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Unformatted text preview: FIN 353 Quiz 1 Review Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The interest rate on a one year bond today is 4%. The rate on a two year bond today is 6%. What is the market predicting about the interest rate on a one year bond one year from now solely based on the expectations theory? 1) _______ A) Will increase by 2%. B) Will increase by 4%. C) Will decrease by 2%. D) Will decrease by 4%. 2) The federal funds rate is currently 3% and the Federal Reserve lowers the discount rate from 4% to 2%. What is the federal funds rate after the Fed lowers the discount rate? 2) _______ A) 3%. B) 2%. C) 2.5%. D) 4.5% 3) According to the Liquidity Premium Theory, a moderately upward- sloping yield curve indicates that short- term interest rates are expected to 3) _______ A) neither rise nor fall, but that long- term rates are expected to rise moderately. B) neither rise nor fall in the near future. C) rise moderately in the near future. D) remain relatively unchanged, but that long- term rates are expected to fall. 4) You purchase a Treasury Inflation Protected Securities, TIPS, where the coupon rate is 5% at the beginning of 2009. The CPI increased 10% over the course of 2009. What will be your coupon payment in 2010? 9) _______ A) $55 B) $50 C) $45 D)$60 5) A credit market instrument that pays the owner the face value of the security at the maturity date and nothing prior to then is called a 5) ______ A) discount bond. B) simple loan....
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