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

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