Page 1

Financial Institutions Quiz # 1

Registration # __________________________________________

Instructions:

This exam consists of 4 pages. Be sure you have all pages. No extra paper is permitted at this exam. Use a pen and show

all computations and work on the exam pages if you want to earn maximum grades. Use of cell phones, programmable

calculators, or sharing calculators is not allowed. Be aware that cheating on any part of this exam will result in an

automatic “F” for the entire course. You have forty minutes to complete this exam. Budget your time wisely!

This exam consists of the following:

Topic I. Multiple Choice (10 questions at 1 mark each)

II Money

III. Interest and Time Value of Money

IV. Cash flows and conceptual problems

MCQs / 10 Questions / 20 Total = / 30

Zaheer A. Swati

Page 2 I. Multiple Choice Questions (MCQs): (10 Marks)

Instructions: Select the best answer for each multiple choice questions. Carefully encircle the most suitable answer.

1. Which of these is not a function of money in an economy?

(a) Source of income (b) Unit of account (c) Store of value (d) Medium of exchange

2. If an investor were to sell 100 shares of Microsoft stock to another investor in the securities market, this would be

referred to as what type of transaction?

(a) It is primary market transaction (b) A secondary market transaction

(c) A money market transaction (d) A futures market transaction

3. The liquidity of an asset is?

(a) The ability of an asset to earn interest income

(b) The relative ease with which an asset can be converted into a common stock

(c) The relative ease with which an asset can be converted into a medium of exchange

(d) The amount of an asset sold at discount or premium

4. The function of money in an economy is to serve as

(a) A medium of exchange (b) A unit of account

(c) A store of value (d) All of the responses are correct

5. As a borrower, you should prefer the bank that ____________________ compound per year?

(a) Less times (b) More times (c) Interest (d) None of the above

6. Money is?

(a) The value of all coins and currency in circulation at any time (b) The same as income

(c) Anything that is generally accepted as a medium of exchange (d) all of the above

7. An item designated as money that is intrinsically worthless is? (a) Barter items (b) fiat money (c) Precious metals (d) Commodity money

8. If Rs. 1,000 were invested now at a 12% interest rate compounded annually, what would be the value of the

investment in two years?

(a) Rs. 1,188 (b) Rs. 1,210 (c) Rs. 1,254 (d) Rs. 1,160

9. Which of the following is included in broad money, but not included in narrow money? (a) Savings accounts (b) Traveler’s checks

(c) Demand deposits (d) Currency held outside banks

10. Which of the following statements is most correct?

(a) If annual compounding is used, the effective annual rate equals the nominal rate

(b) If annual compounding is used, the effective annual rate equals the periodic rate

(c) If a loan has a 12 % nominal rate with semi-annual compounding, its effective annual rate is equal to 11.66 %

(d) Statements a and b are correct

Page 3 II. For each of the following, compute the present value if discount rate is 14 percent? (8 Marks)

Cash flows 1 2 3 4 5 Total

W 100 200 300 400 500 1,500

X 600 ----- 400 200 300 1,500

Y ----- ----- 1,200 ---- 300 1,500

Z 500 ----- 400 600 ---- 1,500

Solution:

Cash flows 1 2 3 4 5 Total

W 87.72 153.89 202.49 236.83 259.68 940.61

X 526.32 ----- 269.99 118.42 155.81 1,070.54

Y ----- ----- 809.97 ---- 155.81 965.78

Z 438.60 ----- 269.99 355.25 ---- 1,063.84

III. You need to decide how much money to invest each month in order to have Rs. 5,000 in 6 years time. You will be

investing at an interest rate of 7.2%, compounded monthly. What should your monthly payments be? (3 Marks)

Solution: CCF = 5,000

[ 12/072.0)12/072.01(

1112*6

]

Answer: Rs. 85.73

Page 4 IV: You have just joined the investment banking firm. They have offered you two different salary arrangements. You can

have Rs. 50,000 per year for the next 3 years or Rs. 35,000 per year for the next 3 years, along with a Rs. 50,000 bonus

today. If the market interest rate is 16%, which salary arrangement do you prefer? (4 Marks)

Solution:

50,000 [ 16.0)16.01(

113

] = Rs. 112,294.48

35,000 [ 16.03)16.01(

11

] =78,606.13 + 50,000 = 128,606.14

Answer: Option B

V: From January, 1998, every three months, Miss Sana deposits Rs. 500.00 in her bank account, which earns 4 percent

annually but is compounded quarterly. On December 31, 2001, she used the entire balance in her bank account to invest

in a contract that pays 9% annually. How much will she have on December 31, 2004? (5 Marks)

Solution: 500 [ 4/04.01)4/04.01( 4*4 ] = 8,628.93

8,628.93 (1 + 0.09) 3

Answer: Rs. 11,174.71