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Summer_2010_FIN_353_Quiz_1_Answers[1] - FIN 353 Quiz 1...

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FIN 353 Quiz 1 Student: ___________________________________________________________________________ 1. In which situation would you prefer to be a borrower? A. The interest rate is 20% and expected inflation is 10%. B. The interest rate is 5% and expected inflation is 3%. C. The interest rate is 50% and expected inflation is 35%. D. The interest rate is 10% and expected inflation is 2%. 2. You purchase a 20 year 5% coupon bond for $1020 in the year 2000. You sell the bond for $900 in 2010. The return made is________ than (as) the yield to maturity in the year 2000 when you purchased it? : A. greater B. less C. the same 3. Consider a coupon bond that has a $1,000 per value and a coupon rate of 10%. The bond is currently selling for $975 and has 1 year to maturity. What is the bond’s yield to maturity? A. 7% B. 10% C. 13% D. 15% 4. A credit instrument that requires a payment of principal and interest in the same payment is a A. simple loan. B. fixed payment loan. C. coupon bond. D. discount bond. 5. You purchase a Treasury Inflation Protected Securities, TIPS, where the coupon rate is 10% at the beginning of 2009. The CPI increased 5% over the course of 2009. What will be your coupon payment at the end of 2009? A. $50. B. $55. C. $100. D. $105. 6. Which treasury security has the greatest interest rate risk? A. 1 year bill. B. 2 year Treasury note. C. 10 year Treasury bond. D. 30 year Treasury bond.
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7. If the expected path of one-year interest rates over the next four years is 5 percent, 4 percent, 2 percent, and 1 percent, then the pure expectations theory predicts that today's interest rate on the four-year bond is? A. 1% B. 2% C. 3% D. 4% 8. What happens to interest rates when the volatility of stock prices decrease relative to bonds? A. Increase.
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