SECTION ONE (Compulsory)：Answer all ten questions in this section. Each question carries 1 mark.
　　1. Multiple-choice questions: from the following four options, select a correct and fill in its labeling the brackets. (A total of 10 points)
　　1. A production function for a firm describes: ()
　　A. What should be produced to maximize profit.
　　B. What is technologically feasible when the firm produces efficiently.
　　C. What revenue is earned from producing efficiently.
　　D. What the firm produces with given inputs.
　　2. Which of the following is not a characteristic of a competitive industry? ()
　　A. There are many firms.
　　B. All firms produce homogeneous products, which are substitutable for each other.
　　C. There is a fierce price war among rivals.
　　D. Firms can enter and exit the industry freely.
　　3. The Central Bank in the open market buying and selling of securities is designed to: ()
　　A. regulation bond prices
　　B. achieve profit maximization
　　C. regulate money supply
　　D. adjust prices level
　　4. What unemployment is formed because of the economic recession? ()
　　A. friction unemployment
　　B. structural unemployment
　　C. cyclical unemployment
　　D. natural unemployment
　　5. After a long race on a hot day, a runner enjoys her first drink a lot, the second she enjoys less and she declines a third drink. This illustrates the principle of: ()
　　A. Increasing marginal utility.
　　B. Decreasing marginal utility.
　　C. Increasing marginal cost.
　　D. Decreasing marginal cost.
　　6. On a hot day, the price and the quantity sold of ice creams both increase. This can reflect a: ()
　　A. Shift in the demand curve to the right.
　　B. Move along the demand curve.
　　C. Shift in the demand curve to the left.
　　D. Shift in the supply curve to the right.
　　 7. When a country’s currency appreciates, the country’s goods abroad become ______ and foreign goods in that country become ______.
　　 A. cheaper... more expensive
　　B. more expensive... cheaper
　　C. cheaper...cheaper
　　D. more expensive... more expensive
　　8. A US company is bidding for a contract in China. Its Chinese customer asks for a performance bond. What is the most likely course of action? ()
　　A. It asks its bank to issue a tender bond which can be converted into a performance bond
　　B. It gives up its bid
　　C. It consults its bank about issuing a standby letter of credit
　　D. It asks its bank to issue a performance bond
　　9. There is a deficit in the federal budget when: ()
　　A. Federal government spending is greater than federal tax revenues.
　　B. U.S. imports are greater than U.S. exports.
　　C. The total demand for money is greater than the total supply of money.
　　D. U.S. imports are smaller than U.S. exports.
　　10. Mrs. Jones purchased a 20-year Treasury bond bearing a 12% coupon rate. She purchased the bond at par ($1000). If rates fall to 9% what will be the new price of the bond? ()
　　A. $1333
　　B. $1500
　　C. $750
　　D. $900
　　E. There will be no change in the price of the bond.
　　SECTION TWO(Compulsory)：Answer the questions in this section.
　　Reading Comprehension: (10 points)
　　James Sigmund, CFA, is the Head of International Equity for Pell Global Advisors (PGA). Sigmund is considering investing in the country of Zuflak as part of an emerging market portfolio. Sigmund is aware of the risks in investing in emerging markets and is preparing a valuation report regarding this investment. He estimates that Zuflak government debt would be rated BB, and has gathered the following market information for use in analyzing Zuflak.
　　Local Government Bond Yield = 11.50%
　　U.S. 10 year Treasury Bond Yield = 4.50%
　　U.S. BB rated Corporate Bond Yield = 7.75%
　　Local Inflation Rate = 6.50%
　　U.S. Inflation Rate = 3.00%
　　To assist in his analysis of Zuflak, Sigmund has asked Stefano Testorf, CFA, to estimate a value for Kiani Corporation (Kiani), Oleg Industries (Oleg), and Malik Incorporated (Malik) - the three primary companies domiciled in Zuflak that Sigmund has determined to have adequate liquidity for inclusion in PGA’s client portfolios. Testorf gives Sigmund a rough draft of his report and tells Sigmund that in order to account for country specific emerging market risks; he used a probability-weighted scenario analysis to adjust cash flows. Sigmund asks him, “Why didn’t you simply adjust the discount rate?” Testorf replies with three reasons:
　　Reason 1: The country risk attributable to Zuflak can be diversified away according to modern finance theory, and should not be included in the cost of capital.
