Econ.423.TEST.A

Econ.423.TEST.A - '\ \00 v ECON 423: Fall 2011 @‘V Test...

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 2
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 4
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 6
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: '\ \00 v ECON 423: Fall 2011 @‘V Test 1A '1 On my honor, I have neither given nor received unauthorized aid on this test: A ‘ Q r Name (if your signature above is NOT legible):_ i SECTION l: 3 points each 7 1. If interest rates on one year, two year and three year Trer. sury bonds are equal, the liquidity premium theory implies that a. Sh rt term interest rates are expected to be constant during the next three years. b. ort term interest rates are expected to rise during the next three years. @ hort term interest rates are expected to fall during the next three years. . Need more information to answer this. 2. It is a common practice to denominate prices of goods in U.S. dollars in many foreign countries. The notion of money that the U.S. dollar performs in this case is: Store of Value Unit of Account c. Means of Accrual d. Transfer of Risk 3. ich of the following situations will hurt a lender? . MM - If the expected inflation at the time of making a loan is 4% and the actual inflation during the Pffizg-m period that the debt is held is 5%. lemm b. If the expected inflation at the time of making a loan is 3% and the actual inflation during the period that the debt is held is 1%. c. If/the expected inflation at the time of making a loan is 10% and the actual inflation during 'e period the debt is held is 10%. f the expected inflation at the time of making a loan is -l% and the actual inflation during the period the debt is held is -l% Which of the following is both a debt market and a capital market instrument? a. Commercial Paper. Cmgmwka} ® Mortgage. c. U.S. T-bill (when mama) d. Google Shares.(e$vt€r\53 5. Let us 3 y that interest rates for all terms to maturity rise by 1%. Which of the following portfolio will 1' ely get hurt the most? (Assume that the four portfolios are equal in size before the interest rat increase and that the yield curve is flat). A portfolio invested only in two year zero-coupon bonds. 9 7/ . A portfolio invested only in two year coupon bonds. . - Q a I:- W @ A portfolio invested only in ten year zero-coupon bonds. 6" W (A ) , . WW d. A portfolio invested only in ten year coupon bonds. {I} pvt. 69 6. Which of the following is NOT an asset item in the Fed’s balance sheet? . Maiden Lane LLC X . , A BankResei-ves (\ e.— lzaanL 6”; mm W 06% (Whittier c. Discount loans d. Mortgage Backed Securities X 7. You recently purchased a coupon bond at a premium. Which of the following must be true on your investment at the time of purchase? \ WM a. Current Yield > Yield to Maturity > Coupon rate K lC' > b. Coupon rate > Yield to Maturity > Current Yield Coupon rate > Current Yield > Yield to Maturi - d. Yield to Maturity > Current Yield > Coupo ate. X 8. An increase in the principal amount of a mortgage when the monthly payment does not cover the rincipal and interest is called Negative Amortization . . Negative Equity c. Margin d. Haircut 9. You have personal funds of $10,000 that you want to invest in a mutual fund whose behavior in the next quarter is determined by the economic conditions as defined in the following table. Economic Condition P(X) Value of Mutual fund Eco. Expansion 0.50 $15,000 Eco. Slowdown 0.50 $8,000 If the maximum loss that you can take is $10,000 and if you do not have pay interest on your loan, the maximum amount that you will borrow to invest in this mutual fund is a. $0 b. $10,000 » 60.000 «.8 '— 440.000 (3) $40,000 , . (WeFIOfioa d. $50,000 I 10. Let us say that you are holding a 2 year Treasury bond. Which of the following is likely to have caused a fall in the price of your bond? (4 w; \\ go up) a. An increase in the risk spread between a 2 year T-bond and the 2 year Corporate Bond. ’4 b. An increase in the risk premium for Greek bonds. , , _ ® Fed’s recent announcement about its “twist” monetary policy. W 5" T'W d. All of the above. m¢“&s3&$u? / .. . /’ a ‘L— ‘+i>one)\ = SWCL fiincmt 'm rum-five. 1%: kg“ :55 Q \ wiv- SECTION 11: Question 1: a. Consider the market for one year discount bonds of face value of $1000. Below are the market supply and demand for the bond. Calculate the yield for each price level and draw the supply and demand curves (showing both price and interest rates). (10 points) ~ __ F _P Price Quantity Demanded Quantity Supplied L '- .