Review Exam 1 by 6H8YHUaK

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									Review Exam 1.

The questions are not in any particular order, even though the review might incorrectly
give you that idea. When you study for the exam, I need you to go through each of the
points in the review and make sure that you understand the issues. Also, you need to read
the questions at least three times before you attempt to answer them. This is so your first
answer is not based on your best guess but more on your knowledge of the information.
Eliminate two of the wrong answer and choose the best possible answer from the two
options that are left. After the exam, you have the chance to repudiate the questions that
you missed during the regular exam. You can only do that once and I will make a note of
that occurrence. Whenever you feel that your answer might be better than mine, you
could challenge me per email (not verbally) about your reasons why. I will not accept
verbal or hand-written arguments and I will only consider the rebuttals in the format
below. This offer is only good until the end of the semester (5/01/08) and does not apply
to your final. The format that I want you to use for the rebuttals:

   1)   Write down the question as it was stated in your exam!
   2)   Write the answer that you gave during the exam!
   3)   Write the answer that you thought also applies to this question!
   4)   More importantly, explain clearly why you think your answer is better!


Your final (possibly optional) will contain questions from your previous. This will give
you the opportunity to do well during your final without damaging your pre-final grade,
or it could potentially increase your grade. I wanted to mention again that I will not
negotiate over an “A” and I will not grade you on the basis of your expectations. You will
have ample opportunities to inquire about your academic standing throughout the
semester so there will not be any confusion.

Review:
   1. How does a firm raise cash? (p.4)
   2. How many levels of markets are there? (p.6)
   3. What are the money market instruments? (p.8)
   4. What are the responsibilities of the SEC? (p.10)
   5. What is an OTC market? (p.7)
   6. What are the functions of a financial intermediary? (p.16)
   7. What are benefits of savings relative to long-term investments? (p.14)
   8. (Calculation) Investment A pays 5% simple interest for 5 years. Investment B
       pays 4.5% interest for 5 years. Both require an initial $10,000 investment. The
       future value of A minus the future value of B is equal to_____(p.29-30)
   9. (Calculation) You buy a car for $25,000. You agree to a 24 month loan with a
       monthly interest rate of 1%. What is your monthly payment? (p.35)
   10. (Calculation) You buy an investment today for $8,725. You sell the investment in
       25 days for $10,000. The EAR on this investment is….(p.37)
   11. What is the effect of inflation on the loanable funds? (p.46-47)
   12. What is term structure? (p.52)
13. (Calculation) You want to be a millionaire when you retire in 25 years. You
    believe that you could earn 11% on your investment. How much do you have to
    put away each year to reach your goal? (p.34)
14. What is a muni? (p.49)
15. What is duration? (p.74-75)
16. (Calculation) A 5 year annual payment bond has a market price of $1050. It pays
    annual interest of $80 and its required return is 9.5%. By how much is the bond
    mispriced? (p.67)
17. (Calculation) A 10 year annual payment bond has a market price of $1125. It
    pays annual interest of $100 and its required return is 8.25%. By how much is the
    bond mispriced? (p.67)
18. Define the required rate of return? (p.63)
19. (Calculation) A 10 year $1,000 bond pays $25 interest every 3 months. What is
    the price if the ytm is 11%? (p.67)
20. (Calculation) A 12 year bond has a 9% coupon rate. What is the price if the
    required rate is 6% and the bond pays semiannually? (p.67)
21. What is the relation between coupon rate and ytm? (p.68)
22. What is commercial paper? (p.138)
23. What is a banker’s acceptance? (p.143)
24. What do you know about the stated rates on federal funds and repurchase
    agreements? (p.133, 137)
25. What is a CD? (p.141)
26. (Calculation) A 100 day $1 million CD has a 5% annual quote rate. If you buy the
    CD, how much will you collect in 100 days? (p.142)
27. (Calculation) If a $10,000 par T-Bill has a 6% discount quote and a 120 day
    maturity, what is its price? (p.132)
28. (Calculation) Suppose that $10,000 face value commercial paper with a 270 day
    maturity is selling for $9,750. What is the BEY? (p.141)
29. (Calculation) What is the clean purchasing price on $1000 par bond that has a
    98:24 bid and a 98:28 ask? (p.163)
30. What is a STRIP? (p.157-158)
31. (Calculation) On January 26, 2000 you purchase a $1,000 par corporate bond that
    matures March 31, 2014. The coupon rate is 5% and the price quote is 99:16. The
    last coupon payment was May 1, 2000 and the next is November 1, 2000 (184
    days total). The accrued interest is…. (see notes)
32. (Calculation) On June 20, 2002 you purchase a $1,000 par corporate bond that
    matures July 31, 2008. The coupon rate is 6% and the ask yield is 6.13%. What is
    the price to the nearest 32nd? (see notes)
33. (Calculation) On June 20, 2002 you purchase a $1,000 par corporate bond that
    matures July 31, 2008. The coupon rate is 6% and the ask price is 99:09. What is
    the ask yield? (see notes)
34. What are the differences between firm commitment and best effort? (p.171-172)
35. What is rule 144A? (p.173)
36. (Calculation) You purchase a $250,000 home and pay 20% down. You obtain a
    30 year fixed rate mortgage with an annual rate of 5.5%. After 10 years you
   refinance the mortgage for 20 years and an annual rate of 5.2%. After you
   refinance, what will be the new monthly payment? (p.201-202)

A homeowner could obtain a $200,000 thirty year fixed rate mortgage at a rate of 6%
with zero points or at a rate of 5.5% with 2 points. (two questions)
37. How long must the owner stay in the house to make it worthwhile to pay the
    points if the payment saving is invested monthly? (p.204)
38. How long must the owner stay in the house to make it worthwhile to pay the
    points if the payment saving is not invested monthly? (p.204)
39. What is a GPM? (p.205)
40. What is a RAM? (p.206-207)
41. What is GNMA? (p.209)
42. (Calculation) You buy a $175,000 home and pay 10% down. What is the monthly
    payment on a thirty year fixed rate mortgage of 7% annual rate? (p.201-202)
43. What is the schedule that separates interest payments from the principal? (p.200)
44. What is securitization? (p.193)
45. What is QTL? (p.419-420)
46. What is disintermediation? (p.417)
47. How were savings associations established? (p.421)
48. What are credit unions? (p.426,428)
49. What are sales finance companies? (p.423)
50. What are subprime lenders? (p.434)

								
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