San Jose State University
Instructions and notes:
name on BOTH the scantron and this exam and return both. If
name is missing
from either, you will receive ZERO on the exam
no exception and no changes after*'ards.
Please p ut your test VERSI ON on the sca ntron.
If the version is
m issi ng, vou
n'i Il be assigned a
version at random and corrected; the result r.r'ill not be changed.
This is a closed-book, closed-notes exam. Do not consult others. You ma1' use onl1, a calculator.
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
Unless specified otheru'ise, assume that
investors maximize their net worth (i.e., thel' are
and firms maximize their
common shareholders' net u'orth.
a// markets are efficient.
firms are t5'pical of the ihdustrf in n'hich the1, operate.
both firms and individuals are residents of the United States, and are interested in profits,
wealth and consumption in terms of the US
Earnings on municipal bonds are exempt from income tax; earnings on all other bonds are
Return includes both interestidividend and capital gain (or loss)
Po = inirial price; Py
final plice: is:iriitial interest rate;
spot (current) rate;
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
liquidity premium for an N-year
The Expectations Theory is when
DROPPED.An open market purchase of securities by the Fed
Increases assets of the nonbank public and increases assets of tlie Fed
Has no net effect on assets ofthe nonbankpublic but increases assets ofthe banking
Decreases assets ofthe nonbank public and increases assets ofthe banking systenl
Decreases assets ofthe banking system and increases assets ofthe Fed
1:30 Velsion B