from their region and are in close contact with the president of their district’s Federal Reserve bank. / B, FRB of San Francisco is the most important of the 12 FRB, as it holds 25% of the FRB assets. 8 A. The major monetary policy-making arm of the Federal Reserve is the Board of Governors. B. The Fed wishes to expand the money supply. It can: + Buy U.S. government securities: © Decrease the discount rate; and x + Decrease reserve requirements. Ofte three options, decreasing the reserye requirement has the most predictable effect. ‘aus got’! Seeunties). 9. A. The most important Monetary Policy Tool and a primaty deterininant of changes in reserves tn the banking system & interest rates isthe reserve requirement for depository institutions. yx B. The reserve requirement: for every dollar of deposits at depository institution, a eertajn fraction mast be held as reserves. This fraction (10%) Is called the required reserve ratio. ¥ epeernreltiL 12. 13. V4. ¢ 15. 16. 17. 18. 19. 20. | 7) De La Salle Us e Financial Markets and Institutions (ACFINA3) SETB / 40, A. To preserve purchasin, - ity Long Quiz No. 1 - For the 1st Term 2018-2019 Page \2 of 5 1g power, the BSP's main objective is to maintain price stability, Jt uses inflation targeting as a framework for conducting monetary policy. Consumers directly benefit. 3, Towards achieving the goal of PRICE STABILITY, market prices are determined by Monetary Policy x nel ces In the open market operations (OMO) of the BSP, a SALE to the public leads to EXPANSION of reserves & deposits, thereby causing expansion of Monetary Base and Money Supply. A B. OMO PURCHASE from the public leads to CONTRACTION of reserves & deposits, thereby causing expansion of Monetary Base and Money Supply. ‘A. The BSP’s 3 Pillars of Central Banking: Price Stability, Financial Stability, and Stability of Financial wcettiemen Markets. ¢effdent payment ea Kk B. The national payments and settlement system includes the country’s entire matrix of institutional and infrastructure arrangements and processes through which money is transferred from one party to another, In the Philippines, this is the PhilPass. A. ‘The real riskefree rate is the increment to purchasing power that the lender earns in order to induce him or her to forego current consumption. v B, For any positive interest rate the present value of a given annuity will be less than the sum of the cash flows, and the future value of the same annuity will be greater than the sum ofthe cash flows. ‘A. interest rates increase, the value ofa fixed Income contract decreases and vice versa, Abond with an 11 percent coupon and 2 9 percent required return will ell ata premium to par. Y/ A. Earning a§ percent interest rate with annual compounding is better than earning.a 4.95 percent interest rate with semiannual compounding. x B, Simple interest calculations assume that interest earned is never reinvested. ‘A. Households generally deiidind more funds to the markets as theit income and wealth increase, ceteris paribus. B. an {increase in the perceived riskiness of investments would cause a movement up along the supply curve, A. When the quantity of a financial security supplied or demanded changes at every given interest rate in response to a change in a factor, this causes a shift in the supply or demand curve. v 3. The term structure of interest rates isthe relationship between interest rates on bonds similar in tem ‘except for maturity. A Mf E(r)2 rorP < PY - Investorshouldnotbuy this security buy) < B If EB (r) < rorP > PV - investorshouldbuy this security, — gelfel! A. Zero coupon bond has a duration equal to its maturity anda convexity greater than zero, 3. ‘Thegreatera security's coupon, the lower the security's price sensitivity toan interest ate change, ceteris paribus. v ‘A Allelse equal, the holder ofa fairly priced premium bond must expecta capital loss over the holdingperiod. B, The longerthe time to maturity, the lower the security's price sensitivity to.an interest rate change, ceteris. paribus.| De La Salle University Financial Markets and Institutions (ACFINA3) seve Long Quiz No. 1 « For the tse Term 2028-2019 Page 13 of 5 [1 MULTIPLE CHOICE THEORIES (10 points) - Shade the best choice. Which ofthe following would normally be expected to result in an increase in the supply of funds, all else equal? aan nee cacrent income and wealth levels increase v I The perceived riskiness of all investments decreases. = JU, Expected inflation increases. Ce) IV, Near term spending needs of households increase as prime commodity costs rise ~~ ©, Hand If] only D. 10, 1l,and!V A. Land IV only B. Tandlll only 22. Which of the following bond terms are generally positively related to bond price volatility? 