FINAL – FINANCE
FINAL – FINANCE 438 Spring 2024 IMPORTANT NOTICE! PLEASE READ: RECEIPT OF THIS DOCUMENT IS ACKNOWLEDGEMENT THAT NONE OF ITS CONTENTS IN PART OR IN ENTIRETY SHALL BE COPIED EITHER PHYSICALLY, MECHANICALLY OR ELECTRONICALLY, NOR BY ANY OTHER MEANS; NOR SHALL ITS CONTENTS BE DISTRIBUTED EITHER ELECTRONICALLY, MECHANICALLY, OR PHYSICALLY, OR BY ANY OTHER MEANS. THE RECIPIENT OF THIS DOCUMENT FURTHER AGREES AND ACKNOWLEDGES THAT IF ANY OF THE MATERIAL CONTAINED HEREIN, IN PART OR ENTIRETY, IS OBSERVED, NOTED, REFERRED TO, OR DISCOVERED BY ANY PERSON OR ENTITY IN ANY WEBSITE, INCLUDING YOUTUBE, QUIZLET, OR ANY OTHER APPLICATION OR PLATFORM, THEN THE RESULTS OF THIS FINAL EXAM ARE NULL AND VOID AND A NEW FINAL EXAM WILL BE ADMINISTERED UNDER NEW CONDITIONS FULLY UNDER THE DISCRETION AND AUTHORITY OF THE PROFESSOR AND AT A TIME AND PLACE AT THE CONVENIENCE OF THE PROFESSOR IN CONFORMANCE TO ACADEMIC STANDARDS OF THE UNIVERSITY. 1. In an interest rate swap: a. there is no credit risk associated with receiving the promised interest rate payments. b. the swap dealer faces no credit risk; only the counterparties are exposed. c. counterparty credit risk has been assumed by the swap dealer. d. the swap dealer assumes the risk of each counterparty defaulting on its respective principal payments. 2. An interest rate swap usually involves: a. swapping debt maturities. b. swapping fixed interest rate payments for floating rate interest rate payments. c. swapping interest rate tax liabilities. d. swapping debt principal payments. 3. In an interest rate swap, the firm wishing floating-rate debt: a. issues fixed rate and is obligated to make fixed-rate payments to its bondholders only if floating-rate payments are received from the other counterparty. b. issues fixed-rate debt and is obligated to make fixed-rate payments to its bondholders regardless of whether it receives floating-rate payments from the other counterparty. c. issues floating-rate debt and is obligated to make fixed-rate payments to its bondholders regardless of whether it receives floating-rate payments from the other counterparty. d. issues floating-rate debt. 4. An interest rate swap is: a. a loan from a commercial bank. b. a financial transaction where two borrowers exchange interest payments on their respective debts. c. an exchange of dividend payments. d. a swap of debt covenant terms. 5. One reason interest rate swaps exist is that: a. interest rates are lower because it is easy to fool investors about the credit worthiness of a company with interest rate swaps. b. industrial companies are not permitted to issue fixed-rate debt. c. commercial banks are not permitted to issue floating-rate debt. d. interest rate swaps allow interest rate risk to be separated from credit risk. 6. A currency swap is: a. an exchange of floating-rate payments for fixed-rate payments. b. an exchange of one currency for another currency in the spot exchange market. c. an exchange of interest payments denominated in one currency for interest payments denominated in another currency. d. an exchange of debt covenant terms in one country for those in another country. 7. A bank has entered into an agreement whereby they pay a fee of 137.5 bp every six months and, in return, are guaranteed recoupment of interest lost and an adjusted value of bonds if the issue defaults. This agreement is known as a: a. CDS b. TRORS c. Subordinated debt d. Equity tranche e. CLO 8. Note the following tranche schedule for this CDO. Amount CDS YTM Term (Mos) Rating Enhanced ($millions) Tranche A $15 1.98% 30 AAA no Tranche B $85 2.75% 60 AAno Tranche C $250 3.05% 120 AAno Tranche D $250 4.87% 240 A yes Tranche Z $50 6.12% 360 A yes Based on the above information, which tranche has the highest likelihood of the occurrence of a credit event? a. Tranche A b. Tranche B c. Tranche C d. Tranche D e. Tranche Z 9. Which of the following statements are true about derivatives? I. Derivatives are securities whose payoff is linked to another