What are the three main factors that led to the eventual demise of the fixed currency exchange rate regime worked out at Bretton Woods? Further, describe any similarities or differences with the current conditions within the Euro zone.

Suppose that the local market has four banks having the deposits shown below. Compute Herfindahl-Hirschman Index (HHI). How would the market be labeled according to the Justice Department Guidelines? Would bank A get approval for a merger with bank C?

Given the original price of a 20-year bond with a par of 1,000 and a 8.0% coupon rate that is paid half-yearly is 923. If the yield of the bond rises 1% from the original, what is the impact on the price of the bond?

Describe a non-deliverable forward and provide a business scenario for its use.

Describe a foreign currency call option contract and describe a scenario for when a corporation might want to use a foreign currency call option contracts.

Mergers and Acquisition in Banking

1. What is a merger?

2. What are the regulatory rules for bank mergers in the U.S?

3. What is the Herfindahl-Hirschman Index (HHI)?

4. What is merger trends and motives behind mergers?

Dutch Disease is a term applied to a problem in the 1970’s whereby the Netherlands were experiencing massive and sudden inflows of capital from abroad. What was the cause of this sudden influx of capital, and what types of potential problems did it have for the Dutch or could it have for any small single resource country? Give an example of a small, single resource country.

 ​(Yield to​ maturity)  Abner​ Corporation's bonds mature in

18

years and pay

9

percent interest annually. If you purchase the bonds for

​$825​,

what is your yield to​ maturity?

Your yield to maturity on the Abner bonds is

nothing​%.

​(Round to two decimal​ places.)

Which of the following best describes a debenture? (Published CFP question, 1996)

a, A corporate debt obligation that allows the holder to repurchase the security at specified dates before maturity

b, Unsecured corporate debt

c, A long-term corporate promissory note

d. An investment in the debt of another corporate party

Bank Capital

1. What is bank capital and why is it important?

2. Describe Basel I

3. Describe Basel II

4. Describe Basel III. What is the capital conservation buffer? Countercyclical Buffer?

During the past years, ABG had limited its investment plans due to high cost of capital. Recently, however, the cost of capital seems to have fallen, and the management of the company is seriously considering the implementation of two major investment plans. Assume that you are the assistant of the ABG's financial director, who has assigned you to calculate the company's cost of capital. Your financial manager has provided the following information:

1. The corporate tax rate is 20%.

2. The company has issued a total of 11,000 non-callable bond with 3% annual nominal interest rate, the coupon of which is paid to the bond holders every six months. These bonds expire after 5 years, have a par value of €1,000 and are currently being traded at €1,030.40.

3. The current price of ABG's preferred stock on the stock market is €3.4 and the company has issued a total of 834,000 shares. The preferences share has a par value of €1 and a 20% dividend yield upon the par value, distributed to the stockholders twice a year. In case of issuance of new preferred share capital, the issue and disposal costs will be €0.30 per share.

4. The current market price of ABG's common stock on the stock market is €3.7 and the company has issued 3,835,000 shares. ABG's most recent dividend (Do) was €0.22 per share and dividends are expected to grow at a steady 2% annual rate for the foreseeable future. The beta coefficient of ABG is 1.4, the long-term government bond offer investors a yield of 2%, and the Expected Return of the Market is estimated to be 6%.

To help you with your task, the Financial Manager of the company has asked you to answer the following questions:

a. What is the (pre-tax) cost of the ABG bond loan and what is the final, after tax, cost of the loan capital to be included in the estimation of ABG’s weighted average cost of capital?

b. What is the cost of the company's preferred share capital?

c. What is the cost of ABG's common equity capital using the Capital Asset Pricing (CAPM) model?

d. What is the cost of ABG's common equity capital, using the dividend discount model?

e. What is ABG's Weighted Average Cost of Capital (WACC)? (Assume that the cost of equity capital is the average value of the two methods of c and d)Explain whether the dividend policy of a company affects its value, by describing the various theories that have been put forward in the literature. Provide for each theory at least two references from published papers in scientific journals (approximately 1,000 words).

Valuing Callable Bonds
Williams Industries has decided to borrow money by issuing perpetual bonds with a coupon rate of 6.5 percent, payable annually, and a par value of $1,000. The 1-year interest rate is 6.5 percent. Next year, there is a 35 percent probability that interest rates will increase to 8 percent and a 65 percent probability that they will fall to 5 percent.

a. What will the market value of these bonds be if they are noncallable?
b. If the company decides instead to make the bonds callable in one year, what coupon will be demanded by the bondholders for the bonds to sell at par? Assume that the bonds will be called if interest rates fall and that the call premium is equal to the annual coupon.
c. What will be the value of the call provision to the company?

(Do not round your intermediate calculations.)

Question 5 (25 marks / Risk, Return and CAPM)
(Each of the following parts is independent.)
(a) According to the Capital Asset Pricing theory, what return would be required by an investor whose portfolio is made up of 40% of the market portfolio (m) and 60% of Treasury bills (i.e. risk-free asset)? Assume the risk-free rate is 3% and the market risk premium is 7%?  

(b) You are considering investing in the following two stocks. The risk-free rate is 7 percent and the market risk premium is 8 percent.

Stock ,Price Today , Expected Price in 1 year, Expected Dividend in 1 year, Beta
X $20 $22 $2.00 1.0
Y $30 $32 $1.78 0.9

i) Compute the expected and required return (using CAPM) on each stock.   
ii) Which asset is worth investing? Support your answer with calculations.     

(c) Which pair of stocks used to form a 2-asset portfolio would have the greatest diversification effect for the portfolio? Briefly explain.
                   
                            Correlation
Stocks A & B            -0.66
Stocks A & C            -0.42
Stocks A & D                0
Stocks A & E               0.75
         
(d) Explain the terms systematic risk and unsystematic risk and their importance in determining investment return.          

1. According to the Capital Asset Pricing theory, what return would be required by an investor whose portfolio is made up of 40% of the market portfolio (m) and 60% of Treasury bills (i.e. risk-free asset)? Assume the risk-free rate is 3% and the market risk premium is 7%?                                                                                          

2. You are considering investing in the following two stocks. The risk-free rate is 7 percent and the market risk premium is 8 percent.

1. Compute the expected and required return (using CAPM) on each stock.   
2. Which asset is worth investing? Support your answer with calculations.    

3. Which pair of stocks used to form a 2-asset portfolio would have the greatest diversification effect for the portfolio? Briefly explain.

(d)   Explain the terms systematic risk and unsystematic risk and their importance in determining    investment return.