Hawassa University
School of Management and Accounting
Makeup Exam for the course Financial Institutions and Capital Markets
Date of the examination: 24/01/12
Time allowed: 1:30 hour
Total marks: 60%
Name of the student ______________________________
Department ______________________________________
ID. No. ___________________________________________
Section __________________________________________
General instructions:
Make sure that the exam book let contains 6 pages including the cover page
The exam has two parts, which comprises 25multiple choice questions and 4
discussion questions
All questions are compulsory
Cheating and attempt to cheat will result the cancellation of your exam
Use of mobile phone is not allowed for calculation purpose
GOOD LUCK!!
Part one: multiple choice questions (1.5 each)
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1. The dominant asset of savings and loan associations is
a. Consumer loans
b. Commercial paper
c. Residential Mortgage loans
d. Corporate debt securities
e. None of the above
2. The saving banks investment is not limited (as required by law) for
a. First mortgage loans
b. U.S government and federal agency securities
c. High grade corporate bonds and stocks
d. Municipal bonds
e. None of the above
3. The initial objective of S & Ls in Ethiopia is
a. To serve the membership
b. To reach the poor
c. To produce loan for business man
d. To produce long term loan for investors
e. None of the above
4. he following factor affects the spread of the securities, except
a. The issuer’s perceived creditworthiness
b. The term or maturity of the instrument
c. The taxability of the interest received by investors
d. The expected liquidity of the issue
e. None of the above
5. The real rate of return is
a. The quoted interest rate on a security or loan
b. The return to the lender or investor
c. The rate of inflation expected by investors
d. The additional risks the investor faces
e. None of the above
6. Which of the following statement is incorrect concerning Fisher effect of
inflation and interest rate?
a. A change in the inflation premium is likely to influence only the nominal
interest rate, at least in the long run
b. In the short run, the nominal rate will rise by the full amount of the
expected increase in the rate of inflation and decline by the full amount of
any expected decline in inflation
c. To the extent that a rise in the actual rate of inflation causes investors to
expect greater inflation in the future, higher nominal interest rates will
soon result
d. A decline in the actual rate of inflation may case investors to revise
downward their expectations of future inflation, leading to lower nominal
interest rates
e. none of the above
7. Suppose that people come to expect a higher inflation rate in the economy.
In response to this inflation-caused wealth effect, which one is correct?
a. The nominal interest rate would rise
b. Reduce current savings
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c. Increase in the real value of wealth holdings
d. Cause the real interest rate to rise
e. None of the above
8. A rise in the expected inflation rate in the economy would cause the following
impact, but
a. Businesses borrow more heavily to increase production and stock
b. The expanded consumption and production increases employment
c. The real interest rate will rise even as nominal rates fall due to lower
expected inflation
d. More savings will eventually flow in to the financial system
e. None of the above
9. Which of the following statement is wrong?
a. The non-bank thrift institutions are depository institutions that accept
deposits from the public as commercial banks do
b. Credit unions are institutions exclusively household oriented
intermediaries
c. Credit unions are permitted to hold savings deposits at commercial banks,
savings, and loan associations, savings banks, and federally insured credit
unions
d. Credit unions pay dividends to their members, and are considered profit
associations doing business only with their owners
e. None of the above
10.A price quote on a bond of 97.4 for each $100 and $1,000 bond respectively
are
a. $97.125 and $971.25
b. $97.25 and 971.125
c. $971.03125 and $97.015625
d. $971.0.15625 and $97.03125
e. None of the above
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11.A price quote of 1000 is a quote of
64
a. 100.2+
b. 1000.2+
c. 1000.078125
d. 100.078125
e. None of the above
12.Which of the following statement is wrong?
a. Coupon rate is the ratio of the annual income (dividends or interest)
generated by the loan or security to its current market value
b. Current yield ignores the stream of actual and anticipated payments
associated with a loan or security and the price at which the investor will
be able to sell or redeem it
c. The yield to maturity is the rate which equates the purchase price of a
security with the present value of all its expected annual net cash inflows
(income).
d. The holding period yield is the discount rate equalizing the market price of
a financial asset with all net cash flows between the time the asset is
purchased and the time it is sold
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e. None of the above
13.Which of the following is incorrect regarding to the liquidity preference theory
of interest rates?
