Capital Markets – Set of Exercises N° 3

v Comment

The development of capital markets is critical to promoting economic growth and financial
stability, to creating jobs and to reducing poverty. Up to $4 trillion of annual investment is needed
for developing countries to achieve the Sustainable Development Goals by 2030. Capital markets
play a key role in the provision of long-term financing for strategic sectors of an economy, and
risk-management tools for both financial-sector participants and end users. In this way, capital
markets contribute to economic growth, which in turn can have an impact on the reduction of
poverty and the creation of shared prosperity. At the same time, well-developed capital markets
can serve as a “spare tire” for the financial sector, enhancing an economy’s financial stability.

Source: http://www.worldbank.org/en/topic/financialsector/brief/capital-markets

§ How capital markets enhance economic performance?

v Multiple Choice Questions

1. If a US-based investor purchases a euro-denominated ETF and the euro subsequently

depreciates in value relative to the dollar, the investor will have a total return that is:

a. Lower than the ETF’s total return

b. Higher than the ETF’s total return

c. The same as the ETF’s total return

d. None of the above

2. Which one of these statements is correct regarding exchange-traded funds (ETFs)?

a. ETFs trade only at the end of each trading day

b. ETFs have features similar to both closed-end funds and stocks

c. ETFs generally have higher expenses than comparable mutual funds

d. Institutional investors are prohibited from investing in ETFs

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 Capital Markets – Set of Exercises N° 3

3. Which one of the following statements related to mutual funds is correct?

a. The information that investors need to know about a mutual fund prior to investing is
contained in a document called the disclosure agreement

b. Mutual funds are only for investors with large portfolios

c. Mutual fund portfolios are managed by the investors who invest in them

d. Mutual funds diversify investment risk

4. The Fast Growth Mutual Fund has assets valued at $4.6 million and costs and liabilities of
$0.28 million. There are 950,000 shares outstanding. What is the fund's net asset value
(NAV)?

a. $4.55

b. $4.84

c. $5.14

d. $5.27

e. $6.03

5. The Market Edge Mutual Fund charges a 3 percent back-end load. Todd invested $2,500 in
this fund sixteen years ago. Today, the total NAV value of his shares is $9,948 so he decided
to withdraw the entire amount. How much did Todd receive when he made his withdrawal?

a. $9,948.00

b. $10,246.44

c. $9,873.00

d. $10,023.00

e. $9,649.56

6. Which of the following is NOT one of the three types of Investment Companies?

a. UCITS

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 Capital Markets – Set of Exercises N° 3

b. Stock brokerage companies

c. Open-end funds

d. Mutual funds

7. Which of the following is NOT an advantage of investing in mutual funds?

a. Professional management

b. Guarantee against loss

c. Diversity by investing in many securities

d. Daily liquidity

e. None of the above

8. One type of managed investment company is named "closed-end investment companies".

What is it that is "closed?"

a. The sales of shares in the company are "closed" after the initial public offering

b. The sales of shares in the company are open only to the officers, "closed" to all others

c. The company invests in some appropriate investments, then "closes" operation

d. The market value of the company is "close" to the net asset value

9. Which of the following properly ranks the different types of mutual funds, starting from the
least risk to the highest risk?

a. International stocks, long term bonds, money market

b. Long term bonds, short term bonds, aggressive stocks

c. Short term bonds, long term bonds, balanced

d. Industry specific, international, long term bonds

10. Who usually gets the sales charge or load on those funds that have loads?

a. The broker selling the fund

b. The investor buying the fund

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 Capital Markets – Set of Exercises N° 3

c. The investment company

d. The regulatory body

11. When comparing ETFs, investors should consider:

a. The expense ratio

b. The underlying index

c. Fund size

d. All of the above

e. None of the above

v Exercise 1

Consider an ETF for which each share represents a portfolio of five shares of Gazprom (GAZ), three
shares of Siemens (SIE), and two shares of General Electric (GE). Suppose the current stock prices
of each individual stock are as shown below:

Stock Current Market Price

GAZ $55

SIE $47

GE $39

1. What is the price per share of the ETF in a normal market?

2. If the ETF currently trades for $450, what arbitrage opportunity is available? What
trades would you make?

3. If the ETF currently trades for $505, what arbitrage opportunity is available? What
trades would you make?

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 Capital Markets – Set of Exercises N° 3

v Exercise 2

Consider the three stocks in the following table, Pt represents the price at time t, Qt represents
shares outstanding at time t. Stock C splits 2-for-1 in the last period.

a. Calculate the rate of return on a price weighted index of the three stocks for the first
period (t=0 to t=1).
b. What must happen to the divisor for the price weighted index in year 2 (when the
stock C has the split 2-for-1).

v Exercise 3

A firm has 10 million shares which are trading at $15 per share. The firm wants to raise $50
million via a ‘’rights offering’’. Let the subscription price be set at $10 per share.

a. How many rights are needed to buy one share?

b. What is the value of a right?
c. What will the price per share be (“rights-on” and “ex-rights”)?