Econ Test 2

Assume that a 1 yr Tnote with a FV=$1000 is currently trading at PV=$963.39. Further assume that investors in the market for the same security anticipate buying it at a price of $956.94 when it becomes available next yr. Please calculate a market implied current price on a 2 yr Tnote with identical face value - under the assumptions of the expectations theory of the term structure.

$921.90

Assume that a 1 yr bond with a face value of $1000 is currently trading at PV=$980.39 and another 2 yr bond with identical face value is currently trading at $907.03. According to the expectations theory of the term structure, anticipated price on identical 1 yr bond which is expected to be re-issued by the municipality of Arlington next year should be

$925.93

Assume that a AAA rated 1 yr bond with a face value of $1000 is currently trading at PV=$980.39 and another 2 yr AAA rated bond w/ identical face value is currently trading at $907.03. If a term premium for holding 2 yr contracts relative to holding 1 yr contracts averages 2.5% points, then according to the theory of term (liquidity) premium - next yr re-issued AAA rated 1 yr bond should go for sale at the price ____ in the primary market.

$970.87

if you expect annual inflation rate to be 12% next year and a 1 yr Tnote has an expected annual yield of 7% then real annual rate of interest on the Tnote is

-4.46%

John is the CFO for ABC corp. 10 years ago, under john's instructions the company invested in 10 yr us treasury bonds that paid 3% interest per year. at the time johns projection was that average annual inflation over the 10 yr period would be .5% per year. turns out, the annual rate of inflation over the 10 yr period was 1.5%. As a result, inflation adjusted rate of return on ABC corporations investment was ___, instead of the ___ return john expected.

1.48% ; 2.49%

On December 31st, 2013 you acquire a 2 yr $5000 Tnote at the prevailing market price of $4,535.15. You held that investment until is expiration on December 31st, 2015. Giving above, please estimate a market implied annualized rate of inflation by taking into account that real interest rate was on average 3% per annum since Dec. 31st, 2013.

1.94%

as of today, there are ____ monetary aggregates in the US

2

On December 3rd, 2013 you acquired a 3 yr Tnote with a face value of $1000 at then prevailing market price of $876.30. Assume that you held that security until it expired on Dec. 3rd, 2016. Please estimate annualized RRFR you realized on that investment over your investment horizon by taking into account the following CPI values: 171.5 on Dec 3rd, 2013 173.8 on Dec 3rd, 2014 177.2 on Dec 3rd, 2015 182.0 on Dec 3rd, 2016

2.45%

there are ____ functions of money

3

Daniella is considering the purchase of a 7 yr $1000 bond being issued by Exxon Mobile. The bond offers an interest rate of 5.50%. The rate on identical maturity US Tbond is 2.50%. All else equal, Daniella will be getting a default premium of ___, if she purchases the Disreputable, INC. bond.

3.00%

Allison works for a pension fund. She is thinking of buying some bonds that have nominal interest rate of 6%. If she believes that the inflation rate over the life of the bond will be 2%, the the real interest rate on this bond she would anticipate to earn should be

3.92%

Saladin is willing to lend her friend Astro $500 to buy a new smart phone. Saladin wants a 3% real rate of return on the loan when it is paid back at the end of the yr. She believes that during the yr the general level of prices will rise by 2%, so she should charge her friend Astro a nominal interest rate of

5.06%

please estimate promised YTM on a 1 yr Tnote under assumption that 1 yr TIPS promises to pay 2% and investors anticipate 3.0% rate of inflation over the same time period.