a. The holding of money could be a perfectly rational act if interest rates
were expected to rise
b. If interest rates rise, the market value of bonds paying a fixed rate of
interest will fall
c. The bond prices rise or fall depending on changes in the rate of interest in
the economy
d. Only two outlets for investor funds are available bonds and money
e. None of the above
14.The following is true concerning the Keynes theory of interest rate, but
a. Both the precautionary and the transactions demand for money is
assumed to be affected by changes in interest rates
b. Transactions and precautionary demands changes as national income
changes
c. When interest rates are low, the opportunity cost of holding idle cash is
low and expected capital loss from holding bonds is high
d. High interest rates encourage investors to reduce their cash balances and
buy bonds.
e. None of the above
15.The supply of funds of loanable fund includes the following except
a. Domestic Savings
b. Money Created
c. Hoarding Demand for Money
d. Dishoarding of Money
e. Foreign Lending in the Domestic Market
16.Which of the following statement is wrong?
a. When the public's demand for money exceeds the supply, positive
hoarding of money takes place
b. When the public's demand for money is less than the supply available,
negative hoarding (also called dishoarding) occurs
c. Hoarding reduces the volume of loanable funds available in the financial
markets
d. Dishoarding is the difference between the public's total demand for
money and the money supply
e. None of the above
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17.A stock price of 70 is a quote of
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a. $70.125
b. $70.25
c. $70.03125
d. $70.015625
e. None of the above
18.Which of the following statement is wrong?
a. Higher interest rate brings forth greater volume of savings
b. Higher interest rate tends to reduce the volume of borrowing
c. Lower interest rate tends to dampen the flow of savings
d. Lower interest rates reduce lending activity
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e. Higher interest rate stimulate borrowing and investment spending
19.Among the following one is not a function of interest rate
a. It helps to guarantee current savings will flow into investments
b. It rations the available supply of credit
c. It brings into the nation’s supply of and demand for money
d. It is the price of credit
e. It is an important tool for executing government policies and strategies
20.The two forces that determine the rate of interest according to the classical
theory of interest rate are:
a. Supply of and demand for loanable funds
b. Supply of savings and demand for investment capital
c. Demand for liquidity and supply of funds
d. Financial information and availability of securities
e. None of the above
21.What will happen in the economy when profits are expected to rise for
business enterprises?
a. Businesses obtain large funds internally
b. Business forced to make heavier use of money and capital markets for
investment funds
c. The demand for credit rises
d. Interest rates rises
e. None of the above
22.Which of the following statement is not correct?
a. Higher rates encourage firms to use internally generated funds
b. Lower rates encourage greater use of external funds
c. Government savings mostly are in the form of a budget surpluses
d. Interest rates are probably key factors in affecting government savings
e. None of the above
23.Why the replacement investment of a firm is usually more predictable and
grows at a more even rate? Because
a. Such expenditures are financed exclusively from inside the firm
b. Such expenditure depends on the business community outlook regarding
future sales
c. Such expenditure depends on changes in technology
d. Such expenditure depends on industrial capacity
e. None of the above
24.The changes in net investment of a firm are not closely linked to
a. Fluctuations in the nation’s output of goods and services
b. Employment
c. Prices
d. Changes in technology
e. None of the above
25.Unless offset by increased consumption or government spending otherwise, a
significant decline in net investment frequently leads to the following but:
a. A business recession
b. A decline in productivity
c. A rise in unemployment
d. A business prosperity
e. None of the above
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Part two: Discussion questions
Q1. List and discuss non bank thrift institutions (8points)
Q2. Discuss liquidity preference theory of interest rate in detail (6 points)
Q4. Suppose the rate of inflation in the Consumer Preference Index (CPI) is
zero right now and the U.S Treasury issues new TIPS that has a nominal
(face) value of $1000 and promises a real annual coupon rate of 4.5% for
five years.
a. If inflation remains at zero, what happens to annual real interest rate
income of the bond? (2point)
b. Suppose, however, that inflation suddenly increase to 5% the day after
the bond is issued and remains at that level for all five years. What will
be the inflation – adjusted nominal value of the bond at the end of its
first year? (2.5 points)
c. What will be the inflation adjusted nominal value of the bond at the
end of 5 years? (2.5 points)
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