Finance 141: Final Examination – Fall 2018 – Prof. Gioia Bales
Do not answer these questions by cutting and pasting from the internet. If that is done, no points will be given for that question. Do not work together on this examination. If collaboration is detected, all parties involved will be severely penalized.
I. General Essay Questions (5pts each)
1. What are TIPs? How do these securities provide a hedge against inflation? Discuss the spread between traditionally-structured Treasury notes and TIPs. What factors influence this spread relationship?
2. Fully describe the fixed-income instruments of the money and capital markets. Make sure you cover all the money and bond markets we discussed. Do not just list the instruments.
3. Fully discuss the concept of risk in the bond market. Describe the different types of risk and how these risks can cause realized return to be different from expected return.
4. What is securitization? Discuss the benefits of securitization from the issuer and investor perspective. What is a CMO? How does it differ from a pass-through security? How did the development of the CMO structure expand the appeal of mortgage securities? What is negative convexity as it relates to mortgage securities?
5. What types of securities does the Treasury issue? Fully explain the Treasury auction system process. Discuss the Treasury’s decision to move to a single-price system. How does the auction system differ from a traditional underwriting?
6. Fully explain the two perspectives of return in the money and capital markets. Fully describe the models of return in the bond and equity markets.
II. Presentation Questions (5pts each)
1. What are the major types of derivatives? Define futures, forwards and options. What benefits do derivatives provide to the money and capital markets?
2. What are emerging markets; converging markets and frontier markets? What characterizes the emerging markets of Brazil and Eastern Europe?
3. What countries make up the Eurozone? What are the benefits of the use of a single currency in the Eurozone? How has the evolution of the Eurozone impacted the money and capital markets?
4. Define all the governmental agencies involved in the securities regulation process. Discuss the major aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, including the Volcker Rule.
5. What are hedge funds and private equity funds? What strategies do these entities employ? How are these types of firms regulated today? Explain the structure of a private equity firm.
III. Market Monitoring Questions
1. You are a reporter for a major financial newspaper. You are asked to write a concise, well-organized article on the major movements in the money and capital markets over the September-November 2018 period, highlighting not only market movements but also the major themes that effected the marketplace during this period. Limit your response to 500 words. (10pts)
2. Clearly economic indicators are an important fundamental factor that influences rates and relationships in the money and capital markets. What do you believe are the four key economic indicators (make sure you cite specific indicators)? Why? What do these indicators tell us about the market? What happened to each of these indicators this semester? (10pts)
3. Discuss the “flight to quality” phenomenon. What is it? Cite examples of the effect of “flight to quality” from market movements this semester. (5pts)
4. We began the semester with a discussion of the key themes currently influencing the money and capital markets. What are these themes? Which of these themes are still driving rates and relationships today? (10pts)
5. The Federal Reserve is clearly a dominant influence on the money and capital markets. Discuss how the markets monitor the Fed and what this information has revealed this semester. What has the market focus been regarding the Fed this semester? (10pts)
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By signing the statement below, I am pledging that the answers to the questions on this examination have been completed solely by myself. This submission does not reflect a group effort and I have worked independently. I fully understand that any indication of a group effort will have severe consequences for all students involved.