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Bus171A-Midterm2Fall09 - Version B Name(please print L,1...

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Version B Name (please print) : Business 171a Fa1l2009 ,1 L/ Professor Reza San Jose State University Midtenn Exam2 Instructions and notes: I. Please put 1,our name on BOTH the scantron and this exam and return both. If .vour name is missing from either, you will receive ZERO on the exam - no exception and no changes after*'ards. II. Please p ut your test VERSI ON on the sca ntron. If the version is m issi ng, vou r exam n'i Il be assigned a version at random and corrected; the result r.r'ill not be changed. lIL This is a closed-book, closed-notes exam. Do not consult others. You ma1' use onl1, a calculator. I\/. There is one correct ans\\,er to each problem. Multiple answers receive zero point. \/. Unless specified otherwise, approximations should be rounded to 2 places after the decimal. Unless specified otherwise, a debt securitl'has a face (par) r'alue of $1,000 \tI. Unless specified otheru'ise, assume that a. investors maximize their net worth (i.e., thel' are "rational") and firms maximize their common shareholders' net u'orth. b. a// markets are efficient. c. firms are t5'pical of the ihdustrf in n'hich the1, operate. d. both firms and individuals are residents of the United States, and are interested in profits, wealth and consumption in terms of the US S. e. Earnings on municipal bonds are exempt from income tax; earnings on all other bonds are taxa ble f. Return includes both interestidividend and capital gain (or loss) P_P" Duration - -' ' ' ' l+. Po = inirial price; Py , final plice: is:iriitial interest rate; Po 1+io i r :final interest rate rl 10., =Z.u +(10., +1i. .+Il.r+. ..+/i-,.r)l/Nl /o.u:N-yearspot(cuffenr)rare; 10., :one-year spot (current) rate; 1i, : one-year fonn ard (expected) rate for one year from now; and so oni 11,-1.1, : one-year forward (expected) rate between year N-1 and year N. Z, : liquidity premium for an N-year bond, The Expectations Theory is when Lr :0 1. DROPPED.An open market purchase of securities by the Fed €) Increases assets of the nonbank public and increases assets of tlie Fed '6. Has no net effect on assets ofthe nonbankpublic but increases assets ofthe banking system c. Decreases assets ofthe nonbank public and increases assets ofthe banking systenl d. Decreases assets ofthe banking system and increases assets ofthe Fed 1:30 Velsion B Exan2 -Fall 2009
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L If the Fed wants to expand reserves in the banking system, it a. Sells government securities b. Raises the discount rate to member banks _c. Raises reserve requirements G, e"vi gou"*-"nfsecurities 3. When the potential borrowers who are the most likely to default are the ones most actively seeking a loan, is said to exist a. Asymmetric information b. Moral hazard c. Fraud @ Adverse selection 4. Risk premiums on corporate bonds (relative to Treasury securities) are usually counter-cyclical - they fall during expansions and rise during recessions. @ T^"****
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Bus171A-Midterm2Fall09 - Version B Name(please print L,1...

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