tesfatsi@iastate.edu
ANSWER KEY
SECOND MIDTERM EXAM: 70 POINTS TOTAL L. Tesfatsion
Econ 353/SECTION 2
April 6, 1999
1-2 If a borrower receives a simple loan on January 1, 1999 in amount
$1000 and agrees to pay the lender $1,200 on January 1, 2001, then the
simple interest rate on this loan is _________.
A. $200
B. 5 percent
X C. 20 percent
D. 10 percent
2-2. Which of the following are true in general for fixed payment loans?
A. The borrower repays the entire principal plus interest at the
maturity date.
B. Installment loans and mortgages are frequently of the fixed payment
type.
C. The borrower repays the loan by making the same payment every month
D. Only A and B of the above
x E. Only B and C of the above
3-2 Under the terms of a discount bond, the borrower agrees to pay to 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.
C. a periodic fixed coupon payment until a specified maturity date, plus
the face value of the bond at the maturity date.
X 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.
4-2 The coupon rate 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
A. the coupon payment $10 divided by the purchase price $80.
B. one coupon payment per year.
X C. the coupon payment $10 divided by the face value $100.
D. total coupon payments $20 divided by the maturity 2.
5-2 If the annual interest rate is 5 percent, the present value of a payment
of $200 to be received three years from now is
A. $200 multiplied by (1 + .05)@3
B. $200 divided by (1 + .15)
X C. $200 divided by (1 + .05)@3
D. $200 divided by 3
6-2 Letting "*" denote multiplication, if the annual interest rate is 8
percent, then the present value of a payment stream ($40, $10) with
$40 to be received at the end of the first year and $10 to be received
at the end of the second year is given by
A. $40*(1 + .08) + $10*(1 + .08)@2
X B. $40/(1 + .08) + $10/(1 + .08)@2
C. $40/(1 + .08) + $10*(1 + .08)
D. [$40 + $10] divided by 2
7-2 The yield to maturity i on a coupon bond with a purchase price $290,
a face value $300, a coupon payment stream ($50,$50), and a 2-year
maturity is calculated as follows:
A. The present value of the coupon payment stream ($50, $50)
B. Total interest payments $100 divided by the maturity 2.
C. The coupon payment $50 divided by the purchase price $290.
X D. The annual interest rate i that, when used to calculate the present
value PV(i) of ($50,$350), gives a value for PV(i) equal to $290.
8-2 For a coupon bond, its current yield is a less accurate measure of its
yield to maturity the _______ the maturity of the bond and the __________
the deviation of its purchase price from its face value.
A. shorter; smaller
X B. shorter; greater
C. longer; smaller
D. longer; greater
9-2 Which of the following are true in general for coupon bonds?
A. When a coupon bond is priced at its face value, its yield to
maturity equals its coupon rate.
B. The purchase price and yield to maturity for a coupon bond are
negatively related, all else remaining constant.
C. For a coupon bond, its yield to maturity is greater than its coupon rate
when its purchase price is below its face value.
X D. All of the above are true.
E. Only A and B of the above are true.
10-2 Which of the following $1000 face-value securities has the HIGHEST
yield to maturity?
A. A 5 percent coupon bond selling for $1,000
B. A 10 percent coupon bond selling for $1,000
X C. A 12 percent coupon bond selling for $1,000
D. A 12 percent coupon bond selling for $1,100
11-2 In which of the following situations would you prefer to be LENDING?
A. The nominal interest rate is 9 percent and the expected inflation rate
is 7 percent.
X 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.
D. The nominal interest rate is 25 percent and the expected inflation rate
is 50 percent.
12-2 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 on a coupon bond 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 on a coupon bond will
be greater than the current yield when the price of the bond falls
between T and T+1.
D. All of the above are true.
X E. Only A and B of the above are true.
13-2 Holding everything else constant,
A. if an asset's risk rises relative to that of alternative assets,
the demand will fall.
B. the more liquid an asset, relative to alternative assets, the
greater will be the demand.
C. the higher the expected return relative to alternative assets,
the greater will be the demand.
X D. all of the above.
E. only A and B of the above.
14-2 Empirically, most savers find return ___________ and risk ___________.
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 a lower expected return
rate, 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 _________ risk.
A. undesirable; desirable; higher
X B. desirable; undesirable; lower
C. undesirable; desirable; lower
D. desirable; undesirable; higher
15-2 By suitably diversifying the assets in a portfolio, its __________ risk
can be eliminated, leaving only ___________ risk.
A. interest rate; default
B. systematic; nonsystematic
C. default; interest rate
X D. nonsystematic; systematic
16-2 The beta of an asset measures the extent to which its _____________
varies directly with the expected return rate on the market portfolio,
hence it constitutes a measure of its _______________.
