3330%20Midterm - Cornell University Gregory Besharov...

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Cornell University Gregory Besharov Economics 3330 Midterm October 20, 2008 1. True/False/Explain (4 points) Please answer two of the following three questions. If more than two are answered, only the first two will be graded. State whether the sentence is true or false and explain your answer. All credit is based on the explanation. Please limit your explanations to no more than two sentences each—additional sentences will not be considered. a. (2 points) According to the expectations theory, if the yield curve is downward-sloping then the market must expect a decrease in short-term rates. b. (2 points) If two bonds have the same yield to maturity and the same maturity date, then they must have the same price. c. (2 points) When one of the stocks in a market-value weighted index splits, the index divisor must be adjusted. 2. Tuition (6 points) You will be paying tuition at the end of each of the next two years. In the first year the expense is $10,500, and in the second year it is 5% higher. The discount rate is 5% and that is also the return on bonds. a) (1 point) What will be the tuition expense at the end of the second year? b) (1 point) What is the present value of your tuition expenses? c) (2 points) What is the duration of your expenses?
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3330%20Midterm - Cornell University Gregory Besharov...

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