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1 UNIVERSITY OF EAST ANGLIA Norwich Business School Main Series UG Examination Registration Number: INTERNATIONAL FINANCIAL SERVICES NBS-6004Y Time allowed: 3 hours Answer any FOURTEEN Questions in Section A Answer any THREE Questions in Section B Please print your student registration number in the box provided ABOVE. BOTH Section A and B should be answered in the SAME answer booklet Use of a calculator is PERMITTED Notes are not permitted in this examination. Do not turn over until you are told to do so by the Invigilator. NBS-6004Y Copyright of the University of East Anglia Module Contact: Dr Patrycja Klusak, NBS Version 1

2 Page 2 SECTION A There are 20 multiple choice questions and you are required to answer any 14 of these questions you prefer. Each one of the 14 questions you answer in this section is worth 5 marks. To answer the multiple choice questions, please clearly circle the letter at the left of the correct answer and also note down the answer on your answer booklet. You also need to offer a brief justification on your answer booklet for each one of your answers in this section. 1. Jarrod King, a private investor, purchases a Treasury bill with a $10,000 par value for $9,645. One hundred days later, Jarrod sells the T-bill for $9,719. What is Jarrod's expected annualized yield from this transaction? a percent b percent c percent d percent e. none of the above 2. Corporate bonds that receive a rating from credit rating agencies are normally placed at yields. a. higher; lower b. lower; lower c. higher; higher d. none of the above 3. Which of the following formulas best describes the value of a bond? a. b. c. d. e. none of the above

3 Page 3 4. If many investors quickly sell an IPO stock in the secondary market, there will be on the stock's price. a. upward pressure b. downward pressure c. no additional pressure d. none of the above 5. A firm is expected to generate earnings of $2.22 per share next year. The mean ratio of share price to expected earnings of competitors in the same industry is 15. Based on this information, the valuation of the firm's shares based on the priceearnings (PE) method is a. $2.22. b. $6.76. c. $ d. none of the above 6. You purchase a stock with cash, and you earn a negative return on the stock. If you had purchased the stock with 60 percent cash and 40 percent borrowed funds, your return on your investment would have been a. positive. b. more negative than if you had covered the entire investment with cash. c. negative, but more favorable than if you had covered the entire investment with cash. d. zero. 7. The Sharpe Index measures the a. average return on a stock. b. variability of stock returns per unit of return c. stock's beta adjusted for risk. d. excess return above the risk-free rate per unit of risk. 8. A(n) is a standardized agreement to deliver or receive a specified amount of a specified financial instrument at a specified price and date. a. option contract b. brokerage contract c. financial futures contract d. margin call TURN OVER

4 Page 4 9. The, the higher the call option premium, other things being equal. a. lower the existing price of the security relative to the exercise price b. lower the variability of the security's market price c. longer the maturity of the option d. A and B 10. Swap transactions are only used to a. hedge against upward interest rate movements. b. hedge against downward interest rate movements. c. speculate. d. none of the above 11. A five-year security was purchased two years ago by an investor who plans to resell it. The security will be sold by the investor in the so-called a. secondary market. b. primary market. c. deficit market. d. surplus market. 12. The federal government demand for loanable funds is. If the budget deficit was expected to increase, the federal government demand for loanable funds would. a. interest elastic; decrease b. interest elastic; increase c. interest inelastic; increase d. interest inelastic; decrease 13. According to the theory of rational expectations, inflationary expectations encourage businesses and households to their demand for loanable funds in order to borrow and make planned expenditures increase. a. higher; reduce b. higher; increase c. lower; reduce d. lower; increase

5 Page Assume investors are indifferent among security maturities. Today, the annualized 2-year interest rate is 12 percent, and the 1-year interest rate is 9 percent. What is the forward rate according to the pure expectations theory? a percent b percent c percent d percent e percent 15. All other things equal, when banks issue new stock, they a. increase reported earnings per share. b. decrease their ability to absorb operating losses. c. dilute the ownership of the bank. d. A and B 16. Which of the following statements is incorrect? a. Managers may be tempted to make decisions that are in their own best interests rather than shareholder interests. b. Directors are responsible for making most of the bank's decisions regarding loans to customers, which encourages a loan department to extend loans with a very high concern for risk. c. To prevent agency problems, some banks provide stock as compensation to managers. d. The underlying goal behind the managerial policies of a bank is to maximize the wealth of the bank's shareholders. 17. Banks offering nontraditional services will incur noninterest expenses and noninterest income. a. fewer; higher; higher b. more; lower; higher c. more; higher; higher d. fewer; lower; higher e. none of the above 18. When savings institutions are unable to attract sufficient deposits, they can a. borrow in the federal funds market. b. borrow from the Federal Reserve. c. borrow through a repurchase agreement. d. all of the above TURN OVER

6 Page Which of the following is not a major function of the securities industry? a. brokerage b. raising new capital c. underwriting d. decisions regarding open market operations 20. Protective covenants impose conditions in which the bank must provide additional loans to a borrower to protect the borrower from going bankrupt. a. True b. False

7 Page 7 SECTION B There are 5 questions and you are required to answer any 3 of these questions you prefer. Each one of the 3 questions you answer in this section is worth 10 marks. 1. Impact of Credit Crisis on financial markets. (i) Explain how the credit crisis affected the default rates of junk bonds and the risk premiums offered on newly issued junk bonds. (ii) Explain the new guidelines for credit rating agencies resulting from the Financial Reform Act of Impact of Interest Rates and inflation. (i) How are the interest rate, the required rate of return on a stock, and the valuation of a stock related? (ii) Assume that the expected inflation rate has just been revised upward by the market. Would the required return by investors who invest in the stocks be affected? Explain. 3. Bond Investment Decision. (i) Based on your forecast of interest rates, would you recommend that investors purchase bonds today? Explain. (ii) You are interested in buying a $1,000 par value bond with 10 years to maturity and an 8 percent coupon rate that is paid semiannually. How much should you be willing to pay for the bond if the investor s required rate of return is 10 percent? TURN OVER

8 Page 8 4. Monetary Policy (i) How does the Fed s monetary policy affect economic conditions? (ii) Explain how a tight monetary policy could affect the amount of funds borrowed at financial institutions by deficit units such as Carson Company. How might it affect the credit risk of these deficit units? How might it affect the performance of financial institutions that provide credit to such deficit units as Carson Company? 5. Bank Use of Funds. (i) Why do banks invest in securities, even though loans typically generate a higher return? How does a bank decide the appropriate percentage of funds that should be allocated to each type of asset? Explain. (ii) Explain how some mortgage operations by some commercial banks (along with other financial institutions) played a major role in instigating the credit crisis. END OF PAPER