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FIN 560: Financial Markets and Institutions

Spring 2015
Midterm Exam Part 1
(Note: Part II is on Connect Finance)
NOTES:

This exam (Part I) is out of 100 points.

Please note that you are expected to work on this test entirely on your own. Any
collaboration with any other person will be considered as academic misconduct
and will be dealt with in accordance with university policy.
The due date is March 8th. Please submit the exam into the appropriate D2L drop
box by 11.59 pm on the due date.
Please keep your responses to the short answer questions brief and to the point
(say, between 50 and 200 words).
Your primary submission must be in a Word Document or PDF. You must show
all your work either on the Word Document/PDF or in a supporting Excel file.
Please name your file(s) as follows:
FirstName_LastName_FIN560Midterm.doc(x) (or .pdf or .xls, as the case may
be).
Please type/write your name on the test as well.
If you type into this word document, please do NOT use bold font. I have used
bold font for the questions so that I can easily distinguish the questions from your
answers.

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1a.

Two of the services provided by financial intermediaries include maturity

intermediation and denomination intermediation. Compare and contrast these two
services. (15 points)

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1b.

What are main characteristics of money market securities, and how are they different
from bond market securities? (10 points)

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2. You are considering purchasing 5-year corporate bonds as an investment. You

have a choice of terms available. Which of the following terms would you find
desirable, ceteris paribus? How does each feature affect the bond's required rate
of return? Explain. (25 points)
a) call feature
b) convertible feature
c) warrants
d) sinking fund
e) debenture
a. The call feature favors the bond issuer, and this only happens when the issue offers a
sufficiently higher rate of return.
b. Convertible feature allows the bondholder convert to stock. The only drawback of this
feature is a reduced promised yield. This could be a desirable one.
c. Warrants allow bondholder to purchase stock at a fixed price, and unlike convertible
bonds, the bondholder does not have to surrender the bond. Offering warrants allows the
bondholder to offer a lower required rate of return. This could be a desirable one.
d. Sinking fund would not be a desirable one if it requires retiring a certain percentage of
the bonds each year.
e. Debenture has no specific collateral. This is very risky to the bondholder because the
required rate of return could be increase anytime.

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3. What are stock (market) indexes? Explain some important differences between
the Dow Jones Industrial Average and S & P 500. (25 points)

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4a.

What are the major foreign exchange trading activities performed by financial
institutions? (15 points)

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4b.

Explain the main differences between options and swaps. (10 points)