3330%20PS3 - Cornell University Fall 2009 Economics 3330:...

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Cornell University Fall 2009 Economics 3330: Problem Set 3 Due 9/30/09 1. True/False/Explain State whether each of the following is true or false and explain your answer. Please limit your explanations to no more than two sentences. a. According to the expectations theory, if the yield curve is flat, the market must expect a decrease in short-term rates. b. According to the liquidity preference theory, if the yield curve is flat, the market must expect a decrease in short-term rates. c. Passive bond management does not involve buying and selling bonds but rather holding them to maturity. d. A risk-averse consumer will not buy insurance when the price of insurance is not actuarially fair. 2. Coupon Renegotiation (Question 20 of Chapter 14 of Text) A 10-year bond of a firm in severe financial distress has a coupon rate of 14% and sells for $900. The firm is currently renegotiating the debt, and it appears that the lenders will allow the firm to reduce coupon payments on the bond to one-half the originally contracted amount. The firm can handle these lower payments. What is the stated and expected yield to maturity of the bond? The bond makes its coupon payments annually. 3.
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This note was uploaded on 12/22/2009 for the course ECON 3330 taught by Professor Mbiekop during the Fall '08 term at Cornell University (Engineering School).

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3330%20PS3 - Cornell University Fall 2009 Economics 3330:...

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