security; the payoff is never assured with certainty. II. A swap is a derivative instrument between counterparties that only exchanges a series of cash flows for specific time period at specific intervals; notionals are never swapped. III. Notionals are standardized and tradable derivatives. IV. All derivatives have potential outcomes which may be unfavorable to one of the parties. V. One of the counterparties will always have off-balance-sheet liability risk. a. Only I. is correct. b. Only II, III, IV and V are true. c. II and V are false; all others are true d. Only II and III are false, all the others are true e. None are correct (very tricky, professor) 10. True or False? The difference between an interest rate swap and a currency swap is that an interest rate swap is an exchange of fixed-interest payments for floating rate payments, while a currency swap is an exchange of two cash flows from sources denominated in different currencies. 11. True or False? There can be currency swaps that also exchange fixed- for floating-rates. 12. Asset-side liquidity risk would be exemplified by which of the following? a. unexpected loan requests b. unexpected exercise of existing loan commitments c. unexpected withdrawals of deposits d. unexpected changes in demand for checking deposits e. a and b 13. In the “liquidity index” measurement scheme, which of the following is/are true? a. The index is higher if the bank’s assets are more liquid. b. The index is higher if the bank’s assets are less liquid. c. The index is higher if immediate asset liquidation requires lower prices. d. b and c e. a and c 14. In the basic “repricing gap” model, an increase in market interest rates would: a. lower the book value of stockholders’ equity of a bank with a negative 1-year gap. b. lower the net interest income of a bank with a negative 1-year gap. c. increase the net interest income of a bank with a positive 1-year gap. d. increase the market value of bank assets. 15. The difference between a bank’s average loans and its average deposits is called the: a. financing gap b. liquidity index c. core deposit surplus d. stored liquidity e. purchased liquidity 16. When the spread between interest rates on RSA and RSL ____________, the bank’s net interest income would be expected to ____________. a. increases; increase b. increases; decrease c. decreases; increase d. b and c 17. A bank with a negative 1-year repricing gap would expect __________________ if interest rates fall during the coming year. a. An increase in interest income b. an increase in interest expense c. an increase in net interest income d. a decrease in net interest income 18. Look at this balance sheet for the Acme National Bank of Eastern West Nevada (ANBEWN). Based on your analysis, is this bank adequately capitalized, based on Basel III standards (assuming full effect, ex post 2019)? ASSETS (in $ millions) Cash & Equivalents $ 124 Loans $8,356 Real Estate $ 67 Other Assets $1,298 LIABILITIES (in $ millions) Demand Deposits Time Deposits Fed Reserve Deposits Long-term Debt Equity $1,565 $3,876 $ 505 $2,655 $1,244 $9,845 TOTAL: $9,845 TOTAL: a. Not adequately capitalized because the bank has less than 10% equity. b. Adequately capitalized because common equity capital exceeds 4.5% of assets. c. Adequately capitalized because common equity capital exceeds 4.5% of risk-adjusted assets. d. Not adequately capitalized because common equity exceeds 4.5% of risk-adjusted assets. 19. Consider the balance sheet (in millions of $) for First Integrated Bank: AMOUNT DURATION ASSETS $790 MILLION 7.5 YEARS LIABILITIES $650 MILLION 1.5 YEARS What is the FIB’s duration gap? a. 5.4 years b. 6.2 years c. 6.7 years d. 9.8 years 20. Study the following Balance Sheet. Based on its structure, what is the potential liability to the bank if interest rates decrease 1% during a 1-year period? Bank “A” Balance Sheet (in $1,000,000s) Assets Liabilities Cash & Cash Equivalents Loans: Fixed-Rate
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