Final_Exam_review_notes_FIN_353[1]

# Final_Exam_review_notes_FIN_353[1] - Final Exam FIN 353...

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Final Exam FIN 353 Review Notes 1 Expectations 50 Multiple Choice Questions: 15 questions from Chapters 3-5, 8. 15 questions from Chapters 9-11, 21, 13. 15 questions from Chapters 15, 17, 18, 20. 5 questions from Chapter 25. Bring a green scantron, pencil, and calculator. One cheat sheet allowed - two sided. Entire Class Period to take the exam, 2 hours and 45 minutes. 2 Chapter 3 2.1 YTM What is the Interest Rate on a ﬁxed payment loan of \$250 where \$100 is due at the end of the year for the next three years? 250 = 100 (1 + r ) + 100 (1 + r ) 2 + 100 (1 + r ) 3 (1) Find YTM and Price for simple loan, ﬁxed, coupon, discount. 2.2 Relationship between YTM and Price Remember when YTm is less than coupon than bond is trading at a premium. Remember when YTM is greater than coupon than bond is traing at a discount. 1

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2.3 real interest rate If nominal is 10% and expected inﬂation is 2% than real rate is 8%. 3 Chapter 4 Factors to aﬀect demand: 1. wealth 2. expected returns 3. risk 4. liquidity Interest rates are expected to increase which means bond returns are expected to decline leading to reduction in the demand for bonds, lower price, and higher interest rates. If stock market risk is relatively higher than risk for bonds, demand for bonds will increase pushing the price up and interest rates down. Factors to aﬀect supply 1. business cycle 2. expected inﬂation 3. government deﬁcit Currently if have expanding business cycle, ﬁrms are going to borrow more to ﬁnance growth of their companies. Therefore, they will sell bonds to borrow money. The supply curve shifts to the right, prices decline, and interest rates increase. when expected inﬂation increases, the true cost of debt decreases, and ﬁrms are more likely to borrow by selling bonds. Prices fall and rates increase. If government has a large deﬁcit than they need to ﬁnance it buy selling bonds, pushing supply up, prices down, and rates up. 2
3.1 Fisher Eﬀect What happends when expected inﬂation increases: On the demand side, demand shifts to the left since if expected inﬂation increases, then prices of real goods will increase like housing. People put money into housing, pusing the demand down for bonds, the price down, and rates up. On the supply side, supply shifts to the left. 3.2 Business Cycle In a business cycle boom more wealth so people buy more bonds. Demand shifts to the right. Also, supply shifts to the right since businesses want to ﬁnance growth. Supply shifts more than demand so rates increase. 4 Chapter 5

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## This note was uploaded on 09/20/2011 for the course FIN 353 taught by Professor Cobus during the Spring '08 term at S.F. State.

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Final_Exam_review_notes_FIN_353[1] - Final Exam FIN 353...

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