MGT411 Midterm 3 Solved Papers by Hafiz Salman Majeed

MIDTERM EXAMINATION · Spring 2009 · MGT411- Money &amp; Banking (Session - 2) · Solved By · Hafiz Salman Majeed <Hafiz. Salman. Majeed > · Time: 60 min Marks: 50

Q1. Wider the range of outcomes wider will be the ___________. (1 marks)

1. Risk
2. Cost
3. Probability
4. Loss

Correct answer: Risk

The wider the range of outcomes the greater the risk

Q2. Which of the following statement is true? (1 marks)

1. Increasing the FV by any percentage will change the PV by same percentage in opposite direction
2. Increasing the FV by any percentage will change the PV by same percentage in same direction
3. Increasing the FV by any percentage will not change the PV by any percentage
4. None of the given options

Correct answer: Increasing the FV by any percentage will change the PV by same percentage in same direction

Reference: Page 23 Lesson 9

Q3. The fact that a financial intermediary can use the same contract for many customers is an example of: (1 marks)

1. Economies of Scope
2. The Law of Diminishing Marginal Returns
3. The Law of Increasing Opportunity Cost
4. Economies of Scale

Correct answer: Economies of Scale

Much of what financial intermediaries do takes advantage of economies of scale,

Q4. You start with a $1000 portfolio; it loses 40% over the next year, the following year it gains 50% in value; At the end of two years the worth of your portfolio will be: (1 marks)

1. $900
2. $600
3. $1000
4. $1100

Correct answer: $900

Reference: 1st year loss = 1000*40/100 = 400 =1000400 =600 2nd year gain = 600*50/100 = 300 = 600+300=900

Q5. An index number is a valuable tool because: (1 marks)

1. The number by itself provides all of the useful information needed
2. The index provides a meaningful measurement scale to calculate percentage changes
3. The index is more stable than the data it reflects
4. It does not require any calculations to compute percentage changes

Correct answer: The index provides a meaningful measurement scale to calculate percentage changes

Q6. The risk premium of a bond will: (1 marks)

1. Higher for investment-grade bonds than for high-yield bonds
2. Positive but small if the risk of default is zero
3. Decrease when the default risk rises
4. Increase when the risk of default rises

Correct answer: Increase when the risk of default rises

Q7. The expectations theory of the term structure assumes: (1 marks)

1. Buyers of bonds consider bonds of different maturities to be perfect substitutes
2. Markets for different maturity bonds are completely separate
3. Buyers of bonds prefer bonds with shorter maturities
4. Buyers of bonds prefer bonds with longer maturities

Correct answer: Buyers of bonds consider bonds of different maturities to be perfect substitutes

Reference:

Q8. Question No: 8 ( Marks: 1 ) - Please choose one

The liquidity premium theory suggests that yield curves should usually be:

1. Up-sloping
2. Inverted
3. Flat
4. Up-sloping through year 1, then flat thereafter

Correct answer: Up-sloping

The yield curve’s upward slope is due to long-term bonds being riskier than short-term bonds

Q9. Which of the following statement is true about two bonds having same default rate and tax status but different maturity dates? (1 marks)

1. It creates no effect on yield of bonds
2. Both of them have different yield
3. Liquidity risk factor should be taken into consideration
4. It is impossible that default risk and tax status of two bonds are same Reference:

Correct answer: Both of them have different yield

Students Choice in Group mail

Q10. Which of the following statement is true for the given sentence, "that tax affects the bond return"? (1 marks)

1. Because only interest income they receive from bond is taxable
2. Because principal amount and interest income they receive from bond is taxable
3. Because bond holders are taxpayers
4. Because all bond is sold with a condition that tax will be deducted from its return

Correct answer: Because only interest income they receive from bond is taxable

Bondholders must pay income tax on the interest income they receive from privately issued bonds (taxable bonds), but government bonds are treated differently

Q11. Which of the following patterns of term structure occur most frequently? (1 marks)

1. Ascending yield curve
2. Descending yield curve
3. Flat yield curve
4. Humped yield curve

Correct answer: Flat yield curve

Reference: We assume that interest rate is constant here

Q12. Mr. Ali has a bond, which is issued by local government of Punjab which is NOT true for situation? (1 marks)

1. He faces tax affects on return on bond
2. His bond can also be named as municipal bond
3. He receive interest on that bond throughout life period of bond
4. Default risk affects its return on bond

Correct answer: He receive interest on that bond throughout life period of bond

Reference: