POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

College of Accountancy and Finance

ACCO 207: Financial Market
Midterm Departmental Examination
2nd Semester AY 2023-2024

Name: ___________________________________________ Campus, Year and Section: _____________________

Instruction: Select the best answer and shade the letter of your answer in the scannable form provided.
1. A universal bank is an example of
a. Commercial bank c. Thrift bank
b. Cooperative bank d. Islamic bank

2. A corporation seeking to sell new equity securities to the public for the first time to raise cash for capital investment
would most likely:
a. Conduct an IPO with the assistance of an investment banker.
b. Engage in a secondary market sale of equity.
c. Conduct a private placement to a large number of potential buyers.
d. Engage in financial institutions that facilitate the issuance of securities.

3. A primary market is one in which

a. financial assets are traded for the first time.
b. Investors buy and sell securities they already own.
c. Securities are sold by and transferred from one investor or to another.
d. The financial market in which previously issued financial instruments like bonds.

4. All financial intermediary institutions in the intermediation market

a. buy primary securities and sell secondary securities c. borrow short and lend long
b. borrow in small denominations and lend in large d. buy from brokers and dealers and sell to the public

5. It is also called the aftermarket where the securities are sold by the investor to another investor for profit or cutting loss.
a. Bond market b. Commodity market c. Primary market d. Secondary market

6. Which of the following statement/s is/are true about financial intermediaries?

I. Financial intermediaries hire people who are highly qualified to assess risky investments.
II. It has a cost advantage or economies of scale.
III. It is difficult to reconcile the conflicting interests of the users and lenders of funds.
a. I and II b. II and III c. I and III d. All statements are true

7. It is a global decentralized or over-the-counter (OTC) market for the trading of currencies.

a. Stocks b. Foreign exchange market c. Repurchase agreement d. Commercial papers

8. The following statements are correct, except

a. When a corporation's shares are owned by a few individuals, we say that the firm is “closely, or privately, held.”
b. “Going public” establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the
firm's shares.
c. The stock of publicly owned companies must generally be registered with and reported to a regulatory agency such
as the SEC.
d. It is possible for a firm to go public and yet not raise any additional new capital for the firm itself.

9. All of the following are true about insurance companies, except:

a. They invest their reserves.
b. They may guarantee to reimburse lenders should lenders' loans go into default.
c. They participate in equipment leasing.
d. They may only invest their reserves in interest-paying bank accounts under the government law.

10. Compared to future contracts, forward contracts

a. are not standardized
b. involve an intermediary or exchange, rather than direct contact between buyer and seller
c. have less formal markets
d. make delivery most often

11. The depository institutions include?

a. Mutual funds c. Commercial banks and thrift banks
b. Investment house d. Credit unions

12. The primary distinction between securities sold in the primary and secondary markets is the:
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 a. riskiness of the securities. c. price of the securities.
b. previous issuance of the securities d. profitability of the issuing corporation

13. The minimum, acceptable rate of return on corporate investments is determined by:
a. investors in financial markets c. Information from accounting statements.
b. the financial manager. d. the senior managers of the company.

14. The most important service provided by mutual funds to mutual fund investors is:
a. the opportunity to buy corporate securities at a discounted price.
b. high expenses and trading costs which increase the rate of return for investors.
c. diversification.
d. a higher than average rate of return.

15. The price paid for the rental of borrowed funds (usually expressed as a percentage of the rental of P100 per year) of
commodity referred to as the
a. inflation rate b. exchange rate c. interest rate d. aggregate price level

16. The bond markets are important because

a. they are easily the most widely followed financial markets in the United States.
b. they are the markets where interest rates are determined.
c. they are the markets where foreign exchange rates are determined.
d. all of the above.

17. The stock market is important because

a. it is where interest rates are determined. c. it is the most widely followed financial market
b. it is where foreign exchange rates are determined. d. all of the above

18. Financial markets have the basic function of

a. bringing together people with funds to lend and people who want to borrow funds.
b. assuring that the swings in the business cycle are less pronounced.
c. assuring that governments need never resort to printing money.
d. both a and b of the above.
e. Both b and c

19. Money is most correctly defined as anything that:

a. is generally accepted as payment of goods and services and for discharging debts
b. has general value in exchange
c. is designed by the government as a means of discharging obligations
d. is accepted by the government as a means of paying taxes

20. A basic requirement for an effective financial system is a monetary system that performs which of the following financial
functions?
a. formation and transferring of money c. storing gold and silver to back up money
b. creating jobs d. transferring real assets

21. This is the interaction of policy makers, a monetary system, financial institutions, and financial markets to expedite the
flow of financial capital from savings into investment.
a. banking system b. stock market c. capital market d. financial system

22. The function of money that expresses prices and contracts for deferred payments in terms of the monetary unit is referred
to as:
a. store of purchasing power b. standard of value c. medium of exchange d. credit money

