Spring 2010 Midterm_II

Spring 2010 Midterm_II - Department of Economics...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 2
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 4
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 6
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 8
Background image of page 9
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Department of Economics Professor'G’Brien Lehigh University ' Spring 2010 Eco 29 Midterm E A Name: \‘442 \{ TA’s Name and Recitation Time: Tie? s. We? fisifirsanswefina M. aka surfiromsaswexsfiqths 8.3. entanswar questions are clear and legible. In order 1‘0 receive full credit, you must .3sz your war-3r. 2. In order that everyone-has the same am0unt of information avaiia‘ble 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 midterm exam is entirely my own. During this exam Ihave not received assistance from anyone, nor have I given assistance to anyone. I have not cheated in any way. (Your signature) 1. (2 pts) Assuming the liquidity premium theory is qonect, use the following information to ' calcuiate the interest rates on a one-year bond, a two-year bond, a three-year bond, and a four- year bond, when hm is the term premium on an 11-year bond: lane—0' ' i1,=1% :22; = 0.25 1-1;} = 2% 113, -= 0.50 ' f5+2= 3% 214; = 0.75 ifm = 4% ON -Y I {90 A, . 1+; .5 1 75/79 +wo'Y9W 2 1; +0.35 - [+3373 1- 0.50 1: 9,. +kv~ee~yeav '—"~ ’3 2. (6 pts} a. Acme Wiéget is expeeted to pay no divideé at the end of this year or at the end of next. At the end of the year after next year, Acme is expected to pay a dividend of$10 per share and it is expected at that time to be seiling for a price of $50 per share. T? investors have a required rate of return on this stock of 3 0%, what wiH be the 01111th price of the stock? EC fix 0 b. Suppose Bethlehem Widget relies on a special mineral to produce its widgets. Supplies of the mineral are expected to be exhausted in 50 years, so Bethlehem Widget is expected to pay a constant dividend of $10 per share for750 years and then go out of business. The first dividend is expected to be paid at the end of this year. If the current price of Bethlehem Widget is $250 per share and an investor’s required return on the stock is 5%, should the investor buy the stock? 7 Briefly explain. ‘ I X/ ' a “155 W a Pat/[Pdfitt'fl/I Wpt/wt Wbef Tgf=éwam 7%: (3.41“ MM 99W m was m'z‘mesmjkmw I ' - m been/Wm; {‘opay, Smog actuafl [3nd :5 J- j. 44M mwa shaded mi“ ém/ W'sfidt. 2. Suppose you expect IBM to pay a dividend 01°32. 6 per share one year fi‘orn now at wfieh time you expect the price of its stock to be $120. Ifinvestinents with equal risk to IBM’s stock I; have an expected retmn of 12%, what is the most that you would pay today for mM’s stock? - Wit (litiin yield, rate of capital gain, and rate of return would you expect to earn at this ' 7 . j price? 1 I 5550—”?- /;|Ct:1 ‘ r: r,1“~'rH Rois—o . it; 46—“: 1‘ 3. (3 pts) a. Suppose that the Bethlehem Bank holds $1 million dollars in 6% couponIO-year Treasury notes that mature in 2019. The Chicago Board of Trade (CBOT) offers a 6% Treasury Note futurescontract that expires inone year. One CBOT contract is for $100,000 in Treasury Notes. Suppose that both the bank’s Treasury notes and the futures contracts are currently selling at par. That is, both are selling for a price of 100 per $100 of face value. lithe bank wants to hedge the risk of holding these Treasmy notes, should it buy or sell Treasury note futures? How many contracts should it buy or sell? 77“ WW4 75 mama Wraier m1th will Mk mg WUCLlM a"? {+5 Wealth/7 M6446! will Arr. Theresa; H 3%“ MMMM/ Mart? slowed. fightwfi . ' a: Wig VW/ W (Ma 07; 7mm“? “fit: S—u‘Hu‘lC—I .4; or; Mihtmwywmm -,,,,,.bw¢. 1L 7 f I m “Wm/apgwl flu; heir/(ye; CPR—e 4' f 5‘ mwivwvr 70- § _ [a 5555 Hm I.“ Mammy M0746 it [drccfiJ l 2% 5w [0 Mme 33. Suppose that one year now from now, the yield to mauu'ity on the Treasury notes has fallen from 6% to 5%. Briefly explain whether when the bank settles its funnes market position, it will record a gain or a loss. You do not have to provide an exact" numerical ansWer, just an explanation. . 12...; W,“ LLfi/filzém’r 72L! /IW We... -! I .97 p/ out! r/LH‘ Wit War/r: w: 5{ it}? I, . l/‘de 9/01! pvt/2L1 Wm Maw/M pdjzfl'o'en 4. (3 pts) a. Use the following information to prepare the balance sheet for Gringott’s National Bank (GNB): The bank has $20 million in US. Treasury bills, $20 million in demand deposits, $5 million in vault cash, $5 million in loans from other banks, $30 million in mortgage-backed securities, $30 million in commercial and industrial loans, $5 million in discount loans from the Federal Reserve, $30 million in other checkable deposits, $10 million is savings account deposits, $8 million in deposits at the Federal Reserve, $10 million in cash items in the process of collection, and owns a building worth $4 million. Afisfij Liabi {Hm i—CWVWJ Cajk 5 be“ “him fi8mzum Och “OW-“k W E35 5 3 351?“: gawmgflsepusm~~¥€C+M0LH< C Ellison} LiBthllliLk Cl/MLLS *FVMGW ,m Vault) Wmnllck (z a M waivile ,l — 0-,; Waiting is m: um Quin 1m; l r ‘ _ Lu. W A, DUL b5? infill”? WUQSSVé 590% Km“ Lauri—Ir DLLW Lidlmii'liu Buddha; quc‘u‘k. 2707 “Hunk b. Here are the Federal Reserve’s current reserve requirements: Amount of Transactions Deosits $0 to $10.7 million More than $10.7 milfion to $55.2 million \h' M, Mr Mitzi/k Reserve Requirement Q. Q ll J i H. Multiple Choice. Select the best answer. 