Both Section A and B should be answered in the same answer booklet

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1 UNIVERSITY OF EAST ANGLIA Norwich Business School Main Series UG Examination INTERNATIONAL FINANCIAL SERVICES NBS-6004Y Time allowed: 3 hours For 70% Answer FOURTEEN Questions in Section A For 30% Answer THREE Questions in Section B Both Section A and B should be answered in the same answer booklet You are permitted to use a pocket calculator 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 (70 Marks) 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 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. If an investor buys a T-bill with a 90-day maturity and $50,000 par value for $48,500 and holds it to maturity, what is the annualized yield? a) about 13.4 percent b) about 12.5 percent c) about 11.3 percent d) about 11.6 percent e) about 10.7 percent 2. Assume that you purchased corporate bonds one year ago that have no protective covenants. Today, it is announced that the firm that issued the bonds plans a leveraged buyout. The market value of your bonds will likely as a result. a) rise b) decline c) be zero d) be unaffected 3. The bonds that are most sensitive to interest rate movements have a) no coupon and a short-term maturity. b) high coupons and a short-term maturity. c) high coupons and a long-term maturity. d) no coupon and a long-term maturity. 4. The transaction costs to the issuing firm in an IPO is usually percent of the funds raised. a) 1 b) 3 c) 7 d) 25

3 Page 3 5. Bolwork Inc. is expected to pay a dividend of $5 per share next year. Bolwork's dividends are expected to grow by 3 percent annually. The required rate of return for Bolwork stock is 15 percent. Based on the dividend discount model, a fair value for Bolwork stock is $ per share. a) b) c) d) A short seller a) anticipates that the price of the stock sold short will increase. b) earns the difference between what they initially paid for the stock versus what they later sell the stock for. c) makes a profit equal to the difference between the original sell price and the price paid for the stock, after subtracting any dividend payments made. d) is essentially lending the stock to another investor and will ultimately receive that stock back from that investor. e) none of the above 7. The is commonly used to determine what a stock's price should have been. a) Capital Asset Pricing Model b) Treynor Index c) Sharpe Index d) B and C 8. Interest rate futures are not available on a) Treasury bonds. b) Treasury notes. c) Eurodollar CDs. d) the S&P 500 index. 9. The sale of a call option on a stock the seller already owns is referred to as a) a covered call. b) a naked call. c) call on futures. d) futures on options. 10. The option on a callable swap would most likely be exercised if interest rates a) rise. b) fall. c) remain constant. d) remain somewhat stable. TURN OVER

4 Page There is a relationship between the risk of a security and the expected return from investing in the security. a) positive b) negative c) indeterminable d) none of the above 12. Due to expectations of lower inflation in the future, we would typically expect the supply of loanable funds to and the demand for loanable funds to. a) increase; decrease b) increase; increase c) decrease; increase d) decrease; decrease 13. Assume an investor's tax rate is 25 percent. The before-tax yield on a security is 12 percent. What is the after-tax yield? a) percent b) 9.25 percent c) 9.00 percent d) 3.00 percent e) none of the above 14. According to the theory of rational expectations, if the Fed uses open market operations in order to increase the supply of loanable funds, the ultimate effect on interest rates is definitely a) a reduction in interest rates. b) an increase in interest rates. c) no effect on the interest rates. d) the impact on interest rates cannot be determined. 15. From a bank manager s perspective, the differential in interest between a bank s loans and its deposits; a) must not exceed the federal funds rate. b) is called the primary credit lending rate. c) must be sufficient to cover the bank s other expenses and generate a reasonable profit for the bank s owners. d) must be sufficient to cover the bank s deposit insurance premiums and its reserve requirements at the Federal Reserve.

5 Page As the secondary market for loans has become active, banks are more able to satisfy their liquidity needs with a proportion of loans while achieving profitability. a) higher; higher b) lower; lower c) higher; lower d) lower; higher 17. During the credit crisis, the level of was much higher than in other periods. a) interest income b) income expenses c) noninterest expenses d) loan loss provision 18. When a savings institution uses interest rate swaps to hedge interest rate risk, it would likely exchange outflows for inflows. a) variable-rate; fixed-rate b) variable-rate; variable-rate c) fixed-rate; variable-rate d) fixed-rate; fixed-rate 19. The price of newly issued stock should be the market price of the firm's outstanding stock. a) about the same as b) much more than c) much less than d) B or C, depending on the amount of stock to be issued 20. Proprietary trading is generally less risky than a bank s lending operations. a) True b) False TURN OVER

6 Page 6 SECTION B (30 Marks) 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. 21. i) Explain the conditions that led to the debt crisis in Greece. ii) Explain how the downgrading of bonds for a particular corporation affects the prices of those bonds, the return to investors that currently hold these bonds, and the potential return to other investors who may invest in the bonds in the near future. 22. Market Efficiency. i) Explain the difference between weak-form, semistrong-form, and strongform efficiency. Which of these forms of efficiency is most difficult to test? Which is most likely to be refuted? Explain how to test weak-form efficiency in the stock market. ii) A consulting firm was hired to determine whether a particular trading strategy could generate abnormal returns. The strategy involved taking positions based on recent historical movements in stock prices. The strategy did not achieve abnormal returns. Consequently, the consulting firm concluded that the stock market is weak-form efficient. Do you agree? Explain. 23. Relevance of Bond Price Movements. i) Why is the relationship between interest rates and bond prices important to financial institutions? ii) Assume that you require a 14 percent return on a zero-coupon bond with a par value of $1,000 and six years to maturity. What is the price you should be willing to pay for this bond?

7 Page i) In what two ways should a bank diversify its loans? Why? Is international diversification of loans a viable strategy for dealing with credit risk? Defend your answer. ii) With regards to commercial borrowing do all commercial borrowers receive the same interest rate on loans? 25. i) Explain why interest rates tend to decrease during recessionary periods. ii) Should increasing money supply growth place upward or downward pressure on interest rates? END OF PAPER