25. Microsoft issues 10-year fixed-rate bonds. Its treasurer expects interest rates to increase for all maturities for at least the next 2 years. He enters into a 2-year agreement with SCB to receive semi-annual floating-rates payments benchmarked on 6-month LIBOR and to make payments based on a fixed-rate. This agreement is best described as a:
3. B is correct. A sinking fund arrangement allows for the retirement of bond on an annual basis based on a random drawing. A serial maturity structure, a stated number of bonds mature and are paid off each year before final maturity. A term maturity structure allows for one lump sum payment at maturity.
4. A is correct. A decision to venture into new markets would increase the company's revenue and profits which is in the interest of both shareholders and employees. In a takeover scenario, the management may fear losing their employment; however, the offer may be attractive for shareholders. Similarly, a proposal to redraft the bonus structure can create a conflict in that shareholders would want to reduce expenses whereas the management would want higher bonuses.
31. A is correct. If a decrease in the central bank’s policy rate is successfully transmitted via the money markets to other parts of the financial sector, consumer demand might increase as the rate of interest on mortgages and other credit declines. This will put an upward pressure on consumer prices.
5. A is correct. The IOSCO is not a regulator of financial markets. To ensure consistent application of international financial standards, it is important to have uniform regulation and enforcement across national boundaries. IOSCO assists in attaining this goal of uniform regulation as well as cross-border co-operation in combating violations of securities and derivatives laws.
27. Jacob is interested in buying shares of GSK. He, therefore, does a thorough research on pharma sector and studies GSK in depth. His analysis involves the estimation of an asset‟s value using earnings and sales forecasts, and risk estimates as well as economic growth, inflation and interest rates prevailing. In such a scenario, Jacob ‟s analysis for investment in GSK assumes markets are:
33. A portfolio manager had invested a total amount of $300,000 in stocks and fixed income instruments at the start of the year. Equity investments represented 60% of the portfolio and generated year-end return of 35%, whereas the fixed income instruments yielded 15%. The correlation of stock returns with fixed income instruments‟ returns was found to be 20%. Based on the given data, the portfolio return would be closest to:
26. PSO and NRL stocks are currently priced at PKR 250 per share. Over the next year, PSO stock is expected to pay dividends whereas NRL stock is not expected to pay dividends. There are no carrying costs associated with holding either stock over the next year. Compared with PSO, the one-year forward price of NRL is most likely:
30. The market price of a company's stock is $5 per share with 100 million shares outstanding. The company decides to use its cash reserves to undertake a $20 million share buyback. Just prior to the buyback, the company reports total assets of $1300 million and total liabilities of $900 million. The company's book value per share after the share buyback is closest to:
B. The deadweight loss must be smaller than the benefit of its improving terms of trade. C. It must auction the import licenses for a fee to offset the decline in the consumer surplus. 17. The diagram below shows the domestic demand and supply curves for a country that imports tea. P w is the world price of tea and P T is the domestic price of tea after imposition of a tariff.
26. B is correct. Quintiles divide data into five parts. Hence the first quintile corresponds to the 20 th percentile and the second quintile corresponds to the 40 th percentile. The location can be determined using: ( ) ( ) ( ) ( ) = 5.6. The value corresponding to location 5 (Fund 5) is 8.25%. The value corresponding to location 6 (Fund 6) is 10.11%. The approximate value corresponding to location 5.6 can be estimated using linear interpolation: ( ( – )) = 9.37%.
3. B is correct. Beschem requires TRY for funding its operations in Turkey, borrows in euros and passes the notional amount in euros to the swap dealer. The dealer repays in TRY which is the amount needed by Beschem at the start of the swap. At each payment date, Beschem receives the fixed-rate euro payment from the dealer and passes it to the Eurozone lender, and pays a fixed-rate TRY payment to the dealer. At maturity, Beschem returns the notional amount in TRY to the swap dealer and receives the notional amount in euros from the dealer which is passed to the Eurozone lender. Section 2.2.1.
16. GP Asset Management Company is defined as a firm according to GIPS standards. The firm‟s inception date is 1 January 2013, and it has been in existence for less than five years. After it builds up GIPS-compliant performance for five years until 31 December 2017, is the firm required to add additional years of GIPS-complaint performance?
56. B is correct. The put provision and the conversion provision are options that benefit the investor. Thus, putable bonds and convertible bonds sell at higher prices and lower yields relative to otherwise similar bonds that lack those provisions. B is correct because the call provision is an option that benefits the issuer. Because of this, callable bonds sell at lower prices and higher yields relative to otherwise similar non-callable bonds.
The initial value of the stock is 100. From historical data, it has been observed that the probability of an up move in any given period is 30% and the probability of a down move in any given period is 70%. Using the above data, the probability that the st ock‟s price will be equal to 102 at the end of period 2 is closest to:
42. A is correct. In a floating exchange rate regime the central bank is able to adjust monetary policy to maintain price stability. A currency board or dollarization exchange rate regime does not allow the central bank to exercise independent monetary policy to buffer its economy from inflation or deflation of the target currency.
25. B is correct. Held-for-trading and available-for-sale securities are carried at market value, whereas held-to-maturity securities are carried at amortized cost. If the investment is reclassified as available-for-sale in 2010, the carrying amount should be adjusted to its market value, which is $9,000. Compared with the amortized cost of $10,000, it is a decrease of $1,000.
1. Angels Corporation incurs two types of depreciation expenses. Depreciation is charged on the factory machinery used for production purposes and for office equipment. The accountant of the firm presents both these expenses under a single heading, depreciation expense, in the income statement. This is most likely to be:
14. B is correct. Buying $50,000 of cars will decrease cash by $50,000 and increase inventory by $50,000. Selling $25,000 of cars for $35,000 will decrease inventory by $25,000, and increase either cash (if cash collected in the same accounting period) or accounts receivable (if sold on credit) by $35,000. The combined effect is an increase of $10,000 in assets.