23. All insurance companies are supervised by

a. Insurance Commission c. Securities and Exchange Commission
b. Bureau of Internal Revenue d. All of the above

24. The following are the similarities of Social Security System and Government Service Insurance System, except
a. Pension fund administration c. Government Financial Institutions
b. Supervised by the Department of Finance d. Insurance fund

25. The following are guaranteed deposits of PDIC, except

a. Savings account b. Commercial paper c. Current account d. Combo account

26. The three functions of money are:

a. medium of exchange, store of value, and measure of liquidity
b. conduit for international trade, store of value, and standard of value
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 c. medium of exchange, store of value, and unit of account
d. inflation hedge, a measure of liquidity, and medium of exchange

27. The following are the functions of money, except

a. It serves as a medium of exchange. c. It may be held as a store of value.
b. It serves as a unit of account. d. It is not subject to inflation

28. Money decreed to be “legal tender” for the payment of debts is money backed by:
a. precious metals b. commodities c. government creditworthiness d. gold or silver

29. An effective financial system must have:

a. several sets of policymakers who pass laws and make decisions relating to fiscal and monetary policies
b. an efficient monetary system for creating and transferring money
c. financial markets that facilitate the transfer of financial assets amongst individuals, institutions, and businesses
d. all of the above

30. The following are factors affecting fiscal policy, except

a. Economic recession b. Budget surplus c. Progressive tax d. Interest rate

31. This fiscal policy refers to increases in government spending or decreases in taxes or both so that the net effect on
aggregate demand is an increase in net government spending.
a. Expansionary b. Contractionary c. Discretionary d. Non-discretionary

32. Statement 1: Primary markets are markets in which users of funds raise cash by selling securities to funds suppliers.
Statement 2: An improvement in economic conditions would likely shift the supply curve down and to the right and shift
the demand curve for funds up and to the right.
a. Both statements are true b. Statement 1 is true; Statement 2 is false
c. Statement 1 is false; Statement 2 is true d. Both statements are false

33. Statement 1: Secondary markets are markets used by corporations to raise cash by issuing securities for a short time
period.
Statement 2: The Philippine Stock Exchange is an example of a secondary market.
a. Both statements are true b. Statement 1 is true; Statement 2 is false
c. Statement 1 is false; Statement 2 is true d. Both statements are false

34. Statement 1: Bangko Sentral ng Pilipinas sometimes indirectly intervene in foreign exchange markets by affecting
foreign exchange rates through raising or lowering interest rates.
Statement 2: We expect liquidity premiums to move inversely with interest rate volatility.
a. Both statements are true b. Statement 1 is true; Statement 2 is false
c. Statement 1 is false; Statement 2 is true d. Both statements are false

35. Statement 1: Money markets are the markets for securities with an original maturity of one year or less.
Statement 2: According to the liquidity premium theory, investors preferring long-term bonds over short-term bonds
would require lower liquidity premium.
a. Both statements are true b. Statement 1 is true; Statement 2 is false
c. Statement 1 is false; Statement 2 is true d. Both statements are false

36. Statement 1: Financial intermediation provides direct transfer of funds to the users.
Statement 2: Households generally supply more funds to the markets as their income and wealth increase.
a. Both statements are true b. Statement 1 is true; Statement 2 is false
c. Statement 1 is false; statement 2 is true d. Both statements are false

37. Statement 1: The unbiased expectations hypothesis of the term structure posits that long-term interest rates are unrelated
to expected future short-term rates.
Statement 2: A syndicate is a group of several investment banking firms that participate in underwriting and distributing
a security issue.
a. Both statements are true b. Statement 1 is true; Statement 2 is false
c. Statement 1 is false; Statement 2 is true d. Both statements are false

38. Statement 1: An important function of the Securities and Exchange Commission is to pass judgment on the investment
merit of a security.
Statement 2: The flotation costs of an initial public offering are comprised solely of direct costs and the spread.
a. Both statements are true b. Statement 1 is true; Statement 2 is false
c. Statement 1 is false; statement 2 is true d. Both statements are false

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39. Statement 1: The real risk-free rate is the increment to purchasing power that the lender earns in order to induce him or
her to forego current consumption.
Statement 2: Corporate security issuers are always directly involved in funds transfers in the secondary market.
a. Both statements are true b. Statement 1 is true; Statement 2 is false
c. Statement 1 is false; Statement 2 is true d. Both statements are false

40. Statement 1: An investor earned a 5 percent nominal risk-free rate over the year. However, over the year, prices
increased by 2 percent. The investor's real risk-free rate was less than his nominal rate of return
Statement 2: An increase in the perceived riskiness of investments would cause a movement up along the supply curve.
a. Both statements are true b. Statement 1 is true; Statement 2 is false
c. Statement 1 is false; Statement 2 is true d. Both statements are false

