ECON 303 Exam 2 – The present value of an expected

Subject: Economics / General Economics
Question
ECON 303 Exam 2 NAME_________________________ This is a 2 hour closed book exam. Please put your name on the exam. The only supplementary aids allowed for this
exam are a 3×5 inch index card (with any notes you may wish to have on ONE side of the card), a calculator whose
primary purpose is to serve as a calculator, and paper (for scratch work or for written answers). ?Cell phones,
blackberries, and other wireless devices are not permitted.
You are to answer all the multiple choice questions from part I for a total of 37.5, four of six questions from part II
for a total of 20 points, two of three problems from part III for a total of 30 points, and the required problem from
part IV for 20 points. This will total to 107.5 points. Since the course is designed for 100 point tests, you have an
opportunity to earn 7.5 bonus points on this exam.
NOTE: You will save the Exam file to the proctor’s computer and then open the file. Print the exam and hand write
your answers (your proctor MUST have the ability to scan the exam back to the computer). After the exam file has
been submitted in Blackboard using the link below, delete your file(s) from the proctor’s computer. The proctor
must confirm that you have done this step.
As a precautionary measure, I require that all handwritten material should then be mailed to my office by the
PROCTOR (except the scratch paper and index card which should be destroyed by your proctor). Otherwise if any
exam material is electronically “lost” or the scanned material is not complete, you will have to take the
comprehensive final to replace the damaged exam. I will not be giving individual make up exams except under the
most unusual circumstances. You are responsible for providing a stamped addressed envelope when you take the
exam. The mailing address AND return address must both be:
Dan Owens
UND Department of Economics
293 Centennial Drive Stop 8369
Grand Forks, ND 58202-8369
Good luck.
Part I: Multiple Choice @ 1.25 points each. Select the best answer available and type or print the capital letter
associated with that answer in the space below each question.
1. The present value of an expected future payment ________ as the interest rate increases.
A) falls
B) rises
C) is constant
D) is unaffected
A credit market instrument that requires the borrower to make the same payment every period until the maturity
date is known as a
A) simple loan.
B) fixed-payment loan.
C) coupon bond.
D) discount bond.
3. All of the following are examples of coupon bonds except
A) Corporate bonds
B) U.S. Treasury bills
C) U.S. Treasury notes D) U.S. Treasury bonds The interest rate that equates the present value of payments received from a debt instrument with its value today is the
A) simple interest rate.
B) current yield.
C) yield to maturity.
D) real interest rate.
Which of the following is true for a coupon bond?
A) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate.
B) The price of a coupon bond and the yield to maturity are positively related.
C) The yield to maturity is greater than the coupon rate when the bond price is above the par value.
D) The yield is less than the coupon rate when the bond price is below the par value.
The ________ of a coupon bond and the yield to maturity are inversely related.
A) price
B) par value
C) maturity date
D) coupon rate
The yield to maturity for a perpetuity is a useful approximation for the yield to maturity on long-term coupon
bonds. The ________ is one approximation for the yield on a coupon bond. A) current yield B) discount yield C) future yield D) present yield 8. One key difficulty in answering the question: "Would you be better off financing your new home with a 15?-?year
mortgage at 9% or by borrowing for five years at 8% and refinancing thereafter?" is that
A) housing prices are very erratic.
B) the tax deductibility of mortgage interest payments has changed over time.
C) dollars paid in different periods are not in the same units.
D) 15?-?year mortgages are fixed?-?payment loans while 5-?year mortgages are simple loans.
9. If, while you are holding a coupon bond, its market price falls, you can be sure that
A) the coupon payment you are receiving must have been reduced.
B) the interest rate on other similar bonds must have fallen.
C) the interest rate on other similar bonds must have risen.
D) the par value of the bond must have declined.
10. Which of the following is fixed on a coupon bond?
A) Current yield
B) Coupon rate
C) Market price D) Yield to maturity 11. A bond’s price and its yield to maturity are inversely related because
A) discounting future payments at a higher rate reduces the present value of the payments.
B) discounting future payments at a higher rate increases the present value of the payments.
C) an increase in the yield to maturity will lower a bond’s coupon rate and hence its price.
D) a fall in a bond’s price will lower its par value and hence its yield to maturity.
12. For a specific change in market interest rates
A) the shorter the time until a bond matures, the greater will be the change in its price.
B) the longer the time until a bond matures, the greater will be the change in its price.
