P4: PROGRESS TEST 5
Progress Test 5 A
Multiple choice questions (11 questions 45 minutes)
1
What will be the cost of the interest repayments on a £2m loan if a company uses a 69 FRA at 5.6% (assume the company can borrow at the base rate)? A B C D
£448,000 £28,000 £56,000 £112,000
(2 marks)
Data for questions 24 Today is 31 December. Washmore plc is expecting that in two months time it will need to borrow £5m for a period of four months. Washmore can borrow at LIBOR + 1%. LIBOR on 31 Dec: 5.10% Futures rates (3 month contracts) on 31 Dec: March June Contract size £500,000 94.80 94.70
2
Identify whether the number, type and date of the contracts needed is: A B C D
3
(2 marks)
Assuming that on 1 March the LIBOR is 5.4%, calculate whether the likely closing futures price on 1 March is: A B C D
4
10 March contracts to sell 7 March contracts to sell 10 June contracts to buy 13 March contracts to sell
94.50 94.53 94.57 94.60
(2 marks)
Using your answer from the previous question, calculate whether the interest costs as a result of the futures hedge is: A B C D
6.17% 5.17% 6.63% 5.63%
(2 marks)
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P4: PROGRESS TEST 5
5
6
Which of the following is not a feature of an exchange traded interest rate option? A
The number of contracts need to be adjusted for the length of the loan versus the standard contract length of three months
B
Can be sold on if not needed
C
Does not have to be used if the interest rate has moved in your favour
D
It is closed out against the LIBOR
(2 marks)
A credit rating is quoting the following yield spread (in basis points ie 1 point = 0.01%): Rating AAA A
1 yr 4 55
2 yr 8 65
3 yr 12 75
5 yr 18 85
7 yr 20 95
10 yr 30 107
30 yr 50 120
Mantovani plc is considering the issue of £0.1bn of debt with a maturity of three years. Currently the yield on one year government securities is 5% and the yield on five year government securities is 5.7%. Mantovani will have a credit rating of A after the debt issue. The cost of debt (pre-tax) will be: A B C D 7
A move away from negotiating directly with Trades Unions A shift towards increasing the level of debt used by a company A shift away from large syndicated loans to issuing bonds directly to investors A move towards maximising the global sales of a product during its life cycle (2 marks)
Analyse whether the maximum reduction in value that would be expected 95% of the time for a company that estimates the standard deviation on its futures contracts over a one stage period to be £100,000 is: A B C D
9
(2 marks)
Disintermediation is a term used to describe which of the following? A B C D
8
6.45% 6.10% 5.57% 5.42%
£164,000 £165,000 £196,000 £164,500
(2 marks)
A nine year project has an NPV of $4m and a standard deviation of $2m. Calculate the probability of the projects NPV being above 0. A B C D
97.72% 47.72% 95% 97.5%
(2 marks)
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P4: PROGRESS TEST 5
10
A nine year project has an NPV of $4m and an annual standard deviation of $2m. Calculate whether the projects value at risk at a 95% confidence level is: A B C D
11
£9.87m (£5.87m) £0.71m £3.29m
(2 marks)
Which of the following is not an advantage of an exchange traded currency option? A B C D
Dates are flexible Can be sold on if not needed Do not have to be used, if the exchange rate has moved in your favour Free, although a deposit does have to be paid
(2 marks)
B
Short written questions (4 questions approximate time 20 minutes)
1
Identify the two main approaches to capping and the two main approaches to fixing interest rate risk on loans that are due in the near future. (4 marks)
2
Identify two motives for a fixed variable interest rate swap, and two motives for a currency swap. (4 marks)
3
Describe how risk mapping can be used to profile the different types of risk that a business is exposed to, and how to describe appropriate risk management strategies. (7 marks)
4
Briefly outline the role of the World Bank, the IMF, a central bank, and the WTO in supporting the development of international trade. (5 marks)
END OF PROGRESS TEST
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