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BFW1300 Dr. Gary John Rangel Page 1 of 12

Monash University
Sample Mid-Semester test 2014
Mid-Semester Test
Faculty of Business and Economics
Department of Banking and Finance

EXAM CODES: BFW1300
TITLE OF PAPER: MONEY AND CAPITAL MARKETS
TEST DURATION: 60 minutes (5 minutes reading time, 55 minutes writing time)


THIS PAPER IS FOR STUDENTS STUDYING AT: (office use only - tick where applicable)

Berwick Clayton Peninsula Distance Education Other (specify)
Caulfield Gippsland Sunway Open Learning

During an exam, you must not have in your possession, a book, notes, paper, calculator, pencil case,
mobile phone or any other material/item which has not been authorised for the exam or specifically
permitted as noted below. Any material or item on your desk, chair or person will be deemed to be in
your possession. You are reminded that possession of unauthorised materials in an exam is a
disciplinable offence under Monash Statute 4.1.

AUTHORISED MATERIALS

CALCULATORS YES NO
(If YES, only calculators with an 'approved for use' Faculty label are permitted)

OPEN BOOK YES NO

SPECIFICALLY PERMITTED ITEMS YES NO
if yes, items permitted are: The only calculators permitted in the examination are those with an
approved for use Faculty label

This paper consists of 40 multiple choice questions questions printed on a total of 13 pages.
Students must attempt to answer ALL questions.


STUDENT ID: ...

LAST NAME: FIRST NAME:



PLEASE CHECK THE PAPER BEFORE COMMENCING.

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BFW1300 MONEY AND CAPITAL MARKETS

BFW1300 Money and Capital Markets Page 2 of 12
1. Which of the following is not an example of market risk?

a. A share investor whose portfolio has been devastated by a stock-market crash.
b. A loan on which the borrower is unable to make scheduled payments
c. A borrower who finds that interest rates are higher than expected
d. An importer that has to cope with an unexpected depreciating exchange rate

2. The risk borrowers face of not being able to maintain the level of their debt is known
as:

a. credit risk
b. funding risk
c. default risk
d. capital risk

3. What is the future value if $15,000 is invested in a term deposit for a period of two
years with daily compounding at 5.75% per annum?

a. $16,827.95
b. $15,842.50
c. $17,931.45
d. $17,221.50

4. All else the same, the liquidity premium theory of the term structure of interest rates
implies:

a. a normal yield curve
b. a flat yield curve
c. an inverse yield curve
d. a humped-backed yield curve

5. All of the following will generally make a central bank increase interest rates, EXCEPT

a. excessive credit growth
b. increasing balance of payments
c. large changes in price levels
d. heavy downward pressure in foreign exchange







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BFW1300 MONEY AND CAPITAL MARKETS

BFW1300 Money and Capital Markets Page 3 of 12
6. An increase in the prices of goods and services causes the demand for funds to _______
and market interest rates should ________

a. fall; increase
b. fall; decrease
c. rise; increase
d. rise; decrease

7. If inflation is expected to increase, this may cause:

a. interest rates to rise
b. the demand for loanable funds to fall
c. the supply of loanable funds to increase
d. interest rates to fall

8. Using the expectations theory of term structure, a negatively sloped yield curve
indicates that investors expect:

a. falling long-term interest rates
b. rising long-term interest rates
c. falling short-term interest rates
d. rising short-term interest rates

9. According to the expectations theory, if investors believed that the average of the
expected future short-term yields were greater than the long-term yield for a holding
period, they would act so as to:

a. drive down the price of the short-term security and drive up the price of the long-
term security
b. drive up the price of the short-term security and drive down the price of the long-
term security
c. drive up the prices of both the short-term and long-term securities
d. drive down the prices of both the short-term and long-term securities

10. During periods of economic recession, it is probable that the risk premium gaps for
different corporate borrowers will:
a. decrease
b. increase
c. remained unchanged
d. widen




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BFW1300 MONEY AND CAPITAL MARKETS

BFW1300 Money and Capital Markets Page 4 of 12
11. If a governments income from tax receipts exceeds its expenditures, the government
is running a:

a. deficit, and is a net borrower of funds
b. surplus, and is a net borrower of funds
c. deficit, and is a net saver of funds
d. surplus, and is a net saver of funds

12. If market interest rates move upwards after an investor buys a government bond, the
investor may:

a. sell the bond back to Treasury
b. sell the bond in the secondary markets for a capital loss
c. sell the bond in the secondary markets for a capital gain
d. hold the bond until the market rates return to their original levels and then have a
capital gain

13. Government securities generally:

a. are highly liquid instruments, especially the short-term ones
b. have an active secondary market
c. are regarded as fault-free
d. All of the given answers

14. Financial institutions hold government securities because of:

a. liquidity requirements
b. interest rate expectations
c. funding requirements
d. All of the given answers


15. Open market operations by Bank Negara Malaysia refer to:

a. the method by which Bank Negara Malaysia allows banks to raise short-term funds
up to a year
b. the method by which Bank Negara Malaysia implements monetary policy
c. the market for short-term securities
d. the method by which Bank Negara Malaysia monitors the financial sector




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BFW1300 MONEY AND CAPITAL MARKETS

BFW1300 Money and Capital Markets Page 5 of 12
16. Repurchase agreements are:

a. usually collaterised with Government securities
b. usually low-interest rate loans
c. usually loans that have real assets as collateral
d. None of the given answers

17. The idea of compound interest refers to:

a. the payment of interest on previously earned interest
b. investing for multiple periods in one year
c. earning interest only on the initial investment
d. changing interest rates during an investment

