THIRD MIDTERM EXAM EC26102: MONEY, BANKING AND FINANCIAL MARKETS MARCH 24, 2004 Ths exam has questons on eght pages. Before you begn, please check to make sure that your copy has all questons and all eght pages. All questons wll receve equal weght n determnng your exam score. lease answer all questons on the answer sheet provded. 1. When the prce of any bond a coupon bond or a dscount bond falls, the nterest rate regardless of whether t s measured by the yeld to maturty, the current yeld, or the yeld on a dscount bass: A) Always rses. C) None of the above. 2. Consder a smple loan that provdes the borrower wth an amount of funds equal to LV (for loan value) today that gets repad together wth an addtonal amount I (for nterest payment) n one bg lump sum of LV + I after one year. For ths loan, the yeld to maturty must satsfy: I A) LV LV B) I LV I C) LV = +. LV I D) I = +. 3. For a one-year smple loan, the yeld to maturty: A) Is always equal to the smple nterest rate. B) Is always greater than the smple nterest rate. C) Is always less than the smple nterest rate.
2 4. Consder a fxed payment loan of $1000 that gets repad by makng annual payments of $126 per year for the next years. For ths loan, the yeld to maturty must satsfy: $126 A) $ 1000 (1 + ) $1000 B) $ 126 (1 + ) C) $ $126 $126 $126 $126 1000 = + + +... +. 2 3 (1 + ) (1 + ) (1 + ) D) $ $126 $126 $126 $126 $1000 1000 = + + +... + +. 2 3 (1 + ) (1 + ) (1 + ) (1 + ) 5. Consder a coupon bond wth face value F, annual coupon payment C, and one year to maturty that sells for prce today. For ths bond, the yeld to maturty must satsfy: C A) C F B) = +. C C) F C D) F = +. 6. When a coupon bond sells for a prce that s above ts face value, the yeld to maturty: A) Is always equal to the coupon rate. B) Is always greater than the coupon rate. C) Is always less than the coupon rate. D) None of above. 7. For a coupon bond, when the bond prce falls, the yeld to maturty: A) Always rses. C) May ether rse or fall, dependng on whether the prce s above or below face value.
3 8. Consder a dscount bond wth $1000 face value and one year to maturty that sells for $900 today. For ths bond, the yeld to maturty must satsfy: $100 A) $900 $900 B) $100 $100 C) $900 $100 D) $1000 9. For a dscount bond, when the bond prce rses, the yeld to maturty: A) Always rses. C) May ether rse or fall, dependng on whether the prce s above or below face value. 10. Consder a coupon bond wth face value F, annual coupon payment C, and 2 years to maturty that sells for prce today. For ths bond, the current yeld c must satsfy: C A) c F C B) c C) c F F D) c 11. For a coupon bond that s sellng for a prce that s above face value: A) The current yeld s always above the yeld to maturty. B) The current yeld s always below the yeld to maturty. C) The current yeld may ether be above or below the yeld to maturty, dependng on the bond s maturty.
4 12. For a coupon bond, when the bond prce falls, the current yeld: A) Always rses. C) May ether rse or all, dependng on whether the bond s sellng at a prce that s above or below face value. 13. Consder a dscount bond wth face value F that sells for prce today. For ths bond, the yeld on a dscount bass db must satsfy: F A) db F F B) db F 365 days C) db =. F days to maturty F days to maturty D) db =. 365 days 14. For a dscount bond, the yeld on a dscount bass: A) Is always equal to the yeld to maturty. B) Is always greater than the yeld to maturty. C) Is always less than the yeld to maturty. D) May be greater than, equal to, or less than the yeld to maturty, dependng on whether the bond s sellng for a prce that s above or below face value. 15. For a dscount bond, when the yeld to maturty rses, the yeld on a dscount bass: A) Always rses. C) May ether rse or fall, dependng on whether the bond s sellng for a prce that s above or below face value.
5 16. Suppose that today, an nvestor buys a coupon bond wth $1000 face value, $100 annual coupon payment, and ten years to maturty for the prce of $1000. Suppose also that over the next year, nterest rates rse. Then after one year, f the nvestor sells the bond n the secondary market, he or she wll earn a total return that: A) Is equal to the bond s coupon rate of 10%. B) Is greater than the bond s coupon rate of 10%. C) Is less than the bond s coupon rate of 10%. [ Ths space ntentonally left blank please contnue to page 6. ]
6 Questons 17 19 refer to Fgure 1, below: In ths fgure, the y-axs (vertcal axs) keeps track of the prce of a one-year dscount bond wth $1000 face value. Note that the bond prce rses as we move up the y-axs. The x-axs (horzontal axs) keeps track of the quantty of bonds demanded and suppled, wth the quantty of bonds ncreasng as we move to the rght along the x-axs. 17. In fgure 1, the downward-slopng lne represents the: A) Demand curve for bonds. B) Supply curve for bonds. 18. In fgure 1, when = $750: A) The demand for bonds exceeds the supply of bonds, hence the bond prce must fall. B) The demand for bonds exceeds the supply of bonds, hence the bond prce must rse. C) The supply of bonds exceeds the demand for bonds, hence the bond prce must fall. D) The supply of bonds exceeds the demand for bonds, hence the bond prce must rse. 19. In fgure 1, the equlbrum prce of bonds s: A) $950. B) $900. C) $850. D) $800. E) $750.
7 Questons 20 and 21 refer to fgure 2, below: In ths fgure, the y-axs (vertcal axs) keeps track of the yeld to maturty on a one-year dscount bond wth $1000 face value. Note that the nterest rate rses as we move up the y-axs. The x-axs (horzontal axs) keeps track of the quantty of loanable funds demanded and suppled, wth the quantty of loanable funds ncreasng as we move to the rght along the x-axs. 20. In fgure 2, the downward-slopng lne represents the: A) Demand curve for loanable funds. B) Supply curve for loanable funds. 21. In fgure 2, when = 5.3%: A) The demand for loanable funds exceeds the supply of loanable funds, hence the nterest rate must fall. B) The demand for loanable funds exceeds the supply of loanable funds, hence the nterest rate must rse. C) The supply of loanable funds exceeds the demand for loanable funds, hence the nterest rate must fall. D) The supply of loanable funds exceeds the demand for loanable funds, hence the nterest rate must rse.
8 22. Accordng to the loanable funds framework, demandng a bond s equvalent to: A) Supplyng loanable funds. B) Demandng loanable funds. C) None of the above. 23. Whch of the followng factors work to shft the supply curve for loanable funds? A) Changes n the lqudty of bonds. B) Changes n the expected proftablty of nvestment opportuntes. C) Changes n the relatve rskness of bonds. D) Changes n wealth. E) All three factors, (A), (B), and (C), lsted above. F) All three factors, (A), (C), and (D), lsted above. 24. Accordng to the loanable funds framework, when bonds become less rsky relatve to other assets (such as stocks), the nterest rate: A) Rses. B) Falls. C) May ether rse or fall, dependng on the relatve magntude of the shfts n the supply of and demand for loanable funds.. Accordng to the loanable funds framework, when nvestors wealth ncreases, the nterest rate: A) Rses. B) Falls. C) May ether rse or fall, dependng on the relatve magntude of the shfts n the supply of and demand for loanable funds.