Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: THEend8_
ECN 226 Capital Markets 1
Midterm test
The midterm test will cover material from the first 4 weeks of your module. Particularly, the
required reading is:
- Chapter 1: The Investment Environment
- Chapter 14: Bond prices and yields
- Chapter 18: Equity Valuation Models
- Chapter 5: Risk, return and historical record (except for section 5.8 Normality and
Long-term Investments)
o Students are required to know ALL lecture notes and Problem Sets for these first four
weeks (material can be found in Aula and QM+).
Marking Criteria:
A 70-100 mark is awarded to the work, generally ‘outstanding’
- where all questions are addressed in a comprehensive way, showing an authoritative
grasp of the concepts involved in the questions.
- that selects and organises the material with consistent relevance.
- that explains in full definitions
- that presents the material in a good format with use of correct notations.
- high levels of ability in the analysis of quantitative and/or qualitative information; it
always demonstrates an understanding of numerical questions.
Students can use MS Excel for the calculations.
2
ECN 226 Capital Markets 1
Mid-term test
-MOCK TEST-
Duration 75 minutes
Students must attempt ALL Questions.
Type your answers on this document below each question under ‘Answer:’
Question 1
a) In no more than 100 words, explain the relationship between securitisation and the
role of financial intermediaries in the economy.
(15 marks)
Answer:
b) A firm's stock that must be held for 5 years is used to compensate managers. Explain,
in no more than 100 words, the advantages and disadvantages of this form of
managerial compensation in terms of mitigating agency problems, that is, potential
conflicts of interest between managers and shareholders.
(10 marks)
Answer:
(Total marks: 25 marks)
Question 2
a) In no more than 100 words, explain why bond prices go down when interest rates go
up.
(10 marks)
Answer:
b) A 20-year maturity 9% coupon bond paying coupons semiannually is callable in five
years at a call price of $1,050. Its par value is $1,000 and the bond currently sells at a
yield to maturity of 8%. What is the yield to call?
(15 marks)
Answer:
(Total marks: 25 marks)
3
Question 3
a) In no more than 100 words, explain how the relationship between a stock’s current
price and its intrinsic value determines the relationship between its market
capitalisation rate and its expected rate of return.
(15 marks)
Answer:
b) A company is expected to pay a dividend in year 1 of $1.70, a dividend in year 2 of
$1.77, and a dividend in year 3 of $1.87. After year 3, dividends are expected to grow
at the rate of 4% per year. An appropriate required return for the stock is 7%. How
much is the stock worth today?
(10 marks)
Answer:
(Total marks: 25 marks)
Question 4
a) Comment, in no more than 100 words, on the following statement. "It makes sense to
borrow during times of high inflation because you can repay the loan in cheaper
money."
(10 marks)
Answer:
b) Explain, in no more than 100 words, the effect of the following scenario on the level of
real interest rates: Businesses become more pessimistic about the future demand for
their products and decide to reduce their capital spending.
(8 marks)
Answer:
c) Suppose that the monthly rate of return on your portfolio is normally distributed with a
mean of 7% and standard deviation of 10%. What is the probability that the return on
your portfolio will be negative?
(7 marks)
Answer: