This preview shows pages 1–6. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full 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 Pfﬁzgm
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. Tbill (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 zerocoupon bonds. 9 7/ . A portfolio invested only in two year coupon bonds. .  Q a I: W
@ A portfolio invested only in ten year zerocoupon 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
BankReseives (\ 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. $50,000 I 10. Let us say that you are holding a 2 year Treasury bond. Which of the following is likely to have
caused a fall in the price of your bond? (4 w; \\ go up)
a. An increase in the risk spread between a 2 year Tbond and the 2 year Corporate Bond. ’4
b. An increase in the risk premium for Greek bonds. , , _
® Fed’s recent announcement about its “twist” monetary policy. W 5" T'W
d. All of the above. m¢“&s3&$u?
/ .. . /’
a ‘L— ‘+i>one)\ = SWCL ﬁincmt 'm rumﬁve. 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 TBill (zerocoupon)
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 TBill 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‘M4' 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 loltlocl.‘39IO.§'BI.Z‘5 ’1— 2x 247,5 ..— ngJlJ/
___”___._,___.—/
W 10331.25 (yr131 = loMO‘iLa +— 850
‘)7—  1.03616292 HI = ,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.
 Spring '08
 VD

Click to edit the document details