41. Statement 1: 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.
Statement 2: At equilibrium a security's required rate of return will be less than its expected rate of return.
a. Both statements are true b. Statement 1 is true; Statement 2 is false
c. Statement 1 is false; Statement 2 is true d. Both statements are false

42. Statement 1: Everything else equal, an effective annual rate will be greater than the bond equivalent yield on the same
security.
Statement 2: Money markets exist to help reduce the opportunity cost of holding cash balances.
a. Both statements are true b. Statement 1 is true; Statement 2 is false
c. Statement 1 is false; statement 2 is true d. Both statements are false

43. Statement 1: Commercial paper is a short-term obligation of the Philippine government issued to cover government
budget deficits and to refinance maturing government debt.
Statement 2: Commercial paper, Treasury bills, and banker's acceptance rates are all quoted as discount yields.
a. Both statements are true b. Statement 1 is true; Statement 2 is false
c. Statement 1 is false; statement 2 is true d. Both statements are false

44. According to the liquidity premium theory of interest rates

a. The term structure a must always be downward sloping
b. Long-term security will always have a higher interest rate than the short-term security
c. Investors prefer certain maturities and will not normally switch out of those maturities
d. Investors are indifferent between different maturities if the long-term spot rates are equal to the average of current
and expected future short-term rates

45. Which of the following pertains to the unbiased expectations theory?

a. liquidity premiums are negative and time-varying.
b. markets are segmented and buyers stay in their segment.
c. the long-term spot rate is an average of the current and expected future short-term interest rates.
d. the term structure will most often be upward sloping.

46. According to this theory, interest rates are determined by the interaction between the aggregate demand and supply of
loanable funds for each segment.
a. Liquidity premium b. Market segmentation c. Unbiased expectations d. Fischer effect

47. In general, financial security with good credit standing will offer
a. higher yield b. lower yield c. the same yield d. yields depending on the move of the lender.

48. Credit (default) risk is likely to be lowest for:

a. AAA corporate securities b. Treasury bonds c. BBB corporate securities d. AA corporate securities

49. Statement 1. The risk-free rate is the rate that assumes zero default in the market which is more or less equivalent to
the rates offered by the sovereign.
Statement 2. The Treasury bill (T-bill) yield or rate is the nominal risk-free rate which is composed of real risk-free
rate plus expected inflation rate for the year.
a. Statement 1 is true c. Statement 2 is true
b. Both statements are false d. Both statements are true

50. Statement 1. The real risk-free rate is the increment of purchasing power that the lender earns to induce him or her to
forego current consumption.
Statement 2. The most fundamental factors that affect the cost of money are production opportunities, economic and
political conditions, risk, and inflation.
a. Statement 1 is false c. Statement 2 is false
b. Both statements are true d. Both statements are false

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51. Suppose that the current one-year Treasury-bill rate is 3.15 percent and the expected one-year rate 12 months from
now is 4.25 percent. According to the unbiased expectations theory, what should be the current rate for a two-year
Treasury security?
a. 3.70% b. 4.15% c. 2.36% d. 4.74%

52. Suppose 1-year T-bills currently yield 7.00% and the future inflation rate is expected to be constant at 3.20% per year.
What is the real risk-free rate of return, r*? Disregard any cross-product terms, i.e., if averaging is required, use the
arithmetic average.
a. 3.99% b. 3.80% c. 4.19% d. 4.40%

53. Suppose 10-year T-bonds have a yield of 5.30% and 10-year corporate bonds yield 6.75%. Also, corporate bonds have
a 0.25% liquidity premium versus a zero liquidity premium for T-bonds, and the maturity risk premium on both
Treasury and corporate 10-year bonds is 1.15%. What is the default risk premium on corporate bonds?
a. 1.08% b. 1.32% c. 1.45% d. 1.20%

54. Kay Corporation's 5-year bonds yield 6.20% and 5-year T-bonds yield 4.40%. The real risk-free rate is r* = 2.5%, the
inflation premium for 5-year bonds is IP = 1.50%, the default risk premium for Kay's bonds is DRP = 1.30% versus
zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t – 1) × 0.1%, where
t = number of years to maturity. What is the liquidity premium (LP) on Kay's bonds?
a. 0.50% b. 0.45% c. 0.41% d. 0.36%

55. Suppose the interest rate on a 1-year T-bond is 5.0% and that on a 2 year T-bond is 7.0%. Assuming the pure expectations
theory is correct, what is the market's forecast for 1-year rates 1 year from now?
a. 9.04% b. 8.16% c. 7.75% d. 7.36%

56. An investor requires a 3 percent increase in purchasing power in order to induce her to lend. She expects inflation to be
2 percent next year. The nominal rate she must charge is about
a. 3.0% b. 2.0% c. 1.0% d. 5.0%

