Module Contact: Prof R Markellos, NBS Copyright of the University of East Anglia Version 2

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1 UNIVERSITY OF EAST ANGLIA Norwich Business School Main Series Examination Student Candidate Number: INTERNATIONAL FINANCIAL SERVICES NBS-3A8Y Time allowed: 3 hours Answer FOURTEEN questions in Section A worth 70% Answer THREE questions in Section B worth 30% Notes are not permitted in this examination. Do not turn over until you are told to do so by the Invigilator. NBS-3A8Y Module Contact: Prof R Markellos, NBS Copyright of the University of East Anglia Version 2

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. If financial markets were, all information about any securities for sale in primary and secondary markets would be continuously and freely available to investors. a. Efficient b. Inefficient c. Perfect d. Imperfect 2. If inflation is expected to decrease, then a. savers will provide less funds at the existing equilibrium interest rate. b. the equilibrium interest rate will increase. c. the equilibrium interest rate will decrease. d. borrowers will demand more funds at the existing equilibrium interest rate. 3. If the Fed uses a passive monetary policy during weak economic conditions, a. it increases money supply substantially. b. it reduces money supply substantially. c. it allows the economy to fix itself. d. it focuses on monetizing the debt. 4. When cash outflows temporarily exceed cash inflows, banks are most likely to experience a. higher dividend payments. b. illiquidity. c. a negative duration on its assets. d. an excess of capital. 5. The Federal Reserve provides loans to banks in order to a. resolve permanent shortages of funds experienced by banks. b. resolve temporary shortages of funds experienced by banks. c. finance the shortages of funds of finance companies.

3 Page 3 6. Gross interest income is affected by a. market interest rates. b. the composition of assets held by banks. c. interest expenses. d. non-interest expenses. e. A and B 7. Savings institutions use most of their funds for. Commercial banks use most of their funds for. a. mortgages; mortgages b. mortgages; business loans and commercial real estate loans c. business loans; commercial real estate loans and mortgages d. commercial real estate loans and mortgages; business loans 8. Securities firms facilitate IPOs in the market; they facilitate the trades of stocks between investors in the market. a. primary; primary b. secondary; primary c. primary; secondary d. secondary; secondary 9. A firm plans to issue 30-day commercial paper for $9,900,000. Par value is $10,000,000. What is the firm's cost of borrowing? a percent b percent c percent d percent e percent 10. The yield on commercial paper is the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a period. a. greater than; recessionary b. greater than; boom economy c. less than; boom economy d. less than; recessionary PLEASE TURN OVER

4 Page 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 12. If interest rates suddenly, those existing bonds that have a call feature are likely to be called. a. decline; more b. decline; less c. increase; more 13. When financial institutions expect interest rates to, they may. a. increase; sell bonds and buy short-term securities b. increase; sell short-term securities and buy bonds c. decrease; sell bonds and buy short-term securities d. B and C 14. Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10 percent yield to maturity. The duration of this bond is a years. b years. c years. 15. Which of the following will most likely cause bond prices to increase? (Assume no possibility of higher inflation in the future.) a. reduced Treasury borrowing along with anticipation that money supply growth will decrease b. reduced Treasury borrowing along with anticipation that money supply growth will increase c. an anticipated drop in money supply growth along with increasing Treasury borrowing d. higher levels of Treasury borrowing and corporate borrowing

5 Page Managers of firms may consider a stock repurchase or even a leveraged buyout when they believe their stock is by the market, or a secondary stock offering when they believe their stock is by the market. a. undervalued; undervalued b. overvalued; overvalued c. undervalued; overvalued d. overvalued; undervalued e. none of the above 17. Which of the following is not true regarding the Sarbanes-Oxley Act? a. It attempts to force accountants to conform to regular accounting standards in preparing a firm's financial statements. b. It requires that only outside board members of a firm be on the firm's audit committee. c. It allows public accounting firms to offer nonaudit consulting services to an audit client whether the client's audit committee pre-approves the nonaudit services or not. d. It prevents members of a firm's audit committee from receiving consulting of advising fees or other compensation from the firm beyond that earned from serving on the board. 18. Stock prices of U.S. firms primarily involved in exporting are likely to be affected by a weak dollar and affected by a strong dollar. a. favourably; adversely b. adversely; adversely c. favourably; favourably d. adversely; favourably 19. The expected acquisition of a firm typically results in in the target's stock price. a. an increase b. a decrease c. no change 20. A stock has a standard deviation of daily returns of 3 percent. It wants to determine the lower boundary of its probability distribution of returns, based on 1.65 standard deviations from the expected outcome. The stock's expected daily return is 0.1 percent. The lower boundary is a percent. b percent. c percent. d percent. PLEASE TURN OVER

6 Page 6 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. 21. Economic crises and Interest rates i) When economic crises in countries are due to a weak economy, local interest rates tend to be very low. However, if the crisis was caused by an unusually high rate of inflation, interest rates tend to be very high. Explain why. During some crises, investors shift their funds out of the stock market and into money market securities for safety, even if they do not fear rising interest rates. Explain how and why these actions by investors affect the yield curve. Is the shift due to the expectations theory, liquidity premium theory, or segmented markets theory? 22. Since the financial crisis of governments and regulatory bodies have reviewed the causes and identified a number of contributing factors. i) Outline five failures within banks which contributed to the financial crisis. Explain how some mortgage operations by some commercial banks (along with other financial institutions) played a major role in instigating the credit crisis. 23. Securities firms i) How do securities firms facilitate mergers and acquisition activity? Why are securities firms that are more capable of raising funds in the capital markets preferred by corporations that need advice on proposed acquisitions? Should analysts be separated from securities firms to ensure no conflicts of interest?

7 Page Market Microstructure i) Explain how margin requirements can affect the potential return and risk from investing in a stock. What is the maintenance margin? Suppose that you buy a stock for 48 by paying 25 and borrowing the remaining 23 from a brokerage firm at 8 percent annualized interest. The stock pays an annual dividend of 0.80 per share, and after one year, you are able to sell it for 65. Calculate your return on the stock. Then, calculate the return on the stock if you had used only personal funds to make the purchase. Repeat the problem, assuming that only personal funds are used, and that you sell the stock for 40 at the end of one year. 25. Derivative Security Markets i) Has the Futures Market Created More Uncertainty for Stocks? Briefly discuss your view. How would you interpret a large increase in the CBOE volatility index (VIX)? Briefly explain why the VIX increased substantially during the credit crisis. END OF PAPER