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FIN 353 Quiz 1 Version A Student: ___________________________________________________________________________ 1. In which situation would you prefer to be a borrower? A. The interest rate is 19% and expected inflation is 10%. B. The interest rate is 6% and expected inflation is 3%. C. The interest rate is 60% and expected inflation is 35%. D. The interest rate is 10% and expected inflation is 11%. 2. Debt issued by Southeastern Corporation has a coupon of 10% and currently yields 11%. A municipal bond of equal risk currently has a coupon of 9% and yields 8%. Your marginal tax bracket is 25%. Which investment is a better buy? A. Corporate bond B. Municipal bond C. None, they have the same yield 3. There is a business boom and corporate earnings have risen such that the probability of bankruptcy has fallen and liquidity has risen. The demand for corporate bonds has _______, the demand for Treasury bonds has _______, and the spread has _________. A. decreased, increased, narrowed B. increased, decreased, narrowed C. decreased, increased, widened D. increased, decreased, widened 4. The one-year interest rate over the next three years is expected to be 3%, 5%, 7%. The liquidity premium for one- to three-year bonds: 0%, 0.25%, 0.5%. What is the interest rate on the three year bond? A. 7.0% B. 7.5% C. 5.0% D. 5.5% 5. What kind of credit instrument pays no coupon and sells less than face value? A. Simple Loan B. Discount Bond C. Coupon Bond D. Fixed Payment Loan 6. The current one year interest rate is 3% on a T-bill. The current two year interest is 6% on the T-note. What is the market predicting about the interest rate on a one year bond in year 2(one year from now) solely based on the expectations theory? A. 3% B. 6% C. 9% D. 12%

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Figure 1 7. Based on Figure 1, what is the market predicting about future interest rates? A. Increase moderately in the short-term and significantly in the long-term. B. Decrease moderately in the short-term and significantly in the long-term. C. Decrease significantly in the short-term and moderately in the long-term. D. Increase significantly in the short-term and moderately in the long-term. 8. There is a housing crash that causes the economic growth rate to decrease. What will the Fed do to stimulate economic growth? A. Open market sale to increase interest rates. B. Open market sale to decrease interest rates. C. Open market purchase to increase interest rates. D. Open market purchase to decrease interest rates. Figure 2 9. In Figure 2, the most likely cause of the increase in the equilibrium interest rate from i1 to i2 is A. business cycle boom. B. business cycle contraction. C. an increase in expected inflation. D. a decrease in expected inflation.
10. Currently, the discount rate is 4% and the federal funds rate is 3%. The Fed changes the discount rate to 2%. How will the supply curve change? How has the federal funds rate changed?

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