{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

econ423hw3 - Econ 423 Summer 2009 Lauren Heller Homework#3...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Background image of page 2
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Background image of page 4
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Econ 423, Summer 2009 Lauren Heller Homework #3, Due 6—30-09 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The risk premium on corporate bonds becomes smaller if A) the riskiness of corporate bonds increases. B) the riskiness of corporate bonds decreases. C) the liquidity of corporate bonds decreases. D) the liquidity of corporate bonds increases. E) either (b) or (d) occur. 2) (I) If a corporation suffers big losses, the demand for its bonds will rise because of the higher interest rates the firm must pay. (ll) The spread between the interest rates on bonds with default risk and default-free bonds is called the risk premium. A) (I) is true, (11) false. B) (l) is false, (ll) true. C) Both are true. D) Both are false. 3) (1) An increase in default risk on corporate bonds shifts the demand curve for corporate bonds to the right. (ll) An increase in default risk on corporate bonds shifts the demand curve for Treasury bonds to the left. A} (I) is true, (ll) false. B) (i) is false, (ll) true. C) Both are true. D) Both are false. 4) When the corporate bond ma rket becomes more liquid, other things equal, the demand curve for corporate bonds shifts to the and the demand curve for Treasury bonds shifts to the A) left; left 13} left; right C) right; left D) right; right 5) A decrease in marginal tax rates would likely have the effect of the demand for municipal bonds and the demand for US. government bonds. A) increasing; increasing B) decreasing; decreasing C) decreasing; increasing D) increasing; decreasing 6) Which of the following statements are true? A) An increase in tax rates will increase the demand for municipal bonds, lowering their interest rates. B) Because coupon payments on municipal bonds are exempt from federal income tax, the expected after—tax return on them will be higher for individuals in higher income tax brackets. C) Interest rates on municipal bonds will be lower than on comparable bonds without the tax exemption. D) All of the above are true statements. E) Only A and B are true statements. 7) The relationship among interest rates on bonds with identical default risk, but different maturities, is called the A) yield curve. B) time—risk structure of interest rates. C) bond demand curve. D) liquidity structure of interest rates. 1) 2) 3} 4) 5) 6) 7) Note: All questions are to be completed on your own, without any assistance from others. 8) When yield curves are steeply upward—sloping, A) short— term interest rates are about the same as long—term interest rates. B) long—term interest rates are above short—term interest rates. C) medium—term interest rates are below both short-term and long—term interest rates. D) short— term interest rates are above long-term interest rates. E) medium—term interest rates are above both short— term and long— term interest rates. 9) According to the expectations theory of the term structure, A) when the yield curve is downward—SIOping, short—term interest rates are expected to decline in the future. B) when the yield curve is steeply upward—sloping, Short-term interest rates are expected to rise in the future. C) buyers of bonds prefer short— term to long— term bonds. D) all of the above. B) only A and B of the above. 10) If the expected path of one—year interest rates over the next five years is 2 percent, 4 percent, 1 percent, 4 percent, and 3 percent, the pure expectations theory predicts that the bond with the lowest interest rate today is the one with a maturity of A) one year. B) two years. C) three years. D) four years. 11) According to the market segmentation theory of the term structure, A) investors' strong preference for short—term relative to long—term bonds explains why yield curves typically slope upward. B) bonds of one maturity are not substitutes for bonds of other maturities; therefore, interest rates on bonds of different maturities do not move together over time. C) the interest rate for bonds of one maturity is determined by supply and demand for bonds of that maturity. D) all of the above. E) none of the above. 12) According to the liquidity premium theory of the term structure, A) because of the positive term premium, the yield curve cannot be downward—sloping. B) the interest rate on long—term bonds will equal an average of short—term interest rates that people expect to occur over the life of the long— term bonds plus a term premium. C) because buyers of bonds may prefer bonds of one maturity over another, interest rates on bonds of different maturities do not move together over time. D) all of the above. B) only A and B of the above. 13) In actual practice, short—term interest rates are just as likely to fall as to rise; this is the major shortcoming of the A) liquidity premium theory. B) expectations theory. C) market segmentation theory. D) separable markets theory. 8) 9) 10) ii) 12) 13) Note: All questions are to be completed on your own, without any assistance from others. 14) If the optimal forecast of the return on a security exceeds the equilibrium return, then 14) A) an unexploited profit opportunity exists. B) the market is inefficient. C) the market is in equilibrium. D) only A and B of the above are true. E} only B and C of the above are true. 15) To say that stock prices follow a "random walk" is to argue that 15) A) stock prices cannot be predicted based on past trends. B) stock prices tend to follow trends. C) stock prices rise, then fall, then rise again. D) stock prices rise, then fall in a predictable fashion. 16) Sometimes one observes that the price of a company's stock falls after the announcement of 16) favorable earnings. This phenomenon is A) consistent with the efficient market hypothesis if the earnings were not as high as anticipated. B) consistent with the efficient market hypothesis if the earnings were not as low as anticipated. C) clearly inconsistent with the efficient market hypothesis. D) the result of none of the above. 17) Although the verdict is not yet in, the available evidence indicates that, for many purposes, the 17) efficient market hypothesis is A) too general to be a useful tool for analyzing expectations. B} not a good starting point for analyzing expectations. C) a good starting point for analyzing expectations. D) none of the above. 18) The small—firm effect refers to the observation that small firms' stocks 18) A) have earned abnormally high returns even taking into account their greater risk. B) have earned abnormally low returns given their greater risk. C) follow a random walk but large firms‘ stocks do not. D) sell for lower prices than do large firms' stocks. 19) Mean reversion refers to the observation that 19) A) stocks with low returns are likely to have high returns in the future. B) stocks prices are more volatile than fluctuations in their fundamental value would predict. C) stocks with iow returns are likely to have even lower returns in the future. D) stock prices overact to news announcements. 20) An investor gains from short selling by and then later . 20) A) buying a stock; selling it at a lower price B) selling a stock; buying at back at a lower price C) buying a stock; selling it at a higher price D) selling a stock; buying it back at a higher price ESSAY. Write your answer in the space provided or on a separate sheet of paper. 21) Mishkin and Eakins, p. 125, Questi on #7 22) Mishkin and Eakins, p. 125, Quantitative Problem #4 Note: All questions are to be completed on your own, without any assistance from others. 23) Mishkin and Eakins, p. 125, Quantitative Problem #5 24) Mishkin and Eakins, p. 125, Quantitative Problem #8 25) Mishkin and Eakins, p. 125, Quantitative Problem #13 26) Mishkin and Eakins, p. 143, Question #1 27) Mishkin and Eakins, p. 144, Question #11 28) Mishkin and Eakins, p. 143, Quantitative Problem #2 29) Explain what the market reaction will be in an efficient market if a firm announces a fully anticipated filing for bankruptcy. 30) Why are expectations important in understanding how financi a1 instruments are valued? ...
View Full Document

{[ snackBarMessage ]}