金融英语考试模拟试题及答案(08)
SECTION 3
Explanations of terms：(10 points)
1. Security market line: Derived from the capital asset pricing model, a linear relationship between the expected returns on securities and the risk of those securities, with risk expressed as the security’s ft (or equivalently, the security’s covariance with the market portfolio).
2. Negotiable certificates of deposit: Bank-issued time deposit that specifies an interest rate and maturity date and is negotiable (saleable on a secondary market).
3. Risk premium: The difference between the yield on a financial instrument and the yield on a default-risk-free instrument of comparable maturity. It measures the additional yield a saver requires to be willing to hold a risky instrument.
4. Financial leasing: Financial leasing is a contract in which the service provided by the lessor to the lessee is limited to financing equipment.
5. Asset Price Volatility: Not all financial instability is associated with the fragility of institutions. Instability in markets, i. e., unjustified or excessive volatility of financial asset prices, can be a matter of just as much concern. This is not only because asset price volatility can be associated with problems for the institutions that are active in the markets concerned, but because changes in financial asset prices have direct effects on private sector spending. These effects occur as a result of changes in the private sector’s stock of wealth, because of the effect of changes in the rate of return on incentives to save and invest, and sometimes because of implications for business and consumer confidence more generally.
SECTION 4
Question1：
Answer:
This theory of the term structure suggests that the market for funds is segmented between those who supply funds and those demanding funds at each different maturity. The interest rate for each kind of securities with a different maturity is then determined by the supply of and demand for that kind of securities with no effects from expected returns on other securities with different maturities. According to this theory, both lenders and borrowers of funds have strong preference for particular maturities.
Question2：
Answer:
Comparisons of reserve holdings across countries and over time need to be scaled to reflect countries’ characteristics and changes therein over time. Based on the foregoing discussion of the main factors that influence a country’s level of reserve holdings, three scaling methods are considered.
●Months of imports. This ratio represents the number of months for which a country can support its current level of imports if all other inflows and outflows stop.
●Short-term external debt based on remaining maturity. This ratio is an indicator of the likelihood and depth of a financial crisis, as it reflects the country’s ability to service external debt falling due in the coming year if external financing conditions deteriorated sharply.
●Broad money. Like the ratio to short-term external debt, this ratio is an indicator of reserve adequacy in the event of a financial crisis, as it reflects the potential for resident-based capital flight from the domestic currency.
These three reserve ratios are calculated for the standard set of selected emerging market economies (data limitations preclude calculations for all emerging market countries).
Reserve ratios in emerging market countries have generally increased over the past decade. Since the mid-1990s, the ratios of reserves to short-term debt and reserves to imports has increased most sharply for emerging economies in Asia, while the ratio of reserves to broad money has risen quickly for emerging market countries outside Asia and Latin America. This divergence is not surprising, given that the data for Asia are dominated by China, which is less financially developed and therefore a country in which high savings are typically channeled into bank deposits. The main exception to the general increase in reserves is Latin America, where the ratio of reserves to imports declined during the second half of the 1990s but that decline has partly reversed in 2002. Within emerging economies in Asia, both economies with limited exchange rate flexibility and those with managed floating exchange rates experienced large increases in reserves.
Question3：
Answer:
The investments officer of a bank or other financial institutions must consider several factors when deciding which investment securities to buy, sell, or hold.
1. Expected Rate of Return
The investments officer must determine the total rate of return that can reasonably expected from each security, including the interest payments promised by the issuer of that security and possible capital gains of losses. For most investments, this requires the investment manager to calculate the yield to maturity (YTM) if a security is to be held to maturity or the planned holding period yield (HPY) between point of purchase and point of sale.
2. Tax Exposure
Interest and capital gains income from investments held by U. S. banks are taxed as ordinary income for tax purposes, just as the wages and salaries earned by most U. S. citizens. Because of their relatively high tax exposure, banks are more interested in the after-tax rate of return on loans and securities than in their before-tax return. This situation contrasts with such institutions as credit unions and mutual funds, which are generally tax-exempt.