C) the longer the time until a bond matures, the greater will be the change in its par value.
D) the shorter the time until a bond matures, the greater will be the change in its coupon rate.
13. If a lender is certain that market interest rates will decline in the future, which of the following will she be most
likely to purchase?
A) A six?-?month Treasury bill
B) A two?-?year Treasury note
C) A thirty?-?year Treasury bond
D) A fifty?-?year Tennessee Valley Authority bond
14. We would expect yields on long?-?term corporate bonds
A) to always be equal the coupon rate on those bonds.
B) to be far more stable than their market prices.
C) to vary inversely with their par values.
D) to always be higher than the yields on long?-?term U.S. Treasury bonds.
15. Everything else held constant, if the expected return on RST stock rises from 9 to 10 percent and the expected
return on XYZ stock rises from 7 to 8 percent, then the expected return of holding RST stock ________ relative
to XYZ stock and demand for XYZ stock ________.
A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls
16. If fluctuations in interest rates become larger, then, other things equal, the demand for stocks ________ and the
demand for long-term bonds ________.
A) increases; increases
B) increases; decreases
C) decreases; decreases D) decreases; increases
17. In the bond market, the seller is considered to be A) the lender.
B) the borrower.
C) the lender or the borrower depending upon the use to which the funds are put.
D) the lender or the borrower depending upon whether interest rates are rising or falling.
18. In the market for loanable funds, the buyer is considered to be
A) the lender.
B) the borrower
C) the lender or the borrower depending upon the use to which the funds are put.
D) the lender or the borrower depending upon whether interest rates are rising or falling.
19. The demand for bonds is
A) equivalent to the demand for loanable funds.
B) equivalent to the supply of loanable funds.
C) represented by an upward?-?sloping line when the price of bonds is on the vertical axis and the quantity of bonds
demanded is on the horizontal axis.
D) represented by a downward?-?sloping line when the interest rate is on the vertical axis and the quantity of bonds
demanded is on the horizontal axis.
20. If there is an excess supply of loanable funds at a given interest rate, then
A) the price of bonds will fall.
B) the price of bonds will rise.
C) the interest rate will rise.
D) the price of bonds may rise or fall depending upon the reasons for the excess supply of loanable funds.
21. Which of the following would NOT cause the demand curve for bonds to shift?
A) A change in wealth.
B) A change in the price of bonds.
C) A change in the liquidity of bonds.
D) A change in expected inflation.
22. If the expected returns on commodities falls, while the expected returns on bonds do not change, then
A) the demand curve for bonds will shift to the left.
B) the supply curve for loanable funds will shift to the right.
C) the equilibrium interest rate will fall.
D) the equilibrium price will rise.
23. The demand curve for bonds would be increased by
A) an increase in expected returns on other assets.
B) an increase in the information costs of bonds relative to other assets.
C) a decrease in the marginal income tax rate.
D) a decrease in the liquidity of bonds relative to other assets.
24. An increase in the corporate profits tax is likely to cause
A) the equilibrium interest rate to rise and the equilibrium price of bonds to fall.
B) the equilibrium interest rate to fall and the equilibrium price of bonds to rise.
C) the equilibrium interest rate and the equilibrium price of bonds both rise.
D) the equilibrium interest rate and the equilibrium price of bonds both fall.
25. The risk structure of interest rates is
A) the structure of how interest rates move over time.
B) the relationship among interest rates of different bonds with the same maturity.
C) the relationship among the term to maturity of different bonds.
D) the relationship among interest rates on bonds with different maturities.
Other things being equal, a decrease in the default risk of corporate bonds shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds to the ________.
A) right; right
B) right; left
C) left; right
D) left; left 27. An increase in the riskiness of corporate bonds will ________ the yield on corporate bonds and ________ the
yield on Treasury securities, everything else held constant.
A) increase; increase
B) reduce; reduce
C) increase; reduce
D) reduce; increase
28. U.S. Treasury bonds
A) carry no risk of default and are therefore not risky investments.
B) have constant yields to maturity and are therefore not risky investments.
C) have constant coupon rates and are therefore not risky investments.
D) are subject to fluctuations in their market prices and are therefore risky investments.
29. Which theory of term structure asserts that lenders and borrowers have very strong preferences for particular maturities?
A) pure expectations.
