tesfatsi@iastate.edu
ANSWER KEY
SECOND MIDTERM EXAM: 70 POINTS TOTAL L. Tesfatsion
Econ 353/Section 1
April 6, 1999
1-1 If a borrower receives a simple loan on January 1, 1999 in amount
$1000 and agrees to pay the lender $1100 on June 1, 2001, then the
simple interest rate on this loan is _________.
A. 1 percent
X B. 10 percent
C. $100
D. 5 percent
2-1 Which of the following are true in general for coupon bonds?
A. The owner of the coupon bond receives a fixed interest payment every
year until the maturity date, when the face value is repaid.
B. U.S. Treasury bonds and notes are examples of coupon bonds.
C. Corporate bonds are examples of coupon bonds.
X D. All of the above
E. Only A and B of the above
3-1 Under the terms of a coupon bond, the borrower agrees to pay the
lender
A. a periodic fixed coupon payment until a specified maturity date, where
the fixed coupon payment includes both principal and interest.
B. the face value of the bond plus principal, both at the maturity date.
X C. a periodic fixed coupon payment until a specified maturity date, plus
the face value of the bond at the maturity date.
D. only one payment, the face value of the bond at the maturity date,
where the face value is more than the purchase price of the bond.
4-1 The current yield on a coupon bond with a purchase price of $80, a $100
face value, annual coupon payments of $10, and a 2-year maturity is
X A. the coupon payment $10 divided by the purchase price $80.
B. the present value of all payments (coupon payments plus face value).
C. the coupon payment $10 divided by the face value $100.
D. the present value of all coupon payments.
5-1 If the annual interest rate is 10 percent, the present value of a payment
of $400 to be received two years from now is
A. $400 multiplied by (1 + .10)@2
X B. $400 divided by (1 + .10)@2
C. $400 divided by (1 + .20)
D. $400 divided by 2
6-1 Letting "*" denote multiplication, if the annual interest rate is 5
percent, then the present value of a payment stream ($10, $50) with $10
to be received at the end of the first year and $50 to be received at the
end of the second year is given by
A. $10*(1 + .05) + $50*(1 + .05)@2
B. $10/(1 + .10) + $50/(1 + .10)
X C. $10/(1 + .05) + $50/(1 + .05)@2
D. [$10 + $50] divided by 2
7-1 The yield to maturity i on a coupon bond with a purchase price $180,
a face value $200, a coupon payment stream ($20,$20), and a 2-year
maturity is calculated as follows:
A. Total coupon payments $40 divided by the maturity 2.
X B. The annual interest rate i that, when used to calculate the present
value PV(i) of ($20,$220), gives a value for PV(i) equal to $180.
C. The coupon payment $20 divided by the purchase price $180.
D. The present value of the coupon payment stream ($20, $20).
8-1 For a coupon bond, its purchase price is _________ than its face value
if and only if its coupon rate is __________ than its yield to maturity.
A. higher; lower
B. lower; higher
X C. lower; lower
D. none of the above.
9-1 Which of the following are true for the current yield of a coupon bond?
A. The current yield is defined as the coupon payment divided by the
price of the bond.
B. The formula for the current yield is identical to the formula
describing the yield to maturity for a consol.
C. The current yield will be a close approximation for the yield to
maturity the longer the time to maturity, and also the closer the bond
price is to its face value.
X D. All of the above are true
E. Only A and B of the above are true.
10-1 Which of the following $1000 face-value securities has the LOWEST
yield to maturity?
X A. A 5 percent coupon bond selling for $1,000
B. A 10 percent coupon bond selling for $1,000
C. A 15 percent coupon bond selling for $1,000
D. A 15 percent coupon bond selling for $900
11-1 In which of the following situations would you prefer to be BORROWING?
A. The nominal interest rate is 9 percent and the expected inflation rate
is 7 percent.
B. The nominal interest rate is 4 percent and the expected inflation rate
is 1 percent.
C. The nominal interest rate is 13 percent and the expected inflation rate
is 15 percent.
X D. The nominal interest rate is 25 percent and the expected inflation rate
is 50 percent.
12-1 Which of the the following are true concerning the distinction between
interest rates and return rates.