5.06%

the best way to measure the default risk premium (DRP) is to

compare the interest rate the borrower is paying vs the risk free rate, usually represented by the rate on US treasury securities with identical maturity, ceteris paribus

In a business cycle contraction, both supply of bonds and demand for bonds will shift. If the shift in the demand curve dominates in magnitude such that it is twice as big as the shift in the supply curve, investors should expect a ____ in equilibrium quantity of bonds, a ___ pressure on the equilibrium price of bonds, and a ____ pressure on the equilibrium interest rates.

decrease ; downward ; upward

during a recession, the supply of corporate bonds ___ and the corporate bond supply curve shifts to the ___.

decreases ; left

the spread in yield rates representing compensation for taking on greater credit risk in known as

default

The supply of bonds is best described as a(n) __________ relationship between the price of bonds and the quantity of bonds supplied, all else equal. a. inverse b. direct c. negative d. exponential

direct

when the price of a bond decreases, all else equal, the bond demand curve ___.

does not shift

The bond demand curve is ________ sloping, indicating a(n) ________ relationship between the price of a bond and the ____ for that bond.

downward ; inverse ; quantity demanded

an inverted yield curve likely means that the

economy is probably headed for recession

the three theories that economists have developed to explain the shape of the yield curve are

expectations theory, term premium theory, and segmented market theory

an increase in the price of bonds will cause a decrease in the demand for bonds

false

no commodity could ever function as money unless authorized by the govt

false

the slope of a yield curve is always constant

false

With respect to the monetary aggregates, we must conclude that M1 and M2

frequently move in the same direction but could also move in opposite directions

In the US during the late 1970s, the nominal interest rates were quite high, but the real interest rates were negative. From the fisher equation we can conclude that expected inflation in the US during this period was ___.

high

As the federal marginal tax rate rises, the advantage of municipal bonds over corporate bonds

increases

Higher government deficits ________ the supply of bonds and shift the supply curve to the ________, everything else held constant.

increases ; right

everything else held constant, when bonds become less widely traded and as a consequence the market becomes less liquid, the demand curve for those bonds shifts to the ___ and the interest rate ___.

left ; rises

according to your textbook, one of the most important functions of the fed is to serve as

lender of last resort

an inverted yield occurs when

long term interest rates are lower than short term interest rates

The yield to maturity for a discount bond is ___ related to the current bond price

negatively

when compared to an exchange system relying on money, the main disadvantage of the barter system is

requirement to satisfy double coincidence of wants

during business cycle expansions when income and wealth are rising, the demand for corporate bonds ___ and the demand curve shifts to the ___

rises ; right

everything else held constant, if interest rates are expected to fall in the future, the demand for long term corporate bond today ___ and the demand curve shifts to the ___.

rises ; right

the chairman of the fed, Paul Volcker, decided that dealing with stagflation would require

shift in focus by the fed from targeting interest rates to targeting the rate of growth of the money supply

when the economy simultaneously experiences growing unemployment and rising rates of inflation, it is called

stagflation

Patrick places his pocket change into his savings bank each evening. By his actions, Patrick indicates that he believes that money is a _____.

store of value

a yield curve illustrates the relationship between

term to maturity of bonds and the interest rate (YTM) they pay, at a particular point of time

a major advantage that municipal bonds have over corporate bonds for investors is that

the income earned on municipal bonds is not subject to federal income tax

ceteris paribus, in DCF valuation techniques giving positive future anticipated cash flow and a non negative interest rate, the longer maturity of a debt contact ___ the present value of that cash flow.

the lower

The organization in charge of the monetary policy in the US is

Federal Reserve

Examples of M2 could be

MMDA's, M1, savings deposits, MMMF's, and time deposits

in the early days of the fed reserve system, the fed reserve bank of ____ quickly established itself as the most important of the 12 fed reserve banks

New York

When money prices are used to facilitate comparisons of value, money is said to function as a

unit of account

economists consider ___ to be the most accurate measure of interest rates

yield to maturity

a bonds maturity refers to the

date this bond expires and must be paid off

When an individual redeems a small denomination time deposit then

M1 increases and M2 stays the same if 100% of proceeds end up in Demand deposits. M1 increases and M2 decreases if 10% of proceeds end up in demand deposits, but 90% of proceeds are invested in corporate shares of common stock.

inflation is a benefit to

borrowers