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Fall2008Test1-Answers

Fall2008Test1-Answers - ECON 423 Fall 2008 Test 1B On my...

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ECON 423: Fall 2008 Test 1B On my honor, I have neither given nor received unauthorized aid on this test: ______________ Name:___________________________________________ Section: _______________ SECTION I: (1.5 points each) __TRUE__ 1. An increase in the price level with shift money demand curve to the right and interest rates will rise. NOT DISCUSSED IN CLASS YET. ???? __ 2. A coupon bond with a 2% coupon rate is likely to be sold at a premium at current interest rates in the US economy. NEED MORE INFORMATION – TERM TO MATURITY?? _TRUE__ 3. Dollar denominated bonds sold by a U.S. corporation in France are Eurobonds. FALSE _4. An increase in the relative riskiness of bonds will shift the bond demand curve to the right. TRUE_ 5. US T-bills are money market instruments. TRUE_ 6. The present value of $1000 to be paid in five years is smaller when the interest rate is 6 percent than when it is 4 percent. TRUE _7. The coupon payment on a bond does not change when its yield to maturity changes. FALSE _8. When the yield to maturity is greater than the coupon rate, the coupon bond will be sold at a premium. FALSE 9. If you hold a discount bond for 3 months and sell it in the secondary market before it matures, and if interest rates have risen during the holding period, you will incur a capital gain. FALSE 10. A recession has always followed whenever the Fed has decreased the growth rate of money supply in the US economy. NOT DISCUSSED IN CLASS Section II: Multiple Choice Questions (3 points each) 1. Estrella and Mishkin report the following results of their Probit estimation using the Yield Curve Spread (Spread between the interest rates for a one-year T-security and a 10 year T-bond) to forecast recession four quarters ahead. Recession Probability Value of Spread (Percent) (Percentage Points) 5 1.21 10 0.76 15 0.46 20 0.22 25 0.02 30 -0.17 1
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40 -0.50 50 -0.82 60 -1.13 70 -1.46 80 -1.85 90 -2.40 a If the interest rate on a one-year bond is 3.5% and the interest rate on a 10 year bond is 2.5%, the probability of a recession as per these results is between a. 5% and 10% b. 10% and 15% c. 50% and 60% d. 60% and 70%
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