FIN221 : Midterm Revision Exam

[CH1] Maturity intermediation means that financial institutions align short-term deposits with long-term loans, ensuring liquidity while meeting long-term funding needs.

[CH1] Finance companies, such as Bahrain Credit, rely mainly on cash deposits from the public to fund the loans they make to individuals and businesses.

[CH1] In the secondary market, the issuing company receives the money every time its shares are sold from one investor to another.

[CH1] Credit risk is the inability of a financial institution to sell its assets at a fair price to obtain sufficient funding.

[CH2] From the demander of funds' (borrower's) point of view, an increase in the interest rate makes them better off, so they are willing to borrow more.

[CH2] If the money supply increases, the supply curve of loanable funds shifts to the right, causing the interest rate to decrease and the quantity of loanable funds to increase.

[CH2] A Treasury bill does not include a Default Risk Premium (DRP) in its interest rate because it is considered risk free.

[CH2] The Liquidity Premium Theory assumes that investors generally prefer longer-term securities, so short-term securities must offer a premium to attract them.

[CH2] In general, households (individuals) tend to be demanders of loanable funds, while corporations tend to be suppliers.

[CH5] In business-format franchising, the franchisee purchases the franchisor's entire way of doing business, as is common in quick-service restaurants.

[CH5] The royalty fee is the one-time amount a person pays to become a franchisee, while the franchise fee is the ongoing payment made to the franchisor.

[CH5] Franchising allows the franchisor to expand with a smaller capital investment because it does not have to borrow from lenders or attract outside investors.

[CH5] Poor performance of other franchisees is a disadvantage to a franchisee, because customers treated badly at one location may expect the same treatment elsewhere.

[CH6] Interest on municipal bonds is exempt from federal taxes, so investors are willing to accept a lower rate compared to taxable bonds.

[CH6] For Treasury Inflation Protection Securities (TIPS), the coupon rate is adjusted according to the inflation rate while the principal stays fixed.

[CH1] Which function of financial institutions involves breaking down large investments into smaller units so that financial products become accessible to a wider range of investors?

[CH1] A Bahraini company sells its shares to the public for the first time through an underwriter in an IPO. In which market does this transaction take place?

[CH1] An investor buys a six-month certificate of deposit (CD) with little risk of capital loss and a low return. This instrument is traded in the:

[CH1] A bank's online system is hit by a cyberattack that causes a data breach of customer records. Which risk has the bank experienced?

[CH1] Employees and their employer pay money every month into a fund that is invested to provide the employees with income after they retire. This institution is a:

[CH1] Which financial institutions underwrite securities and engage in related activities such as securities brokerage, securities trading, and making a market in which securities can trade?

[CH2] A savings account offers a nominal interest rate of 7% while inflation is 4.5%. Using the Fisher equation from the notes, what is the realized (real) return?

[CH2] A corporate bond has: RFR = 2.5%, IP = 2%, DRP = 1.5%, LRP = 0.75%, SCP = 0.25%, MP = 1%. What is its interest rate (i)?

[CH2] A security's equilibrium rate is 9%. RFR = 3%, IP = 2.5%, LRP = 0.5%, SCP = 0%, MP = 1.2%. What is its Default Risk Premium (DRP)?

[CH2] The current 1-year rate is 5% and the expected 1-year rate next year, E(2r1), is 7%. According to the Unbiased Expectations Theory, what is the current 2-year rate (rounded)?

[CH2] The 1-year rate (1R1) is 4%, the expected 1-year rate next year, E(2r1), is 6%, and the liquidity premium for year 2 (L2) is 0.5%. Using the Liquidity Premium Theory (geometric method), what is the 2-year rate, 1R2?

[CH2] The central bank lowers interest rates. According to the notes, which outcome is expected?

[CH2] Banks make their loan contracts more restrictive (stricter nonprice conditions). What happens in the market for loanable funds?

[CH2] An investor demands an extra return for holding a corporate bond that is rarely traded and hard to sell quickly without a loss. This extra return is the:

[CH5] Which of the following is the best example of product distribution franchising?

[CH5] A franchisor earns an initial franchise fee, a percentage of each outlet's monthly revenue, and income from selling supplies to its franchisees. Which advantage to the franchisor does this illustrate?

[CH5] Sara's franchise outlet loses customers after a social media story reports rude treatment at another branch of the same franchise. Which disadvantage to the franchisee does this illustrate?

[CH5] Which element of the franchise agreement states the geographic size of the territory and the franchisee's exclusive rights within it?

[CH5] A franchisor and several franchisees argue over fee increases, new branch openings near existing outlets, and required opening hours. Which disadvantage to the franchisor is this?

[CH6] A 3-year bond has a face value of $1,000 and a 6% coupon paid annually. The current market rate is 8%. What is the price of the bond?

[CH6] An investor is pricing a bond that matures in 2 years, pays an 8% annual coupon in two semi-annual instalments, and has a $1,000 par value. If the market yield is 6%, the bond's price is closest to:

[CH6] A bond has a face value of $1,000 and a 7% coupon rate paid semi-annually. How much coupon does the investor receive each period?

[CH6] A U.S. government debt security with a 7-year maturity that pays coupons semi-annually is classified as a:

[CH6] According to the notes, why do corporations pay higher interest on their bonds than governments do?

[CH6] The price of a bond is the present value of its promised future cash flows, discounted at the:

[CH1] List and explain five key functions provided by financial institutions.

[CH1] Define risk and explain four types of risk faced by financial institutions. Then explain what Enterprise Risk Management (ERM) is.

[CH2] Explain the determinants of the interest rate on an individual security using the equation i = RFR + IP + DRP + LRP + SCP + MP. Define each component.

[CH2] Compare the Unbiased Expectations Theory and the Liquidity Premium Theory of the term structure of interest rates.

[CH5] List and discuss five advantages of franchising to the franchisee.

[CH5] Explain the steps a prospective franchisee should follow to evaluate a potential franchise opportunity.

[CH6] Define a bond and explain its main characteristics, including why governments and corporations issue bonds.

[CH6] Compare U.S. Treasury notes and bonds, municipal bonds, Treasury Inflation Protection Securities (TIPS), and corporate bonds.

[CH5] Identify the type of franchising system Layla has entered and justify your answer using details from the case.

[CH5] Using the case, explain two disadvantages Layla faces as a franchisee, and name the two types of fees she pays to the franchisor.

[CH2] Is Layla's bank loan a fixed or a floating interest rate loan? Explain what will happen to her loan payments and to borrowing in the economy if the Central Bank of Bahrain raises interest rates.

[CH6] Calculate the price of one GML bond at issue, and state whether it sells at a discount or a premium to its face value.

[CH1] In which capital market is GML's bond issue sold, and what market will Fatima use if she sells her bonds after a year? Explain the role of the investment bank and whether GML receives money in each case.

[CH2] Using the determinants of interest rates for individual securities, explain why GML's bonds must offer a higher yield (9%) than government bonds of similar maturity.