57. The real risk-free rate of interest is 3 percent. Inflation is expected to be 4 percent this coming year, jump to 5 percent
next year, and increase to 6 percent the year after (Year 3). According to the expectations theory, what should be the
interest rate on 3-year, risk free securities today?
a. 6.0% b. 8.0% c. 12.0% d. 18.0%

58. Given the following data, find the expected rate of inflation during the next year. r* = real risk-free rate = 3%. Maturity
risk premium on 10-year T-bonds = 2%. It is zero on 1-year bonds, and a linear relationship exists. Default risk premium
on 10-year, A-rated bonds = 1.5%. Liquidity premium = 0%. Going interest rate on 1-year T-bonds = 8.5%.
a. 5.5% b. 4.5% c. 3.5% d. 6.5%

59. Koy Corporation's 5-year bonds yield 7.00%, and 5-year T-bonds yield 5.15%. The real risk-free rate is r* = 3.0%, the
inflation premium for 5-year bonds is IP = 1.75%, the liquidity premium for Koy's bonds is LP = 0.75% versus zero
for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t – 1) × 0.1%, where t =
number of years to maturity. What is the default risk premium (DRP) on Koy's bonds?
a. 6.6% b. 5.94% c. 7.26% d. 7.99%

60. Suppose the interest rate on a 1-year T-bond is 5.0% and that on a 2-year T-bond is 7.0%. Assuming the pure
expectations theory is correct, what is the market's forecast for 1-year rates 1 year from now?
a. 9.04% b. 8.59% c. 8.16% d. 7.75%

61. What is the real risk-free rate of return (r*) if a 1-year T-bills currently yield 7.00% and the future inflation rate is
expected to be constant at 2.60% per year?
a. 3.80% b. 3.99% c. 4.19% d. 4.40%

62. Currently, 10-year T-bonds have a yield of 5.00% and 10-year corporate bonds yield 6.75%. Also, corporate bonds
and T-bonds have a liquidity premium of 0.30% and zero, consecutively. The maturity risk premium on both Treasury
and corporate 10-year bonds is 1.15%. What is the default risk premium on corporate bonds?
a. 1.08% b.1.20% c. 1.32% d. 1.45%

63. Yuki is wanting to invest in government security. In this regard she conducted research and found out that the real risk-
free rate is 3.00%, the average expected future inflation rate is 2.25%, and a maturity risk premium of 0.10% per year
to maturity applies, i.e., MRP = 0.10%(t), where t is the years to maturity. What rate of return would Yuki expect on
a 2-year Treasury security, assuming the pure expectations theory is NOT valid?
a. 5.25% b. 5.45% c. 6.75% d. 6.95%

64. Ziva Corp. issued a 10-year Php 1,000 bond with 12% interest. If the required return is 10%, the value of the bond
should be
a. P 791.98 b. P 925.61 c. P 1,000.00 d. P 1,122.89
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65. The effective interest rate for a bond purchased at P875 and has 5 years before maturity with a face value of P1000 and
stated interest of 8% is
a. 11.2% b. 10% c. 8% d. 14.8%

66. If a bond with a par value of P1,000 and stated interest of 12% was purchased at P800, the effective rate is expected to
be
a. Equal to 12% b. Higher than 12% c. Lower than 12% d. No sufficient information

67. Kaplan Inc. secured a 20-year bond at P1,000 bond with a stated interest rate of 7.5% on January 1, 2000. On January
2, 2015, Yuki Corp. purchased the bond from Kaplan Inc. when the prevailing rate for this type of bond remains to be
seven and a half percent. Based on the foregoing, the value should Yuki Corp. purchase the bond from Kaplan Inc is
a. P729.88 b. P696.55 c. P1,128.35 d. P1,000

68. Determine the effective interest prevailing for a bond if it was purchased at P1,085, 10 years before maturity while
the bond the following information: Face value -P1,000 ; Interest rate - 10% payable annually ; Tenor - 15 years
a. 11.15% b. 10% c. 9.05% d. 8.77%

69. You are analyzing the risk-free rate of return for government bonds in the country. The current yield on a 10-year
Treasury bond is 2.5%. You are also provided with the following information:
The current inflation rate for the year is 1.8%; The expected inflation rate for next year is 2.0%. What is the real risk-
free rate of return.
a. 0.7% b. 2.5% c. 2.7% d. 4.7%

70. You are analyzing the risk-free rate of return for government bonds in the country. The current yield on a 10-year
Treasury bond is 2.5%. You are also provided with the following information:
The current inflation rate for the year is 1.8%; The expected inflation rate for next year is 2.0%. What is the nominal
risk-free rate of return?
a. 0.7% b. 2.5% c. 2.7% d. 4.7%

END OF EXAM

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