Finance sample paper with answers

1.       Refer to page 28. Comment on the size, structure and composition of the commercial banking industry. Do you think that the outlook for the industry is positive or negative ?Why ?

2.       Evaluate the classes and subclasses of life insurance by comparing their benefits and risks.

3.       Assess the regulatory environment faced by brokerages and investment banking firms. Do you consider this environment to be highly regulated, moderately regulated or unregulated.  Justify your response.

4.       Compare and contrast credit risk with liquidity risk.

5.       Describe the size, structure and composition of the mutual fund industry.  Do you consider these   characteristicsas having a positive or negative impact on investors ?Why ?

6.       An investment bank pays $ 23.00 for 4 million shares of JC Co., and then resells them for $ 25 per share. How much money does JC receive? What is the profit to the investment bank ?

7.       An investment bank pays $ 20.50 per share for 3 million shares of X. It then sells these shares to the public for $ 22.50 per share. How much money does X receive ? What is the profit to the investment bank ? What is the stock price of X ?

8.       A mutual fund owns 500 shares of X currently trading at $ 12, and 300 shares of Y, currently trading at $ 24. The fund has 800 shares outstanding.

a.       What is the Net Asset  Value of the fund ?

b.      If investors expect the price of X shares to increase to $ 14, and Y shares to decrease to $ 23, at the end of the year, what is the new NAV ?

c.       Assume that the expected price of X shares is realized at $ 14. What is the maximum price decrease that can occur to Y to realize an end of year NAV equal to the NAV estimated in (a).

9.       Assume that a bank has assets located in the EU worth 101 million euros, on which it earns an average of 9% per year. The bank has 76 million Euros in liabilities on which pays an average of 5% per year. The spot exchange rate is 0.76 euros/$.

a.       If the exchange rate at the end of the year is 0.79euros/$, will the dollar have appreciated or depreciated against the euro ?

b.      Given the change in the exchange rate, what is the effect in dollars on the net interest income from foreign assets and liabilities ?

 

10.   Consider the following balance sheet for X Savings (in milllions).

Assets                                

Floating rate mortgages             $ 40

(Currently 9% annually)

30-year fixed rate loans

(Currently 6% annually)              40

Total Assets                                   80

 

Liabilities and Equity

1-year time deposits

(currently 5% annually)              $ 50

3-year time deposits

(Currently 7% annually)               20

Equity                                             10

Total liabilities and equity           80

a.       What Is X’s expected net interest income at year end ?

b.      What will net interest income be if interest rates rise by 1 percent ?

c.       Using the cumulative repricing gap model, what is the expected net interest income for a 1 percent increase in interest rates ?

d.      What will net interest income be at year end if interest rates on rate sensitive assets increase by 1% but interest rates on rate sensitive liabilities increase by 0.5% ?

 

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