3. Interest Rate Risk
Changing interest rates create real risk for investments officers and their institutions. Rising interest rates lower the market value of previously issued bonds and notes, with the longest-term security issues generally suffering the greatest losses.
4. Credit or Default Risk
The security investments made by banks and by their closest competitors are closely regulated due to the credit risk displayed by many securities, especially those issued by private corporations and some local governments.
5. Business Risk
Banks and other financial institutions of all sizes face significant risk that the economy of the market area they serve may turn down, with falling business sales and rising bankruptcies and unemployment.
6. Liquidity Risk
Banks and competing financial institutions must be ever mindful of the possibility they will be required to sell investment securities in advance of their maturity due to liquidity needs and be subjected to liquidity risk. Thus, a key issue that a portfolio manager must face in selecting a security for investment purposes is the breadth and depth of its resale market.
7. Call Risk
Many corporations and some governments that issue investment securities reserve the right to call in those instruments in advance of their maturity and pay them off. Because such calls usually take place when market interest rates have declined (and the borrower can issue new securities bearing lower interest costs) , the financial firm investing in callable bonds and notes runs the risk of an earnings loss because it must reinvest its recovered funds at today’s lower interest rates.
8. Prepayment Risk
A form of risk specific to certain kinds of investment securities—especially asset-backed securities—that financial firms buy for their investment portfolios is known as prepayment risk. This form of risk arises because the realized interest and principal payments (cash flow) from a pool of securitized loans, such as GNMA or FIN MA pass-throughs, collateralized mortgage obligations (CMOs ) , or securitized packages of auto or credit card loans, may be quite different from the payments (cash flow) expected originally.
9. Inflation Risk
While there is less of a problem today than in some earlier periods, banks and other investing institutions must be alert to the possibility that the purchasing power of both the interest income and repaid principal from a security or loan will be eroded by rising prices for goods and services. Inflation can also erode the value of the stockholders’ investment in a bank or other institution—its net worth. Some protection against inflation risk is provided by short-term securities and those with variable interest rates, which usually grant the investments officer greater flexibility in responding to any flare-up under inflationary pressures.
10. Pledging Requirements
Depository institutions in the United States cannot accept deposits from federal, state, and local governments unless they post collateral acceptable to these governmental units in order to safeguard the deposit of public funds. Sometimes the government owning the deposit requires that the pledged securities be placed with a trustee not affiliated with the institution receiving the deposit. If a bank or another financial institution uses repurchase agreements (RPs) to raise money, it must pledge come of its securities (usually U. S. Treasury and federal agency issues) as collateral in order to receive funds at the low RP interest rate.
Question4：
Answer:
(1) During the last decade, a new branch of financial economic theories has been developed, which is referred to as Behavioral Finance Theory. The theory is focused on the analysis of various psychological traits of individuals and how these traits affect the ways by which they act as investors, analysts, and portfolio managers. As noted by Olsen, behavioral finance recognizes that the standard finance model of rational behavior and profit maximization can be true within specific boundaries, but advocates of behavioral finance assert that this model is incomplete since it does not consider individual behavior. In detail, behavioral finance seeks to understand and predict systematic financial market implications of psychological decision processes. Behavioral finance is focused on the implication of psychological and economic principles for the improvement of financial decision making.
(2)While it is accepted that currently there is no unified theory of behavioral finance, the emphasis has been on identifying portfolio anomalies that can be explained by various psychological traits in individuals or groups or rare instances where it is possible to experience above-normal rates of return by exploiting the biases of analysts or portfolio managers.
(3)Recently, it has been noted that investors have a lot of biases that negatively affect their investment performance. Advocates of behavioral finance have been able to explain a lot of these biases based on psychological characteristics. A major documented bias is the propensity of investors to hold on to losing positions too long and sell "winners" to soon. The point is, investors fear losses much more than they value gains.