1/2 point each. - ' 1. When a recession is about to begin, you are likely to observe that a. the yield curve is sharply upward sloping. b. the yield curve is slightly upward sloping. ® theyieid curve is flat or inverted. d. the yield Curve is upward sloping for short times to maturity, then downward sloping for longer times to maturity. - 2. In the foilowing table, which is from the close of trading on March. 16, what is the best explanation for why the October call has a higher price than the March call? Amazon ( AMZN ) Underlying stock price: 131.13 Expiration Strike ' can ' Put Last Volume Open Interest Last Voiume Open Interest ‘ Mar 120.00 11.12 399 6235 0.10 893 10565 wee rrrrrrrrrrrrrrrrrrrrrrr ritzesefiriirzez rrrrrrrrrrrrrrrrrrr rrrrrrrrrrrrrrrrrrrrrrrrrrrrrr 777576 rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr Jui 120.00 6.40 483 ' 1253 6.43 131‘ 2149 Oct 120.00 20.00 ' ' 1 1817 10.40 7 1475 a. monomer its the assay, want the Match assistants? " ([9 The further in the future the expiration date is for an option, the higher the option’s price will be. c. Investors must have been expecting that interest rates would fall between March and October. which would increase the price of options contracts. ' ti. investors must have been expecting that interest rates Would rise between March and October, which would increase the price of options contracts. 3. Referring to the table above, what is the premith on the October pit? a. $1 1.13 @sio.4o at. $0 4. If an option adjustable rate mortgage results in negative amortization a. the interest rate on the ioan will increase every month- Ci? the principal of the loan will increase every month. c. the loan will mature in five years or less. 6. over the life of the ioan, the total interest payments will be much smaller than the tot l - - i principal payments. 5 - a.....QLilli.CfflCiefltmal‘ketfihfiothasigisigcgge9L-..".. . 5. The “originate-to-distribute” business model for mortgage loan originators a. resulted in higher interest rates for borrowers. 1). resulted in higher down payments for borrowers. c.— was prohibited under the Mortgage Reform Act of 2010. (1. made the principal-agent problem in the mortgage market worse. 6. Suppose that you make a $40,000 down payment when purchasing a house that sells for a price of $500,000. If one year later the house has a price of $530,000, the rate of return on your investment was a. 6%. b. 7.5%. c. 8%. . 75%. 7. The results of the Wall Street Journal ’5 “Dart-Board Portfolio” indicate that a. investors in financial markets do not have rational expectations. — investment analysts are unabie to consistently choose stocks that perform better than randomiy chosen stocks. _ d. there are many anomalies in financial markets that can be taken advantage of by shrer investors. “1%Wfich-ofme firms/ing'i‘s—z‘acorrect according (mite efficrent alarms hypoth esis“?____ __ _ 7 7 ‘_ __ a. At the assent trading {mamas-optimal forecast eras price'bfniaate’s stock at the close of trading tomorrow is its price at the close of trading toda . r _ h. The difference between the actual price of a stock and the optimal forecast of the price of the stock is an‘error term the size of which can he forecast from patterns of past prices of the stock. _ 0. Most investors make their forecasts of stock prices on the basis of rational expectations rather than on the basis of adaptive expectations; ' 7 d. An investor with access to inside infonnation wouid be able to earn an above-normal return from investing in stocks. ' 9. Compared with buying stock, buying bonds a. is iike to result in greater risk for the average investor. b. is likely to increase the tax liability for the average investor. c. is likely to involve less moral hazard. . makes the investor an owner of the firm, rather than a creditor. 10. in the futures market for oil, we are most likely to see oil companies selling futures contracts and companies that use'oil buying futures contracts. . oil companies buying, futures contracts and companies that use oil selling futures contracts. c. oil companies and companies that use oil both huying'fiitines contracts. 6:. oil companies and companies that use oii both seliing firtnres contracts. l 1. Compared with futures contracts, forward contracts a. are more liquid. [email protected] greater counterparty risk. e. have lower prices. d. are only available for commodities, rather than financial assets. 12. If you pay $3 for a call option on Microsoft stock with a $50 exercise price, and $2 for a put option on Microsofl stock with a $48 exercise price, you will break even if Microsoft’s price on c expiration date is a. 43‘ - in. $48._ c. $50. d. $53. ...
View Full Document

This note was uploaded on 02/22/2011 for the course ECO 029 taught by Professor Anthonyp.o'brien during the Spring '08 term at Lehigh University .

Page1 / 9

Spring 2010 Midterm_II - Department of Economics...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online