A. The return rate on a bond will not necessarily equal the interest
rate on that bond.
B. The return rate can be expressed as the sum of the current yield
and the rate of capital gain or loss
C. Measured from time T to time T+1, the return rate will be greater than
the interest rate when the price of the bond rises between T and T+1.
X D. All of the above are true.
E. Only A and B of the above are true.
13-1 Holding everything else constant,
A. if an asset's risk falls relative to that of alternative assets,
the demand will rise.
B. the more liquid an asset, relative to alternative assets, the
greater will be the demand.
C. the lower the expected return relative to alternative assets,
the greater will be the demand.
D. all of the above.
X E. only A and B of the above.
14-1 Empirically, most savers find risk ___________ and return ___________.
Consequently, if you offer a saver a choice of another asset portfolio
than the one he currently owns, where both portfolios have the same total
market value but the alternative portfolio has greater risk, the only way
the saver would be willing to accept the alternative portfolio in place
of his current portfolio is if the alternative portfolio has a_________
expected return rate.
A. desirable; undesirable; lower
X B. undesirable; desirable; higher
C. undesirable; desirable; lower
D. desirable; undesirable; higher
15-1 If a portfolio is sufficiently diversified, the __________ risk of each
asset contributes nothing to the total risk of the portfolio; consequently,
only _________ risk remains.
A. interest rate; default
X B. nonsystematic; systematic
C. default; interest rate
D. systematic; nonsystematic
16-1 The __________ of an asset measures the extent to which its
expected return rate varies directly with the expected return rate
of __________, hence it constitutes a measure of its systematic risk.
A. market price; the risk-free asset
B. standard deviation; the market portfolio
C. liquidity; the risk-free asset
X D. beta; the market portfolio
17-1 CAPM theory assumes that, for any given level of ________, each
saver prefers a higher level of ___________ to a lower level.
A. expected return; risk
X B. risk; expected return
C. interest; liquidity
D. liquidity; interest
18-1 The basic capital asset pricing (CAPM) postulates that the expected
return rate of an asset can be explained by __________ of systematic
risk as reflected by movements in ______________.
A. two sources; its current yield and its capital gain or loss
X B. a single source; the expected return rate of the market portfolio
C. multiple sources; inflation rate, yield spread, and other factors
D. its total amount; the purchase price of the asset
19-1 Arbitrage pricing theory (APT) postulates that the _______________
of an asset can be explained ___________.
A. price; by arbitrage conditions relating its price to its current yield
X B. expected return rate; by multiple sources of systematic risk
C. expected return rate; solely by movements in the market portfolio value
D. systematic risk; by its degree of liquidity
20-1 When the interest rate on loans is _________ the equilibrium interest
rate, there is an excess _________ for (of) loanable funds and the
interest rate will tend to _______.
X A. below; demand; rise
B. below; demand; fall
C. below; supply; fall
D. above; supply; rise
21-1 When an increase occurs in the expected interest rate on bonds from
period T+1 to period T+2, all else remaining constant, normally one
would expect to see a _________ in the demand for bonds in period T
because of ____________.
A. increase; an expected increase in the price of bonds in period T+1
X B. decrease; an expected decrease in the price of bonds in period T+1
C. increase; an expected decrease in the price of bonds in period T+1
D. decrease; an expected increase in the price of bonds in period T+1
22-1 In gross domestic product accounting, HC exports consist of all
purchases by ________ of goods and services produced ___________.
A. ROW; within the borders of ROW
B. HC; with ROW-owned assets of production
X C. ROW; within the borders of the HC
D. HC; within the borders of ROW
23-1 In GDP accounting, ROW saving in relation to the HC is defined to be
___________ minus ______________.
A. HC imports; HC exports
B. ROW GDP; ROW consumption
X C. Total income received by ROW from the HC; HC exports
D. Total income received by ROW from the HC; HC imports
24-1 When the U.S. exchange rate for the French franc changes from 9 francs
per dollar to 10 francs per dollar, then
A. the franc has appreciated and the dollar has appreciated
X B. the franc has depreciated and the dollar has appreciated
C. the franc has appreciated and the dollar has depreciated
D. the frand has depreciated and the dollar has depreciated
25-1 If the U.S. dollar appreciates relative to the British pound,
X A. British wool blankets will become cheaper in the U.S.