　　Reason 2: Companies in emerging markets tend to exhibit wild price swings both up and down, therefore adjusting cash flows is the best way to account for these symmetrical country risks.
　　Reason 3: Although Kiani, Oleg, and Malik are all domiciled in Zuflak, each of these companies will tend to respond differently to country risks. This makes it virtually impossible to adjust the discount rate for country specific risk and come up with an accurate valuation estimate.
　　After careful analysis by Sigmund and his team, Sigmund decides that he wants to have exposure to Zuflak in his international portfolios. He is still unsure however, what the best way would be to establish the exposure. Sigmund discusses his concerns with Steve Solak, another portfolio manager with PGA. Solak suggests that Sigmund consider using a closed-end country fund to invest in Zuflak. Solak hands Sigmund a copy of a note that he had provided to a client listing facts about country-specific closed end funds. The note contained the following statements:
　　Closed-end country funds provide an excellent means to access local foreign markets. Even nations that have restrictions on foreign investment are sometimes accessible using closed-end country funds.
　　Closed-end country funds issue a fixed number of shares and are a great way to diversify a U.S.-dollar stock portfolio because of their low correlation with the U.S. stock market.
　　Sigmund thanks Solak for the information and heads back to his office. As he is leaving, Solak asks him if he would have time later that afternoon to discuss the use of American Depository Receipts (ADRs).
　　Part 1)
　　What is the best estimate of the country risk premium for Zuflak? ()
　　A. 0.25%.
　　B. 1.50%.
　　C. 2.75%.
　　D. 6.00%.
　　Part 2)
　　To determine a valuation estimate for Oleg, Testorf assumes that local investors require a 5 percent real rate of return on companies with similar risk to Oleg. What is Oleg’s price-to-earnings (P/E) ratio, if the company has an inflation flow-through rate of 65 percent? ()
　　A. 13.75.
　　B. 5.33.
　　C. 3.00.
　　D. 21.25
　　Part 3)
　　In regard to Testorf’s reasons for incorporating emerging market risk into the valuation of Zuflak by adjusting cash flows rather than adjusting the discount rate, which of the following is TRUE?()
　　A. Reasons 1 and 3 support Testorf’s cash flow adjustment, but reason 2 does not.
　　B. All three of the reasons given support Testorf’s cash flow adjustment.
　　C. Reasons 2 and 3 support Testorf’s cash flow adjustment, but reason 1 does not.
　　D. Reason 1 supports Testorf’s cash flow adjustment, but reasons 2 and 3 do not.
　　Part 4)
　　Due to the high inflation rate of the local country, Testorf calculates the return on invested capital (ROIC) for Kiani by revaluing the company’s fixed assets. In comparing the performance of Zuflak to other local companies, the ROIC calculation should: ()
　　A. Exclude goodwill.
　　B. Exclude depreciation.
　　C. Not revalue fixed assets.
　　D. Exclude net operating profit adjusted for taxes.
　　Part 5)
　　With regard to Solak’s note concerning closed end-country funds: ()
　　A. Statement 1 is correct, statement 2 is correct.
　　B. Statement 1 is incorrect, statement 2 is incorrect.
　　C. Statement 1 is correct, statement 2 is incorrect.
　　D. Statement 1 is incorrect, statement 2 is correct.
　　Explanations of terms：(10 points)
　　1. Real interest rate
　　2. Window instruction
　　3. Special drawing rights
　　4. Money market mutual funds
　　5. Putable bonds
　　Question3: Please list some Capital Market Instruments.
　　Question4: What kind of Economic Policy in an Open Economy
　　Question5: What is the Modern Quantity Theory of Money Demand?
　　Question6: If you are a policy maker, what are your Ultimate Targets of Monetary Policy?