1 Coupon rate I. Maturity IIL Yield-to-Maturity (YTM) IV. Payment frequency ) A. Mand IV only C. Mand Ill only of B. Land only D. Honly 23, The Fed funds rate is the rate that A. banks charge each other on loans of excess reserves. B, banks charge to lend foreign exchange to customers. ¢. the Federal Reserve charges on emergency loans to commercial banks. D. banks charge for loans to corporate customers. 24. The diagram below isa diagram of the Users ofFunds | [——* [Underwriter | [I [Supplier of Funds] ‘A. secondary markets C. money markets B. primary markets 1D. derivatives markets 25. Liquidity risk at a financial intermediary (Fl) is the risk ‘A. that promised cash flows from loans and securities held by Fls may not be paid in full. B, incurred by an FI when the maturities ofits assets and Habilities do not match, C. thata sudden surge in liability withdrawals may require an Fl te liquidate assets quickly at fire sale prices. D. risk that an FI may not have enough capital to offset a sudden decline in the value of its assets. 26. If the Fed wishes to stimulate the economy, it could 1. buy US.government securities UL. raise the discount rate UI lowerreserve requirements A. Landill only ©. Landlf only B. Wand Iff only D. Ltt, and itt 27, A decrease in interest rates will: A. decrease the bond's PV. €. lower the bonds coupon rate, B. increase the bond's duration D. not affect the bond's duration, 28. The discount rate is the rate that A. banks charge each other on loans of excess reserves. B, banks charge to lend foreign exchange to customers, C. the Federal Reserve charges on emergency loans to commercial batik D. banks charge for loans to corporate customers.)D 0 "| De La Salle University | Financial Markets and Institutions (ACFIN | Long Quiz No. 1 = For the 1st Term 2018-29, A3) 19 SETS Page \4 of 5 29, A decrease in reserve requirements could lead to an ‘A. increase in bank lending. B. increase in the money supply. C. increase in the discount rate. D. increase in bank lending and an increase in the money supply. 30. In primary markets, the first time issued shares to be publicly traded in stock markets is considered as: A, traded offering B, public markets . issuance offering D. initial public offering I, MULTIPLE CHOICE PROBLEMS (20 points, 2 points each) - Shade the best choice. Provide detailed solutions. DOUBLE-RULE or highlight final answers. 31. A four-year maturity zero-percent coupon corporate bond with a required rate of return of 12 percent has an annual duration of A. 297 years C. 3.71 years B. 3.05 years D. 4.00 years 32. A newly promoted executive with a company car plan Benefit, you buy a car for P3,8000,000. You agree toa 60-month loan with a monthly interest rate of 0.55 percent. What is the required monthly payment? A. P 60,554 c. #74529 B. 763,424 D. 976,407 33. A corporate bond returns 12 percent of its cost (in PV terms) in the first year, 11 percent in the second year, 10 percentin the third year and the remainder in the fourth year. What is the bond’s duration in years? A. 3.32 years ©. 3.75 years B. 3.68 years D. 4.00 years 34. You borrow P95 today for six and a half weeks. You must repay P100 at loan maturity. What is the effective annual rate (RAR) on this loan? A. 50.73 percent ©. 32.33 percent B. 40.00 percent D. 27.95 percent 35. Investment A pays 8 percent simple interest for 10 years. Investment 6 pays 7.75 percent compound interest for 10 years. Both require an initial P10,000 investment. The future value of A minus the future value of B is equalto__ (to the nearest centavo). A P 1643.32 c. P 3,094.67 B. P2,500.00 D. P(3,094.67)‘Lastname, Firstname, M1) - Name(| = —_ a ee we | GUIMORIAND | | Sunject Code — Section i | ACEINAZ K32 — Date of Examination : j| 4 Nov ow | ' [100- [230 ®OO8GO00) = @®000000 DOO@OOOOG@| O midTem rms | |ODOOODOG|| O Fina oo | Begesees ° I 28st eoo ————— DOOO@O@® DOOOOOOG|OA OF OOOOOOOG||@8 O° MARKING INSTRUCTIONS = Use a black or blue ballpen and No. 2 pencil only Make solid marks that fill the response completely - Make no stray marks on this form 2 Use "Correction Tape" to crase if using ballpen - CORRECT: @ iNcoRRECT: GROO OOOOO| 11 [| OOOGO cs 21 @@OO®@| 12 | @E®OOO 3.1 @@OOO! 3 | ©CO@OO 4.|@@OOO| 4 | ©QO@OO 5.| @O©O@O| 5 | Q@OOO 6.| OOOO | 16 | OOOO 7.1 @©OOO| 17. | @O@O®O 3 | @OOB® | 18% | ©OOOBO 9} @Q@OO| 12. | ©BOOO 10 | @©OOO| 2 | @O©OOO Serial Control Number: 088988-P Copynght @ DLSU 2013 (Office of the University Registrar)© | 6.) @OOO O88 ee 67.| ©@O©OO® | @OOO® | 8) OOOOH @@00®@ 89.| DOOO®O @®OO® | 7. @OOO® @OO®@ | 72| ©OOOO OS O06 | 73| SOOO AOQO@® | 7. @OOO® @OQO@O | 75.| ©OOOO | AOOSO | 76.| ©OO©OOO @OOSO® | 77.| OOOO @OOOO | 78. | ©OOOOO @O©OO® | 79.| ©OOGO @OO@E | &.| PDOOOO ®BOOO | 81.| OOOOO ®O@OO@ | 8&2| ©OOOOO @®OOO | B.| ©OOOO @OQGOO | 84.) ©OOOO ®@OOO | 8.) 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