B. American wheat will become cheaper in Great Britain
C. British wool blankets will become more expensive in the U.S.
D. None of the above
26-1 Given a world divided between HC and ROW, the purchasing power parity
condition in level form asserts that
A. the HC nominal exchange rate will stay constant over time
X B. the HC real exchange rate will stay constant over time
C. the HC real interest rate will stay constant over time
D. the value of HC GDP and ROW GDP will stay equal over time
27-1 Given a world divided between HC and ROW, the purchasing power parity
condition reduces to a straightforward application of the "law of one
price" under the following conditions:
A. HC and ROW produce one good of the same physical type
B. there are no trade barriers between the HC and ROW
C. every resident of the HC and ROW has complete information about
the price and availability of goods anywhere in the world
X D. all of the above.
28-1 Given a world divided between HC and ROW, the purchasing power parity
condition in rates-of-change form predicts the following: If the 1996
inflation rate in the HC is 8 percent, and the 1996 inflation rate in ROW
is 6 percent, then the HC exchange rate E will _______ in 1997.
A. rise by 7 percent
B. rise by 2 percent
C. remain unchanged
X D. fall by 2 percent
29-1 Given a world divided between HC and ROW, the interest parity
condition is _______ condition that attempts to help predict
the short-run relation between _________ in the HC and ROW by
determining a necessary condition for______________.
A. a market equilibrium; currency reserves; demand = supply for HC currency
B. an accounting; savings rates; equality of HC and ROW interest rates
X C. an arbitrage; interest rates; the absence of profit opportunities
D. a balance of payments; borrowing and lending; bond market equilibrium
30-1 Given a world divided between HC and ROW, according to the interest
parity condition, a ROW saver attempting to decide between holding a bank
deposit account in ROW and a bank deposit in the HC with the same _______
will choose the investment with the highest ________ taking into account
both _________ and _________.
A. expected return; risk; default risk; interest rate risk
X B. risk; expected return; interest rates; expected HC exchange rate changes
C. risk; liquidity; inflation rates; price levels
D. expected return; market value; the HC exchange rate; the HC price level
31-1 Given a world divided between HC and ROW, if the nominal interest rate
in the HC is 4 percent in period T, and the nominal interest rate in ROW
is 6 percent in period T, then the HC nominal exchange rate (measured in
ROW currency units per HC currency unit) can be expected to _________
by __________ from period T to T+1.
X A. appreciate; 2 percent
B. depreciate; 2 percent
C. appreciate; 10 percent
D. depreciate; 10 percent
32-1 As conventionally defined in GDP national income accounting in the
United States, the _________ keeps track of __________________ .
X A. capital account; net trades in existing financial and real assets
B. capital account; net exports and net factor payments and net transfers
C. current account; net trades in existing financial and real assets
D. current account; net official reserve transactions
33-1 Holding other factors constant, which of the following would INCREASE
the size of the U.S. current account SURPLUS?
A. Payments by the U.S. goverment to help emerging democracies in Africa
B. Increased travel to Korea by U.S. college students
X C. Payments by foreign governments to the U.S. to help pay for the
Persian gulf war
D. Both A and B of the above
34-1 Assuming the world is divided between HC and ROW, if the HC is running
a current account deficit, then HC national saving _______ HC total
investment and the HC is ___________ ROW.
A. is greater than; lending to
B. is greater than; borrowing from
C. is less than; lending to
X D. is less than; borrowing from
35-1 Assuming the world is divided between HC and ROW, that only the HC
central bank holds offical reserve assets (HC and ROW currency
reserves), and that the changes in ROW currency reserves ("official
reserve asset transactions") undertaken by the HC central bank are included
in the definition of the HC capital account, the balance of payments
accounting identity for the HC requires that the sum of the _________ and
the ___________ equals _____________
A. HC current account; changes in ROW currency reserves; HC capital account
X B. HC current account; HC capital account; 0
C. HC current account; HC capital account; changes in ROW currency reserves
D HC capital account; changes in ROW currency reserves; 0