(4)Another bias is overconfidence in forecasts, which causes analysts to overestimate growth rates for growth companies. In addition, they overemphasize good news for firms evaluated and ignore negative news items—that is, they generally believe that the stocks of the growth companies will be "good" stocks. This is referred to as "confirmation bias", where investors look for information that supports their prior opinion and decision. As a result, they tend to disvalue the stocks.
A study by Brown examined the effect of "noise traders" (nonprofessionals with no special information) on the volatility of closed-end mutual funds. When there is a shift in sentiment, these traders move heavily, that increases the prices and the volatility of these securities during trading hours. It is certified that the noise traders tend to follow newsletter writers, who in turn tend to "follow the herd"; and these writers and "the herd" are almost always wrong, which contributes to excess volatility. The difficult psychological factor is to seriously look for the bad news and consider the effects of that negative information on your prior valuation.
SECTION 5
Caculation
ANSWERS:
The absorption approach starts with the idea that the value of total domestic output (Y) equals the level of total spending. Total spending consists of consumption ( C), investment(I), government expenditures ( G), and net exports (X - M). This can be written as
Y = C + I + G + (X-M)
The absorption approach then consolidates C +1 + G into a single term, which is referred to as absorption, and designates net exports (X - M) as B. Total
domestic output thus equals the sum of absorption plus net exports, or
Y = A +B
This can be rewritten as
B = Y -A
This expression suggests that the balance of trade (B) equals the difference between total domestic output (Y) and the level of absorption (A ). If national output exceeds domestic absorption, the economy’s trade balance will be positive. Conversely, a negative trade balance suggests that an economy is spending beyond its ability to produce.
SO the result is :
Y=100+80+50+60=290
A=100+80+50=230
SECTION 6
Close:
(1) Interest Rates fall
(2) Net capital outflows
(3) Trade account worsens
(4) Increase in government spending
(5) Money demand rises
(6) Trade account worsens
Explanations of terms：(10 points)
1. Security market line: Derived from the capital asset pricing model, a linear relationship between the expected returns on securities and the risk of those securities, with risk expressed as the security’s ft (or equivalently, the security’s covariance with the market portfolio).
2. Negotiable certificates of deposit: Bank-issued time deposit that specifies an interest rate and maturity date and is negotiable (saleable on a secondary market).
3. Risk premium: The difference between the yield on a financial instrument and the yield on a default-risk-free instrument of comparable maturity. It measures the additional yield a saver requires to be willing to hold a risky instrument.
4. Financial leasing: Financial leasing is a contract in which the service provided by the lessor to the lessee is limited to financing equipment.
5. Asset Price Volatility: Not all financial instability is associated with the fragility of institutions. Instability in markets, i. e., unjustified or excessive volatility of financial asset prices, can be a matter of just as much concern. This is not only because asset price volatility can be associated with problems for the institutions that are active in the markets concerned, but because changes in financial asset prices have direct effects on private sector spending. These effects occur as a result of changes in the private sector’s stock of wealth, because of the effect of changes in the rate of return on incentives to save and invest, and sometimes because of implications for business and consumer confidence more generally.
SECTION 4
Question1：
Answer:
This theory of the term structure suggests that the market for funds is segmented between those who supply funds and those demanding funds at each different maturity. The interest rate for each kind of securities with a different maturity is then determined by the supply of and demand for that kind of securities with no effects from expected returns on other securities with different maturities. According to this theory, both lenders and borrowers of funds have strong preference for particular maturities.
Question2：
Answer:
Comparisons of reserve holdings across countries and over time need to be scaled to reflect countries’ characteristics and changes therein over time. Based on the foregoing discussion of the main factors that influence a country’s level of reserve holdings, three scaling methods are considered.
●Months of imports. This ratio represents the number of months for which a country can support its current level of imports if all other inflows and outflows stop.
