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Midterm3-2017.pdf - FIN 307 Spring 2017 The Financial...

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FIN 307 – Spring 2017 The Financial System 1 Midterm 3 27 Multiple Choice Questions (1 point each—27 points total): Choose the one alternative that best completes the statement or answers the question. There is only one correct answer. 1. Suppose the yield on taxable bonds is 6%. There is another class of “tax-exempt” bonds similar to the taxable bonds in every respect but for the fact that they are tax-exempt. The tax rate is 25%. All else equal, what should be the equilibrium yield on the tax-exempt bonds? A. 1.5% B. 4.5% C. 3% D. It cannot be calculated with the data that are provided. 2. The risk spread (or premium) is: 3. If a bond's rating improves, then it should cause the bond's price 4. Investors usually obtain bond ratings from:
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2 5. The market for bonds is initially described by the supply of bonds S 0 , and the demand for bonds D 0 , with the equilibrium price and quantity P 0 and Q 0 . If the federal government were to increase the size of the budget deficit, all other factors constant, we would expect to see: A. Bond supply curve to shift to S2 B. Bond demand curve to shift to D1 C. Bond supply curve to shift to S1 D. Bond demand curve to shift to D2 6. If interest rates are expected to rise, the bond prices will: 7. An increase in expected inflation for any given nominal interest rate will cause:
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