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Unformatted text preview: Answer Outline ECONOMICS 353 L. Tesfatsion/Fall 06 EXERCISE 6: Six Questions (8 Points Total) DUE: Tues, October 10, 2006, 2:10pm **IMPORTANT REMINDER: LATE ASSIGNMENTS WILL NOT BE ACCEPTED – NO EXCEPTIONS** EXERCISE INSTRUCTIONS: • (1) Please fill in your name and student ID number on Side 1 of your bubble sheet and write 353-Ex6 in the top margin of Side 1. • (2) Use a number 2 pencil to mark your answers on Side 1 of the bubble sheet to the first five questions Q1 through Q5, below, which are in multiple choice format. • (3) The sixth question Q6 is a Web Exercise that asks you to consider a controversy that has arisen regarding the mortgage refinance company Fannie Mae and an alleged price bubble in the U.S. housing market. Please put your name and student ID number at the top of your print-out sheet for Q6 along with 353-Ex6:Q6 and separately hand in your answer sheet sheet for Q6 in addition to your answer bubble sheet for questions Q1 through Q5. • (4) Each question Q1 through Q5 is worth 1 point, and Q6 is worth 3 points. Q1 (1 Point). If a 10-year $5 , 000 coupon bond (i.e., a coupon bond with a $5000 face value and a 10 year maturity) has a coupon rate of 10 percent and a purchase price of $4 , 000, then the COUPON PAYMENT is A. $600 B B. $500 C. $400 D. $300 Q2 (1 point). If a coupon bond with an $8000 face value and a 7 year maturity has a $400 coupon payment and a purchase price of $10 , 000, then the CURRENT YIELD is A. 7 percent B. 6 percent C. 5 percent D D. 4 percent E. none of the above 1 Q3 (1 Point). Letting i denote the yield to maturity on coupon bonds, which of the following situations should a rational BORROWER prefer to be in if he is planning to raise funds through the issue of new coupon bonds? A. i = 25 percent and the expected inflation rate = 20 percent B B. i = 13 percent and the expected inflation rate = 11 percent C. i = 6 percent and the expected inflation rate = 2 percent D. i = 1 percent and the expected inflation rate = -2 percent Q4 ( 1 Point). As detailed in Mishkin (Chapter 4), the interest rate on Treasury Inflation Pro- tected Securities (TIPS) is a direct measure of because interest and principal payments on TIPS are . A. a nominal interest rate; denominated in current U.S. dollars. B. the inflation rate; adjusted for cost of living increases. C C. a real interest rate; adjusted for changes in the price level. D. the return on gold collectibles; collateralized by gold. Q5 (1 Point). Smart investors need to understand the distinction between the YIELD TO MA- TURITY on a financial asset and its RETURN RATE (equivalently, its rate of return) because A. the yield to maturity assumes a financial asset will be held to maturity, whereas the return rate can be calculated for any holding period....
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This note was uploaded on 04/30/2011 for the course ECON 234 taught by Professor Koki during the Spring '11 term at Punjab Engineering College.
- Spring '11