●Short-term external debt based on remaining maturity. This ratio is an indicator of the likelihood and depth of a financial crisis, as it reflects the country’s ability to service external debt falling due in the coming year if external financing conditions deteriorated sharply.
●Broad money. Like the ratio to short-term external debt, this ratio is an indicator of reserve adequacy in the event of a financial crisis, as it reflects the potential for resident-based capital flight from the domestic currency.
These three reserve ratios are calculated for the standard set of selected emerging market economies (data limitations preclude calculations for all emerging market countries).
Reserve ratios in emerging market countries have generally increased over the past decade. Since the mid-1990s, the ratios of reserves to short-term debt and reserves to imports has increased most sharply for emerging economies in Asia, while the ratio of reserves to broad money has risen quickly for emerging market countries outside Asia and Latin America. This divergence is not surprising, given that the data for Asia are dominated by China, which is less financially developed and therefore a country in which high savings are typically channeled into bank deposits. The main exception to the general increase in reserves is Latin America, where the ratio of reserves to imports declined during the second half of the 1990s but that decline has partly reversed in 2002. Within emerging economies in Asia, both economies with limited exchange rate flexibility and those with managed floating exchange rates experienced large increases in reserves.
Question3：
Answer:
The investments officer of a bank or other financial institutions must consider several factors when deciding which investment securities to buy, sell, or hold.
1. Expected Rate of Return
The investments officer must determine the total rate of return that can reasonably expected from each security, including the interest payments promised by the issuer of that security and possible capital gains of losses. For most investments, this requires the investment manager to calculate the yield to maturity (YTM) if a security is to be held to maturity or the planned holding period yield (HPY) between point of purchase and point of sale.
2. Tax Exposure
Interest and capital gains income from investments held by U. S. banks are taxed as ordinary income for tax purposes, just as the wages and salaries earned by most U. S. citizens. Because of their relatively high tax exposure, banks are more interested in the after-tax rate of return on loans and securities than in their before-tax return. This situation contrasts with such institutions as credit unions and mutual funds, which are generally tax-exempt.
3. Interest Rate Risk
Changing interest rates create real risk for investments officers and their institutions. Rising interest rates lower the market value of previously issued bonds and notes, with the longest-term security issues generally suffering the greatest losses.
4. Credit or Default Risk
The security investments made by banks and by their closest competitors are closely regulated due to the credit risk displayed by many securities, especially those issued by private corporations and some local governments.
5. Business Risk
Banks and other financial institutions of all sizes face significant risk that the economy of the market area they serve may turn down, with falling business sales and rising bankruptcies and unemployment.
6. Liquidity Risk
Banks and competing financial institutions must be ever mindful of the possibility they will be required to sell investment securities in advance of their maturity due to liquidity needs and be subjected to liquidity risk. Thus, a key issue that a portfolio manager must face in selecting a security for investment purposes is the breadth and depth of its resale market.
7. Call Risk
Many corporations and some governments that issue investment securities reserve the right to call in those instruments in advance of their maturity and pay them off. Because such calls usually take place when market interest rates have declined (and the borrower can issue new securities bearing lower interest costs) , the financial firm investing in callable bonds and notes runs the risk of an earnings loss because it must reinvest its recovered funds at today’s lower interest rates.
8. Prepayment Risk
A form of risk specific to certain kinds of investment securities—especially asset-backed securities—that financial firms buy for their investment portfolios is known as prepayment risk. This form of risk arises because the realized interest and principal payments (cash flow) from a pool of securitized loans, such as GNMA or FIN MA pass-throughs, collateralized mortgage obligations (CMOs ) , or securitized packages of auto or credit card loans, may be quite different from the payments (cash flow) expected originally.
