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ECOM049 Commercial & Investment Banking

2020

Section A

Multiple Choice

Answer ALL multiple choice questions on the separate answer sheet provided.

For each question there is only one correct answer.  Mark your answer by putting a tick ( ) in the correct grid square (cell).  In case you want to change your answer put a cross (X) in the cell you want the marker to ignore and put a tick in the cell for the answer you want to be marked.  For these questions you do not  need to show your workings.

Each correct answer is worth 2 marks.

Remember to add your student number and your desk number to the multiple choice answer sheet. At the end of the exam, attach the multiple choice answer sheet to your answer booklet using a treasury tag.  If   you have not been provided with a treasury tag, ask an invigilator for one.

1) An investment pays $400 in one year, X amount of dollars in two years, and $500 in three years. The total present value of all the cash flows (including X) is equal to $1,500. If interest rate is 6 percent, what is X?

A) $702.83

B) $822.41

C) $789.70

D) $749.67

E) $600.00

2) Bank assets tend to have ________ maturities and ________ liquidity than/as bank liabilities.

A) longer; greater

B) longer; lower

C) shorter; greater

D) shorter; lower

E) equal; equal

3) Classify each of the following in terms of their effect (increase or decrease) on interest rates:

I. Perceived risk of financial securities increases.

II. Near term spending needs decrease.

III. Future profitability of real investments increases.

A) I increases, II increases, III increases

B) I increases, II decreases, III decreases

C) I decreases, II increases, III increases

D) I decreases, II decreases, III decreases

E) None of these choices are correct.

4) Fernando Bank has interest expense of $150 million, earning assets of $1,400 million and a Net Interest Margin (NIM) of 5 percent. The bank also has interest-bearing liabilities of $1,100 million. Fernando Bank's spread is

A) 1.10 percent.

B) 1.65 percent.

C) 1.94 percent.

D) 2.08 percent.

E) 2.16 percent.

5) Oceanside Bank converts a dollar of equity into 10 cents of net income and has $9.50 in assets per dollar of equity capital. Oceanside also has a profit margin of 15 percent. What is Oceanside's Asset Utilisation      (AU) ratio?

A) 1.05 percent

B) 3.55 percent

C) 5.56 percent

D) 6.45 percent

E) 7.02 percent

6) The FDIC may require an undercapitalized bank to:

I. provide the FDIC with a capital restoration plan.

II. cease acquiring brokered deposits.

III. obtain FDIC approval for all acquisitions.

IV. suspend dividends and management fees.

V. suspend payments on subordinated debt.

A) I and II only

B) III only

C) I, II, III, and IV only

D) I, II, III, IV, and V

E) I, II, III, and V only

7) Tier I (core) capital includes at least some part of which of the following?

I. Common stockholders' equity

II. Retained earnings

III. Subordinated debt

IV. Allowance for loan and lease losses

A) I only

B) I and II only

C) I and IV only

D) II and III only

E) I, II, III, and IV

8) Tier II (supplementary) capital includes which of the following?

I. Allowance for loan and lease losses, up to 1.25 percent of risk-weighted assets

II. Subordinated debt with original maturity of at least 5 years

III. Common stock and retained earnings

IV. Nontransaction deposits

A) II and III only

B) I and IV only

C) I and II only

D) I, II and III only

E) I, III and IV only

9) As a result of the alleged conflicts of interest between analysts and underwriting, which of the following changes were implemented?

I. Analysts cannot participate in nor attend certain presentations to potential investors conducted by investment bankers associated with underwriting an issue.

II. Analyst compensation can no longer be tied to the amount of underwriting business a firm generates.

III. Securities firms must divest stock research divisions to ensure independence from their investment banking business.

A) I only

B)  I and II only

C) I and III only

D) II and III only

E) I, II, and III

10) When the investment banker sells the new securities on commission without guaranteeing the sale of the whole issue, the process is called:

A) Private placement

B) Best effort

C) Brokered sale

D) Underwriting

E) Syndicate offering

Section B

Answer five (5) only of the following six questions  [each question weight 16 marks]

Question 1 : Discuss the challenges nonbanks are posing to commercial banks .

[16 marks]

Question 2 : Discuss the benefits and costs of negative interest rates .

[16 marks]

Question 3 : Discuss the advantages and disadvantages of ETFs (Exchange Traded Funds).

[16 marks]

Question 4 : Calculate:

a.  the duration of a two-year bond that pays an annual coupon of 10 percent and whose current yield to maturity is 14 percent? Use $1,000 as the face value.

[10 marks]

b. the expected change in the price of the bond if interest rates are expected to decline by 0.5 percent?

[6 marks]

Question 5 : Assume that an open-end Fund A has 165 shares of a Corporation Y valued at $35 each and

50 shares of a Corporation Z valued at $45 each. Closed-end Fund B has 75 shares of Corporation Y and

120 shares of Corporation Z. Both funds have 1,000 shares outstanding.

a. What is the NAV of each fund using these prices?

[4 marks]

b. If the price of Corporation Y stock increases to $36.25 and the price of Corporation Z stock declines to $43.375, how does that impact the NAV of both funds?

[8 marks]

c. Assume that another 155 shares of Corporation Y valued at $35 are added to Fund A. The funds needed to buy the new shares are obtained by selling 676 more shares in Fund A. What is the effect on Fund A's    NAV if the prices remain unchanged from the original prices?

[4 marks]

Question 6 :

a. A Financial Institution (FI) is planning to give a loan of $5,000,000 to a firm in the steel industry. It           expects to charge an up-front fee of 0.10 percent and a service fee of 5 basis points. The loan has a           maturity of 8 years. The cost of funds (and the RAROC benchmark) for the FI is 10 percent. The FI has      estimated the risk premium on the steel manufacturing sector to be approximately 0.18 percent, based on  two years of historical data. The current market interest rate for loans in this sector is 10.1 percent. The      99th (extreme case) loss rate for borrowers of this type has historically run at 3 percent, and the dollar        proportion of loans of this type that cannot be recaptured on default has historically been 90 percent. Using the RAROC model, should the FI make the loan?

[10 marks]

b. A bank has two loans of equal size outstanding, A and B, and the bank has identified the returns they would earn in two different states of nature, 1 and 2, representing default and no default, respectively.

 

State 1

State 2

Security A

0.02

0.14

Security B

0.00

0.18

If the probability of state 1 is 0.2 and the probability of state 2 is 0.8, calculate (i) the expected return of each security, (ii) the expected return on the portfolio in each state, and (iii) the expected return on the portfolio.

[6 marks]