Written Examination consists of 2 parts. Read carefully before you tick and/or fill in the answer. Please write in clear and readable handwriting. Overwriting is not allowed. Transfer all of your answers to the answer sheet.

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Part 1  (50 points in total)                                                    


  1. Answer the following questions. (25 points each)


  • You work as a financial consultant for various individuals. One day, one of your clients approaches you with a new business idea of investing in a new student housing facility. The facility is located in a prime location and it has easy access to all major restaurants, parks, hospitals, and schools in town. The building is assessed at $2,000,000, but your client does not have that type of money. He has $500,000 of his own and is thinking of taking a loan. He also expects to make about $500,000 next year once his investment takes off and to have a solid income revenue in the years to come. You think the idea has potential to be successful, so you recommend the client to go out to the local banks to take a loan. The client follows your advice. However, as he visits different banks, they all offer him different types of loans. Confused and undecided, he comes back to you and asks you to make a choice for him, as he is not sure which loan is best. The following is the list of loans offered to him:
    1. $1,500,000 loan with an interest rate of 7% for 50 years, with no option of balloon payments or other opportunities to pay it earlier.
    2. $1,000,000 loan with an interest rate of 5%, compounded twice annually, for 20 years with no option of balloon payments or other opportunities to pay it earlier. There is a general clause that allows for refinancing.
    3. $500,000 loan with an interest rate of 0.1%, compounded daily, for 10 years
    4. $2,000,000 loan with an interest rate of 12% for 25 years, with options for balloon payments
    5. $750,000 loan with an interest rate of 4 %, compounded monthly, for 15 years with options for balloon payments
    6. $900,00 loan with an interest rate of 6% for 40 years with options for balloon payments. It allows for a combination of such loan with another loan of $100,000 with no interest rate.


Analyze the following loans and recommend one of them to your client. MAKE SURE TO SHOW ALL THE CALCULATING WORK THAT YOU DO.




  • A fully amortizing mortgage loan is made for $500,000 at 5% interest for 40 years. Payments are to be made monthly. Calculate:
    1. Monthly Payments
    2. Interest and principal payments during month 1
    3. Total principal and total interest paid over 40 years.
    4. The outstanding loan balance if the loan is repaid at the end of year 10.
    5. Total monthly interest and principal payments through year 10



Part 2 (50 Points in total)                           


Bad banking behavior has led to financial crises. Often, the underlying factor has been moral hazard.  Pick a financial crisis of your choice as a case study in any country. Describe what happened, define what is moral hazard and how it led to the crisis. Support your arguments with points mentioned in the articles you had to read for our class and those that were mentioned during our class discussions. Lastly, recommend some banking regulation that you think would have avoided the crisis if it had been in place.





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