A. market price; nonsystematic risk
X B. expected return rate; systematic risk
C. market price; liquidity
D. nonsystematic risk; desirability
17-2 CAPM theory assumes that each saver's preferences over asset portfolios
depend only on ___________ and __________.
A. current yield; capital gain or loss
X B. risk; expected return
C. interest; liquidity
D. purchase price; default risk
18-2 The basic capital asset pricing model (CAPM) postulates that the
________ of an asset can be explained by a single source of systematic
risk as reflected by movements in ______________.
A. interest rate risk; its yield to maturity
X B. expected return rate; the expected return rate of the market portfolio
C. total risk; the return rate of the risk-free asset
D. purchase price; the inflation rate
19-2 Arbitrage pricing theory (APT) 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
B. a single source; the expected return rate of the market portfolio
X C. multiple sources; factors such as the inflation rate and yield spread
D. a single source; its price relative to the market portfolio price
20-2 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 _______.
A. above; demand; rise
B. below; demand; fall
X C. above; supply; fall
D. above; supply; rise
21-2 When an increase occurs in the expected inflation rate from period T+1
to period T+2, all else remaining constant, normally one would expect to
see _____ in the demand for bonds in period T because of an ________.
A. an increase; expected increase in the real interest rate from T+1 to T+2
X B. a decrease; expected decrease in the real interest rate from T+1 to T+2
C. an increase; expected decrease in the real interest rate from T+1 to T+2
D. a decrease; expected increase in the real interest rate from T+1 to T+2
22-2 In gross domestic product accounting, HC imports consist of all
purchases by ________ of goods and services newly produced ________.
A. ROW; within the borders of ROW
B. HC; with ROW-owned assets of production
C. ROW; within the borders of the HC
X D. HC; within the borders of ROW
23-2 In GDP accounting, ROW saving in relation to the HC is defined to be
___________ minus ______________.
A. ROW GDP; ROW consumption
X B. Total income received by ROW from the HC; HC exports
C. HC imports; HC exports
D. Total income received by ROW from the HC; HC imports
24-2 When the U.S. exchange rate for the Mexican peso changes from 12 pesos
per dollar to 8 pesos per dollar, then
A. the peso has appreciated and the dollar has appreciated
B. the peso has depreciated and the dollar has appreciated
X C. the peso has appreciated and the dollar has depreciated
D. the peso has depreciated and the dollar has depreciated
25-2 If the U.S. dollar depreciates relative to the British pound,
A. British wool blankets will become more expensive in the U.S.
B. American computers will become less expensive in Great Britain
C. British wool blankets will become less expensive in the U.S.
X D. only A and B will occur
26-2 Given a world divided between HC and ROW, the purchasing power parity
condition in level form asserts that
A. the HC inflation rate will equal the ROW inflation rate over time
B. the HC nominal exchange rate will stay constant over time
C. the value of HC GDP and ROW GDP will stay equal over time
X D. the HC real exchange rate will stay constant over time
27-2 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
28-2 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 3 percent, and the 1996 inflation rate in ROW
is 6 percent, then the HC exchange rate E will ________ in 1996.
A. rise by 9 percent
X B. rise by 3 percent
C. remain unchanged
D. fall by 3 percent
29-2 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 balance of payments; borrowing and lending; bond market equilibrium
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 market equilibrium; currency reserves; demand = supply for HC currency
30-2 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. default risk; insurance; insurance premiums; contingency fees
B. risk; liquidity; inflation rates; price levels
X C. risk; expected return; interest rates; expected HC exchange rate changes
D. expected return; market value; the HC exchange rate; the HC price level
31-2 Given a world divided between HC and ROW, if the nominal interest rate
in the HC is 8 percent in period T, and the nominal interest rate in ROW
is 4 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.
A. appreciate; 6 percent
B. depreciate; 6 percent
C. appreciate; 4 percent
X D. depreciate; 4 percent
32-2 As conventionally defined in GDP national income accounting in the
United States, the _________ keeps track of __________________ .
A. current account; net trades in existing financial and real assets
B. capital account; net trades in newly produced goods and services
X C. current account; net exports and net factor payments and net transfers
33-2 Holding other factors constant, which of the following would INCREASE
the size of the U.S. current account DEFICIT?
A. A decline in U.S. net investment income
B. An increase in the amount of services purchased from foreigners
C. An increase in unilateral transfers from the U.S. to foreigners
X D. All of the above
34-2 Assuming the world is divided between HC and ROW, if the HC is running
a current account surplus, then HC national saving _______ HC total
investment and the HC is ___________ ROW.
A. is greater than; borrowing from
X B. is greater than; lending to
C. is less than; lending to
D. is less than; borrowing from
35-2 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; 0
B. HC capital account; changes in ROW currency reserves; HC current account
X C. HC current account; HC capital account; 0
D. HC current account; HC capital account; changes in ROW currency reserves