Econ423_practicemidterm2010

Econ423_practicemidterm2010 - Economics 423 Financial...

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Economics 423: Financial Markets Fall 2010 Instructor: Josef Perktold Midterm Examination Name:. ................................ Student ID:. ........................................... Instructions (Read Carefully): You have 70 minutes to complete this exam. There are 11 questions totaling 120 points; the point value of each question is given next to that question. Do not forget to label the axes and curves when you draw a graph. For each question, support your answer with arguments. This is a closed book/notes exam. Only simple calculators are allowed. Good Luck! (10 pages including cover) 1
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1) (6 points) When a saver deposits funds in a bank, she may earn about 5% on the deposit. saver be able to earn more on her funds and the borrower have to pay less to borrow these funds? Why do large companies increasingly issue short term securities, instead of taking out a loan with a bank? 2) (12 points) Portfolio Choice a) Give some reasons why an investor might prefer a mutual fund over individual stocks. b) Give some reason why an investor might prefer funds in a checking account over bonds. c) Give some reason why an investor might prefer municipal bonds over Treasury bonds. 2
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3) (8 points) Money a) What is the di/erence between money, wealth and income? b) What is the real interest rate on cash holdings. 4) (6 points) Adverse Selection What is the adverse selection problem? Illustrate for the following case: A small entrepreneur approaches a bank and tries to convince the bank manager that the idea has a high probability of
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Econ423_practicemidterm2010 - Economics 423 Financial...

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