B) liquidity premium
C) segmented markets
D) preferred habitat
If the expected path of 1-year interest rates over the next five years is 4 percent, 5 percent, 6 percent, 7 percent, and 8 percent,
the preferred habitat theory predicts that the bond with the highest interest rate today is the one with a maturity of
A) one year.
B) two years.
C) three years.
D) five years.
E) unable to be determined with the information given. Part II: Short Problems @ 5 points each. Do 4 out of 6 problems below. Show all set up and work for credit.
All interest rate problems must be carried at least 5 decimal places and left in % form. Formulas from class
must be utilized and financial calculator answers will not be accepted.
1. Determine the market price of a 3-year, 4.89%, $25,000 coupon bond when market interest rates are 5.45%. 2. What is the total rate of return on a $5,000 coupon bond with a coupon rate 7.64% that was purchased for $4,700
and sold one year later for par? 1
3. What is the approximate yield to maturity for a $150,000 coupon bond with a 5.89% coupon rate selling for
$159,000
2
and maturing in 6 years (use the approximate ?im? ? formula from class). 4. Determine the market price on a ten year 4.6%, $50,000 coupon bond when the market interest rate is 5.2%. 5. Do both of the following:
a) A $250,000 coupon bond with a $17,800 coupon payment and a yield to maturity of 9.15% has a coupon rate of b) A consol paying $250 annually when the interest rate is 4.55% percent has a price of 6. Suppose that you are an savor with a choice of three financial assets that are identical in every way except their
nominal interest rate and taxability. Calculate the after tax real yield for each of the following three assets and
choose which of the three assets is the best option if inflation is expected to be 2.25% annually.
Asset 1: Interest rate 9%, interest taxed at 36%
Asset 2: Interest rate 8%, interest taxed at 27%
Asset 3: Interest rate 6.0%, interest taxed at 0% Parts III & IV: Essays/Problems/Graphs
Show all set up and work for credit.
All interest rate problems must be carried at least 5 decimal places and left in % form. Financial calculator answers
for present value will not be accepted.All answers must be legible to receive credit. Partial credit is awarded.
Part III: 15 point problems—do 2 of the following 3 questions.
1. Evaluate which of the following options would be your best investment based solely on the yield to maturity criterion.
Option #1: Purchase a $10,000 discount bond selling for $8,100 and maturing in 4 years.
Option #2: Purchase a $10,000 coupon bond with a 5.5% coupon rate selling for $10,600 and maturing in 6 years.
Option #3: Lend a reliable friend $15,000 with the agreement that she pays you $6,534.80 five years from now,
$8,540.72 ten years from now, and $11,162.38 fifteen years from now. (Note: each future payment
represents an equal present value amount). 3
4
5
6
7 8
9
10
2. Using ?either? the loanable funds model or the supply and demand for bonds model, demonstrate graphically and
explain the changes in "i" and total lending ?for each of the following three scenarios?. Note: each letter should be
considered independent of the other letters and worked on separate graphs.
a. The Federal Reserve reverses its policy of quantitative easing at the same time business confidence improves.
b. A new forecast for next year has expected inflation falls from 14.75% to 2.5%.
c. The government decreases income taxes while holding government expenditures constant. 11
12
13
14 15
16
3. Suppose you purchased a 25-year, $1.5 million deep discount bond when it was initially offered. 7 years
later you
17
sell the bond and market interest rates have risen from 5.45% to 6.89%.
a. Calculate the initial price of the bond.
b. Calculate the current price of the bond.
c. Calculate the annual holding period return on this instrument and compare it to the annual return you were expecting.
d. Explain whether your return would have been relatively greater or less if you had purchased a 10-year instrument.
Support your conclusion with numerical evidence. . Part IV: 20 point problem—do the following problem
Given the following information on U.S. Government Treasury securities:
? 1-year note yield = 6.83%
2-year note yield = 6.72%
? 4-year note yield = 6.42%
5-year note yield = 6.39% 3-year note yield = 6.51%
6-year note yield = 6.34% And non-changing premiums of 0, .15%, .26%, .42%, .49%, .57%, & .62%
a.
b.
c.
d.
e.
f. Calculate the expected expectations yields for a (4,1,1) path.
Calculate the preferred habitat yield for a (3,2,1) path.
Calculate the expected market yields for a (1,5) path.
Calculate the expected expectations yield for a 3-year note purchased at the beginning of year 2.
Determine the yield on a 4-year Treasury note purchased today.
Graph and provide an interpretation of this yield curve.

https://applewriters.com/place-order/

We can do it for you