1) there is an intimate relationship between a country’s bca and how the country
finances its domestic investment and pays for government expenditures. given this, in
order for a country to reduce a bca deficit, which of the following must occur?
a.for a given level of s and i, the government budget deficit (t – g) must be reduced
b.for a given level of i and (t – g), s must be increased
c.for a given level of s and (t – g), i must fall
d.all of the above would work to reduce a bca deficit
2) standard & poor’s has for years provided credit ratings on international bonds.
a.the ratings reflect the safety of principal for a u.s. investor
b.their ratings reflect the creditworthiness of the borrower and not exchange rate
uncertainty
c.their ratings reflect creditworthiness of the lender and predict the exchange rate
expected to prevail at maturity
d.the ratings are biased since 40 percent of eurobond issues are rated aaa and 30 percent
are aa
3) benetton, an italian clothier, is listed on the new york stock exchange.
a.this decision provides their shareholders with a higher degree of protection than is
available in italy
b.this decision can be a signal of the company’s commitment to shareholder rights
c.this may make investors both in italy and abroad more willing to provide capital and
to increase the value of the pre-existing shares
d.all of the above
4) suppose that the current exchange rate is £1.00 = $2.00. the indirect quote, from the
u.s. perspective is
a.£1.00 = $2.00
b.£1.00 = $0.50
c.£0.50 = $1.00
d.none of the above
5) when a bank purchases at a discount from an importer a series of promissory notes in
favor of an exporter, this is called
a.accounts receivable financing
b.asset backed commercial paper
c.discounting
d.forfeiting
6) a major risk faced by a swap dealer is mismatch risk. this is
a.the probability floating rates and exchange rates will not move together
b.the difficulty in finding a second counterparty for a swap that the bank has agreed to
take with another party
c.the probability that both counterparties default
d.none of the above
7) if irp fails to hold
a.pressure from arbitrageurs should bring exchange rates and interest rates back into
line
b.it may fail to hold due to transactions costs
c.it may be due to government-imposed capital controls
d.all of the above
8) for question in this section, the notation is
y = gnp = national income
c = consumption
i = private investment
g = government spending
x = exports
m = imports
national income, or gross national product is given by
a.gnp y c + i + g + x + m
b.gnp y c + i + g + x – m
c.gnp i c + y + g + x – m
d.gnp y c + i + x + m – g
9) your firm is in the 34% tax bracket. the yield to maturity on your existing bonds is
8%. the state of georgia offers to loan your firm $1,000,000 with a two year amortizing
loan at a 5% rate of interest and annual payments due at the end of the year.
the interest will be deductible at the time that you pay. what is the apv of this
below-market loan to your firm? i did not round any of my intermediate steps. you
might be a little bit off. pick the answer closest to yours.
a.$64,157.38
b.$417,201.05
c.$840,797
d.none of the above
10) floating-rate notes (frn)
a.experience very volatile price changes between reset dates
b.are typically medium-term bonds with coupon payments indexed to some reference
rate (e.g. libor)
c.appeal to investors with strong need to preserve the principal value of the investment
should they need to liquidate prior to the maturity of the bonds
d.both b and c
11) consider the graph of a call option shown at right. the option is a three-month
american call option on 62,500 with a strike price of $1.50 = 1.00 and an option
premium of $3,125. what are the values of a, b, and c, respectively?
a.a = -$3,125 (or -$.05 depending on your scale); b = $1.50; c = $1.55
b.a = -3,750 (or -.06 depending on your scale); b = $1.50; c = $1.55
c.a = -$.05; b = $1.55; c = $1.60
d.none of the above