18. What is future value in four-and-a-half years of $5,000 invested today at 9.50%
compounded semi-annually?

a. $6,161.17
b. $7,522.00
c. $7,592.00
d. $9,875.00

19. What is the present value of the following cash flow stream, discounted at 6.5% per
annum, compounded monthly?
Year 1: $1,000; Year 2: $1,500; Year 3: $2,000; Year 4: $2,500

a. $5,844.58
b. $5,863.11
c. $5,874.79
d. $5,986.23

20. A finite stream of regular cash flows over a given period is known as a/an:

a. perpetuity
b. annuity
c. debenture
d. allowance





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BFW1300 MONEY AND CAPITAL MARKETS

BFW1300 Money and Capital Markets Page 6 of 12
21. If the interest rate is 7.4% per annum, compounding quarterly, what is the future value
of a six-year ordinary annuity with quarterly payments of $4,000?

a. $28,903.12
b. $85,938.40
c. $62,647.89
d. $103,126.09

22. An investor plans to save $1,000 per year for the next ten years as a retirement fund,
and expects to earn 8.4% per annum, compounded monthly over the period, on all
invested funds. How much will the investor have at the end of ten years?

a. $187,085.48
b. $296,035.24
c. $126,882.77
d. $153,178.10

23. The _______ value of a bond is also called its par value. Bonds with a current price
greater than their par value sell at ________ , while bonds with a current price less than
their par value sell at ________ .

a. premium; face value; a discount
b. discount; a premium; face value
c. face; a premium; a discount
d. premium; a reduction; a discount

24. A $1,000 face value bond, with coupon rate of 9% paid annually, has six years to
maturity. If bonds of similar risk are currently earning 11%, what is the current price
of the bond?

a. $915.39
b. $1,000
c. $1,089.72
d. None of the given answers

25. All of the following features of a bond are fixed EXCEPT:

a. coupon rate
b. face value
c. price
d. interest payments

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BFW1300 MONEY AND CAPITAL MARKETS

BFW1300 Money and Capital Markets Page 7 of 12
26. If a bonds price is at a discount to face value, it has a:

a. yield below its coupon rate of interest
b. yield equal to its coupon rate of interest
c. yield above its coupon rate
d. decreased risk premium

27. A characteristic of secondary markets for shares is that:

a. only highly risky shares are traded
b. only low-risk shares are traded
c. they are where companies borrow funds for the second time
d. companies do not get funds from the secondary market in shares

28. Financial intermediaries (FIs) can offer savers, more liquid investment than a capital
market security, even though the intermediary invests in risky illiquid investments
because

a. FIs can diversify away some of their risk
b. FIs closely monitor the riskiness of their assets
c. the federal government requires them to do so
d. both (a) and (b)

29. An investment pays $400 in one year, X amount of dollars in two years, and $500 in 3
years. The total present value of all the cash flows (including X) is equal to $1,500. If
market interest rates are 6%, what is X?

a. $702.83
b. $822.41
c. $789.70
d. $749.67

30. An investor requires a 3% increase in purchasing power in order to induce her to lend.
She expects inflation to be 2% next year. The nominal rate she must charge is about

a. 3%
b. 2%
c. 1%
d. 5%




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BFW1300 MONEY AND CAPITAL MARKETS

BFW1300 Money and Capital Markets Page 8 of 12
31. Which of the following bond types pays interest that is exempt from federal taxation?

a. Municipal bonds
b. Corporate bonds
c. Treasury bonds
d. Convertible bonds

32. The relationship between maturity and yield to maturity is called the

a. loan covenant
b. term structure
c. bond indenture
d. Fisher effect

33. Duration is

a. the elasticity of a securitys value to small coupon changes
b. the weighted average time to maturity of a bonds cash flows
c. the time until the investor recovers the price of the bond in todays dollars
d. greater than maturity for deep discount bonds and less than maturity for premium
bonds

34. A 12-year annual payment corporate bond has a market price of $925. It pays annual
interests of $60 and its required rate of return is 7%. By how much is the bond
mispriced?

a. $0.00
b. Overpriced by $7.29
c. Underpriced by $7.29
d. Overpriced by $4.43


35. Regulators provide a valuable function for the capital markets because they

a. try to keep the market participants honest
b. try to prevent excessive speculation from destabilising the market
c. make sure all pertinent information about publicly traded securities is disclosed
d. all of the above





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BFW1300 MONEY AND CAPITAL MARKETS

BFW1300 Money and Capital Markets Page 9 of 12
36. What is the estimated value of a stock, which paid a $5 dividend last year, expects to
grow at 6%, and requires a 20% return?

a. $35.71
b. $37.86
c. $25.00
d. $20.38

37. The sale of securities to a public via an investment banker by a new corporation raising
funds is called

a. a seasoned offering
b. a secondary offering
c. an initial public offering
d. a best efforts offering

38. Non-participating in preference shares means:

a. the firm cannot pay a dividend on its ordinary shares until it has paid the preference
shareholders the dividends in arrears
b. the preference dividend remains constant regardless of any increase in the firms
earnings
c. the right of the issuer to buy back shares from the holders
d. none of the above

39. All but one of the following is associated with characteristics of ordinary shares.

a. Residual claim on income and assets
b. Proxy
c. Cumulative dividends
d. Dual-class stock

40. When an investor buys convertible preference shares, the investor:

a. can obtain a good dividend return plus have the possibility that should the ordinary
shares rise in price, the investment would rise in value.
b. can convert into preferred shares at a predetermined ratio
c. can earn double dividends
d. has limited liability




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BFW1300 Money and Capital Markets Page 10 of 12
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BFW1300 Money and Capital Markets Page 11 of 12
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BFW1300 MONEY AND CAPITAL MARKETS

BFW1300 Money and Capital Markets Page 12 of 12

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