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Midterm_I_Key_Fall_2009

Midterm_I_Key_Fall_2009 - Department ofEconomies Professor...

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Unformatted text preview: Department ofEconomies Professor O’Brien Lehigh University - Fall 2009 Eco 29 Midterm I A Name: 1< Q \ Recitation (Time and T A): “LI.- 1. Take time to think before answering. Make sure your answers to the shofi-answer quesuons are clear and legible. In order to receive fuil credit, you mus: Show your work. 2. To ensure that everyone has the same amount of information available to answer the problems, we won’t be able to respond to requests for clarification or elaboration. Honor Code: PLEASE READ AND SIGN: The work on this n'fidienn exam is entirely my om: During this exam I have not - received assistance fiom anyone, nor have I given assistance to anyone. I have not cheated in any way. . (Yonr signature) 1. (4 pts) a. Rich Uncle Scrooge thinks his nephew Donald should have a two-week vacation every year. Scrooge wants to give Donald a one-time, lump-sum amount that Donald can use to pay for a $15,000 vacation every year forever. IfDonald earns 5 percent per year on his investments, and if the first vacation takes place one year after Scrooge gives him the money, how much money Will Scrooge have to give Donald? Be sure to show your work. 5/ 3‘, 000 ——1 —— Amewfii 0.05" ”i i{Because b. Suppose instead that the first vacation will take place three years after Scrooge gives Donald the money. Now how much will Scrooge have to give Donald? 53 Because ______.__.......-_-—... flotsam-i '7' tilt-05.33" —_- fiancee-t c. Now suppose that Donald' 1s worried that because of inflation the real value of the money spent on his vacations wifl be continually declining. So, he decides to as}: Scrooge to increase ‘ the amount so that the real value of the money spent on the vacations remains the same forever. If Donald believes that the inflation rate will be a constant 2 percent per year, how much will he ask Scrooge to give him (assume that the first vacation will take place one year after Scrooge gives Donald the money)? Be sure to show your work. F/ 3‘, one IQ W‘W‘fi H} aor— 0.03— .; hyooiooo 2. a. (4 pts) Use the following hypothetical information to calculate the asked yield on a discount basis for this Treasury bill: '. Days to - Asked g Mammy minty i 33‘3"“ C33 yield 2009 Oct 23 so 999 43.05 6700 3/ OUO ”P 3 (9 r - ‘ x3 --- 0. 0e 00 1? f0 ‘ "(>1 Mex. 91' 33/1000 -~ 3 ‘i‘ff. 35" 3 a o 1:: s5 we 5'0 -::°. 0,705.97 01 $2872} 13. Suppose on January 1, 2010 the price of a one-year Treasury bill is $980.39. Investors expect the price level will be unchanged during 2010, but at the end of the year the inflation rate turns out to have been 3 percent. What is the nominal interest rate on the bill (measured as the yield to maturity), the ex ante real interest rate, and the ex post real interest rate? a _ 3/,000 ._.. 9803‘; 37780.5? Nomad :ajeaesr mt: —.—_ 0.9; m EX amt-9 Wat-«Q Miwsi- wet-(e 7- mt-wn- Wt”: '= 0.03. wait) we 32e0%:;% {f M first =42 -:>.: ()1?ch If"? _ 4 3. (4 pts) Suppose that on January 1, 2009 you purchased a coupon bond with three years anti} maturity (that is, the number of annual coupon payments you will receive is three) and the following characteristics: ' ' Par Value = $1,000 Coupon Rate = 6.50% Yield to Matmity = 5.25% a. What price did you pay for the bond? COWWM g $4 (0 S: {)0- ;s [a 3’ f!» (a 5' g 6‘ r {£333- . 9- W + . '3 WWW? i: C [f-Ob'3'5-5 4’ C£¥'OS}'¥§> Ci+a0€3’§) ’3- Fifi/£053 .81,“ b. What is the bond’s current yield? Mes" r M (1C:- %{a0%b:?’)" a... .092“! 5'} (:0. 957 Z 4. (4 pts} a. Which bond with ten years to maturity will have a higher coupon rate, a $1,000 face value bond, with a 5.0% yield to maturity that sells for $900; or a $1,000 face value bond, with a 5.0% yield to maturity that sells for $1, 050? Explain your reasoning m “Fat/3i— QM 14613 apr 6e 55 may face S, ta {MILE-i" [A (is; Waugh Yidd {‘0 W06 5'0}; Wu Seward lamJ Mas a pm'q C‘jwiar tum. $145000 50 {fl WM wet-e musi- :02, but’ WNW Waikiki \{Etid +0 Mfi'fitwpy a“? Iv-v—" 1). Consider 'a $1,000 face value bond sells for an initial price of$450. It will pay no coupons for the first ten years and then pay 6.25% coupons for the remaining twenty years. Write down an expression showing the relationship between the price of the bond, the coupon (in dollars), and the yield to matulity, You don’t have to show every term in the expression, but be sure to Show enough terms so we know you understand the relationship. Hoots share ’ Man) #950 C 3“ + cam- “ mat“ 1"” 1H,. ‘ 324cm) i- ________s C 2+ L33“ 11. Multiple Choice. Select the best answer. 1/2 point each. 1. Last Friday, gold was selling for about ® $1,006 per ounce. b. $155 per ton. 0. $10,135 per ounce. d. $135 per ounce. 2. Last Friday, the S&P 500 closed at about b 9605 c 2081 d 1232 3. All other factors held constant, @ an investment with more liquidity should offer a lower return and sell for a higher price. b. an investment with less liquidity should sell for a higher price and offer a higher return. c. an investment with more liquidity should sell for a lower price and offer a higher return. (:1. an iptrndfmphf tiri‘l‘lfl 1960 lin111’1‘1‘hr 311011111 (113.“ Fnr a 16117:“. “winc- 311d n‘FFn-s- a laws}: rat-dim- AvvuLLLAuxll, VVLLAL Luau Lil-zluiuil.) ulu Dull LUl VVUJ. FLJVU ULLUJ. 4. In which of the following situations would you prefer to be the borrower? a. ”the interest rate is 9 percent and the expected inflation rate is 7 percent. b. The interest rate is 4 percent and the expected inflation rate is 1 percent. c. The interest rate is 13 percent and the expected inflation rate is 15 percent. © The interest rate is 25 percent and the expected inflation rate is 35 percent. 5. If a security pays $110 next year and $121 the year after that, what is its yield to maturity if it sells for $200? a. 9 percent 6) 10 percent 0. 11 percent d. 12 percent 6. A system of barter has substantial transactions costs because 3. taxes under a barter system are generally a large fraction of the value of output. @ traders must spend considerable time searching for trading partners. 0. the uncertainties of trade result in high legal fees being incurred to draw up binding contracts. d. the uncertainties of trade result in high insurance premiums. 7 Which of the following Iong—tenn bonds would have the highest interest rate? Corporate Baa bonds b. U.S. Treasury beads C. Corporate Aaa bonds (1. I Municipal bonds 8. If an individual moves fimds from a'smaH-denonfination time deposit to a demand deposit account, @MI increases and M2 stays the same. b. M1 stays the same and M2 increases- 0. M1 and M2 both stay the same. d. M1 increases andMZ decreases. ...
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