9. Inflation Risk
While there is less of a problem today than in some earlier periods, banks and other investing institutions must be alert to the possibility that the purchasing power of both the interest income and repaid principal from a security or loan will be eroded by rising prices for goods and services. Inflation can also erode the value of the stockholders’ investment in a bank or other institution—its net worth. Some protection against inflation risk is provided by short-term securities and those with variable interest rates, which usually grant the investments officer greater flexibility in responding to any flare-up under inflationary pressures.
10. Pledging Requirements
Depository institutions in the United States cannot accept deposits from federal, state, and local governments unless they post collateral acceptable to these governmental units in order to safeguard the deposit of public funds. Sometimes the government owning the deposit requires that the pledged securities be placed with a trustee not affiliated with the institution receiving the deposit. If a bank or another financial institution uses repurchase agreements (RPs) to raise money, it must pledge come of its securities (usually U. S. Treasury and federal agency issues) as collateral in order to receive funds at the low RP interest rate.
Question4：
Answer:
(1) During the last decade, a new branch of financial economic theories has been developed, which is referred to as Behavioral Finance Theory. The theory is focused on the analysis of various psychological traits of individuals and how these traits affect the ways by which they act as investors, analysts, and portfolio managers. As noted by Olsen, behavioral finance recognizes that the standard finance model of rational behavior and profit maximization can be true within specific boundaries, but advocates of behavioral finance assert that this model is incomplete since it does not consider individual behavior. In detail, behavioral finance seeks to understand and predict systematic financial market implications of psychological decision processes. Behavioral finance is focused on the implication of psychological and economic principles for the improvement of financial decision making.
(2)While it is accepted that currently there is no unified theory of behavioral finance, the emphasis has been on identifying portfolio anomalies that can be explained by various psychological traits in individuals or groups or rare instances where it is possible to experience above-normal rates of return by exploiting the biases of analysts or portfolio managers.
(3)Recently, it has been noted that investors have a lot of biases that negatively affect their investment performance. Advocates of behavioral finance have been able to explain a lot of these biases based on psychological characteristics. A major documented bias is the propensity of investors to hold on to losing positions too long and sell "winners" to soon. The point is, investors fear losses much more than they value gains.
(4)Another bias is overconfidence in forecasts, which causes analysts to overestimate growth rates for growth companies. In addition, they overemphasize good news for firms evaluated and ignore negative news items—that is, they generally believe that the stocks of the growth companies will be "good" stocks. This is referred to as "confirmation bias", where investors look for information that supports their prior opinion and decision. As a result, they tend to disvalue the stocks.
A study by Brown examined the effect of "noise traders" (nonprofessionals with no special information) on the volatility of closed-end mutual funds. When there is a shift in sentiment, these traders move heavily, that increases the prices and the volatility of these securities during trading hours. It is certified that the noise traders tend to follow newsletter writers, who in turn tend to "follow the herd"; and these writers and "the herd" are almost always wrong, which contributes to excess volatility. The difficult psychological factor is to seriously look for the bad news and consider the effects of that negative information on your prior valuation.
SECTION 5
Caculation
ANSWERS:
The absorption approach starts with the idea that the value of total domestic output (Y) equals the level of total spending. Total spending consists of consumption ( C), investment(I), government expenditures ( G), and net exports (X - M). This can be written as
Y = C + I + G + (X-M)
The absorption approach then consolidates C +1 + G into a single term, which is referred to as absorption, and designates net exports (X - M) as B. Total
domestic output thus equals the sum of absorption plus net exports, or
Y = A +B
This can be rewritten as
B = Y -A
This expression suggests that the balance of trade (B) equals the difference between total domestic output (Y) and the level of absorption (A ). If national output exceeds domestic absorption, the economy’s trade balance will be positive. Conversely, a negative trade balance suggests that an economy is spending beyond its ability to produce.
SO the result is :
Y=100+80+50+60=290
A=100+80+50=230
SECTION 6
Close:
(1) Interest Rates fall
(2) Net capital outflows
(3) Trade account worsens
(4) Increase in government spending
(5) Money demand rises
(6) Trade account worsens