———- (filbondl (Billions of dollars) {Billions of dollars) 16 70 ,oeega- $%5 ° ' 0 5W1? $ 970 120 so .0 2.5 (0H ' $ 975 95 95 .oon $ 980 90 110 , oz 5 “U5 $ 985 85 130 .0165 ;oaoqzs b. Assume that this equilibrium is at an expected inflation of 1%. Now assume that expected inflation changes to -1% (deflationary expectations) and the real interest rate is unchanged in the new equilibrium. Show how your graph is affected, and calculate the new equilibrium bond price and interest rate. Ex lain Ve briefl y e curve ? (8 points) a, " 6 Question 2. Estrella and Mishkin (E&M) in their paper entitled “Yield Curve as a predictor of US. recessions” report that the yield curve outperforms the other variables considered in their paper in one to six quarter ahead forecasting of US. recessions. TRUE 0R FALSE. What are the variables used by E&M in their study? Explain BRIEFLY the findings reported by E&M. (11 points) 56m. 8M «+wa 9W lW‘w’ 2 Question 3. a. During the cun‘ent financial crisis, an investor bought a $10,000 T-Bill (zero-coupon) with 91 days to maturity at a price of $9,990. What was the yield to maturity on this investment? (6 points) 9,440 .- 0000 / b. Could an investor who bought this T-Bill have sold it for more than its face value before it matured? Why or Why not? (4 points). \ K 2.741 W ‘ c. You have paid $1030.00 for an 8% coupon bond with a face value of $1,000 that matures in five years. You plan on holding the bond for three years. If you want to earn an annual rate of return of 9% on this investment, what price must you sell the bond for? Assume that coupon payments are not reinvested. (8 points) (“093319.720 a moat- ,4. X =5 image? = d. You have taken up your first job and you want to start saving to have $50,000 at the end of 5 years to make a down payment to buy a house. Assume that you will be saving annually at the end of each year. If the interest rate is 0.02, what should your annual saving be? (6 points) 60900 : o (Gown6 " 0 02 60.19.29: 02, = c. ==$Q.QO‘?-q'2- 4. Wall Street Journal online: US. Treasury Bond prices on September 30, 2009 e, 4...” r.“ .. .»-. “7-.-.” hunk.“ ... 1....» .,,. .‘ >4'. a. m... “raw-.1. .e._.......l.....-.....W-—m.-.«..... .1vu»~M-,p.>r‘rur-‘ n—~.~..—m<m.wu.u~.u.- ' . . , ~ . 3 V ; Asked Maturlly Coupon BId Asked ‘ Chg yield 2012 Sep15 ‘ 1.375 ; 99:24 99:24 +1 1.4588 2012 Sep 30 4.250 108:09 108:10 i +2 ‘ 1.4102] a. Why is there a difference in the above two bond (asked) prices even though both bonds are maturing very close to each other (September 2012). Answer very briefly..(3 points) . anew/1m WM 7332» Arm/ALA Mm, I‘M-4' W91“ 'DV' b. On September 30'“, The Wall Street Journal reported that the above 2012 September 30'h bond had an asked ield of 0.15% or ield to maturi of 0.15% . Calculate the asked price of this bond on September 30'”, 2011? (7 points) mm = .0015 6+ “()0 l6) WWWW @MM Q [0,000 bowl ’z \0.NO°\,’%Q =PVb°Nr on Qibo/ZDH c. Calculate the total holding period return and the annual rate of return for an investor who bought the September 3052012 bond on September 30, 2009 and sold it on September 30, 201 1? (7 points) 103110: log,3{25 :27 to, 832.60 lolt-locl.‘39-IO.§'BI.Z‘5 ’1— 2x 247,5 -.-.— ngJl-J/ ___”_-__._,___.—/ W 10331.25 (yr-131 = loMO‘i-La +— 850 ‘)7— - 1.03616292- H-I = |,O lq'Sfi' (a? \}:,OIQ5?‘ ...
View Full Document

This note was uploaded on 02/13/2012 for the course ECON 423 taught by Professor Vd during the Spring '08 term at UNC.

Page1 / 6

Econ.423.TEST.A - '\ \00 v ECON 423: Fall 2011 @‘V Test...

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online