FINANCE

A commercial bank recognizes that its net income suffers whenever interest rates increase.  Which of the following strategies would protect the bank against rising interest rates?

Answer

[removed]   Buying inverse floaters.
[removed]   Entering into an interest rate swap where the bank receives a fixed payment stream, and in return agrees to make payments that float with market interest rates.
[removed]   Purchase principal only (PO) strips that decline in value whenever interest rates rise.
[removed]   Enter into a short hedge where the bank agrees to sell interest rate futures.
[removed]   Sell some of the bank’s floating-rate loans and use the proceeds to make fixed-rate loans.
     

 

 

Suppose hockey skates sell in Canada for 165 Canadian dollars, and 1 Canadian dollar equals 0.71 U.S. dollars.  If purchasing power parity (PPP) holds, what is the price of hockey skates in the United States?

Answer

[removed]   $94.89
[removed]   $99.58
[removed]   $113.64
[removed]   $131.21
[removed]   $117.15

 

Quaid Co.’s common stock sells for $34, pays a dividend of $2.10, and has an expected long-term growth rate of 6%.  The firm’s straight-debt bonds pay 10.8%.  Quaid is planning a convertible bond issue.  The bonds will have a 20-year maturity, pay a 10% annual coupon, have a par value of $1,000, and a conversion ratio of 25 shares per bond.  The bonds will sell for $1,000 and will be callable after 10 years.  Assuming that the bonds will be converted at Year 10, when they become callable, what will be the expected return on the convertible when it is issued?

Answer

[removed]   12.86%
[removed]   13.63%
[removed]   11.32%
[removed]   12.35%
[removed]   11.96%

 

Herbert Engineering is issuing new 15-year bonds that have warrants attached. If not for the attached warrants, the bonds would carry a 9% annual interest rate. However, with the warrants attached the bonds will pay a 6.1% annual coupon. There are 30 warrants attached to each bond, which has a par value of $1,000. What is the value of the straight-debt portion of the bonds?

Answer

[removed]   $796.09
[removed]   $720.27
[removed]   $835.89
[removed]   $766.24
[removed]   $877.69

 

 

Suppose that currently, 1 British pound equals 1.98 U.S. dollars and 1 U.S. dollar equals 1.40 Swiss francs.  How many Swiss francs are needed to purchase 1 pound?

Answer

[removed]   2.3008
[removed]   3.1046
[removed]   2.5225
[removed]   2.8274
[removed]   2.7720

 

 

In the lease versus buy decision, leasing is often preferable

Answer

[removed]   because it has no effect on the firm’s ability to borrow to make other investments.
[removed]   because, generally, no down payment is required, and there are no indirect interest costs.
[removed]   because lease obligations do not affect the firm’s risk as seen by investors.
[removed]   because the lessee owns the property at the end of the lease term.
[removed]   because the lessee may have greater flexibility in abandoning the project in which the leased property is used than if the lessee bought and owned the asset.

 

 

Blenman Corporation, based in the United States, arranged a 2-year, $1,000,000 loan to fund a project in Mexico.  The loan is denominated in Mexican pesos, carries a 11.0% nominal rate, and requires equal semiannual payments.  The exchange rate at the time of the loan was 5.75 pesos per dollar, but it dropped to 5.10 pesos per dollar before the first payment came due.  The loan was not hedged in the foreign exchange market.  Thus, Blenman must convert U.S. funds to Mexican pesos to make its payments.  If the exchange rate remains at 5.10 pesos per dollar through the end of the loan period, what effective annual interest rate will Blenman end up paying on the loan?

Answer

[removed]   23.91%
[removed]   22.76%
[removed]   20.46%
[removed]   21.84%
[removed]   22.99%

 

 

One year ago, a U.S. investor converted dollars to yen and purchased 100 shares of stock in a Japanese company at a price of 3,150 yen per share.  The stock’s total purchase cost was 315,000 yen.  At the time of purchase, in the currency market 1 yen equaled $0.00952.  Today, the stock is selling at a price of 3,465 yen per share, and in the currency market $1 equals 95 yen.  The stock does not pay a dividend.  If the investor were to sell the stock today and convert the proceeds back to dollars, what would be his realized return on his initial dollar investment from holding the stock?

Answer

[removed]   21.41%
[removed]   21.63%
[removed]   22.06%
[removed]   23.14%
[removed]   21.84%

 

 

Suppose the exchange rate between U.S. dollars and Swiss francs is SF 1.41 = $1.00, and the exchange rate between the U.S. dollar and the euro is $1.00 = 0.50 euros.  What is the cross rate of Swiss francs to euros?

Answer

[removed]   2.9046
[removed]   3.0738
[removed]   2.8200
[removed]   2.3970
[removed]   3.1584

 

 

If one Swiss franc can purchase $0.85 U.S. dollars, how many Swiss francs can one U.S. dollar buy?

Answer

[removed]   1.2588
[removed]   1.1765
[removed]   1.3647
[removed]   1.2471
[removed]   1.0824

 

 

Suppose DeGraw Corporation, a U.S. exporter, sold a solar heating station to a Japanese customer at a price of 139.0 million yen, when the exchange rate was 140 yen per dollar.  In order to close the sale, DeGraw agreed to make the bill payable in yen, thus agreeing to take some exchange rate risk for the transaction.  The terms were net 6 months.  If the yen fell against the dollar such that one dollar would buy 154.4 yen when the invoice was paid, what dollar amount would DeGraw actually receive after it exchanged yen for U.S. dollars?

Answer

[removed]   $900,259.07
[removed]   $711,204.66
[removed]   $1,008,290.16
[removed]   $954,274.61
[removed]   $702,202.07

 

 

Suppose a U.S. firm buys $200,000 worth of television tubes from a Mexican manufacturer for delivery in 60 days with payment to be made in 90 days (30 days after the goods are received).  The rising U.S. deficit has caused the dollar to depreciate against the peso recently.  The current exchange rate is 5.975 pesos per U.S. dollar.  The 90-day forward rate is 5.45 pesos/dollar.  The firm goes into the forward market today and buys enough Mexican pesos at the 90-day forward rate to completely cover its trade obligation.  Assume the spot rate in 90 days is 5.30 Mexican pesos per U.S. dollar.  How much in U.S. dollars did the firm save by eliminating its foreign exchange currency risk with its forward market hedge?

Answer

[removed]   $5,088.63
[removed]   $7,012.38
[removed]   $5,336.85
[removed]   $6,205.64
[removed]   $6,391.81

 

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