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(econ333)[2005](f)midterm~masze^_10254.pdf
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Midterm Exam
Economics 333
Money and Banking
October 20, 2005

Write your name on the answer key and write your answers on this white sheet.

1.
A manufacturing corporation needs to borrow $1,000,000 funds to build a factory. The corporations chief financial officer visits an investment bank. The bank calls one of its regular customers, which agrees to exchange $1,000,000 for the new bond. The market for this bond could be described as:


a.
A primary market and a derivative market.


b.
A cash market and an auction market


c.
An over-the counter market and a secondary market.


d.
An over-the-counter market and a primary market.





_____D__________


2.
A coupon bond pays a coupon of $100,000 and has a face value of $1,000,000. You calculate the yield to maturity of the bond as 12%. The bond has an


a.
Initial price less than $1,000,000 and a current yield greater than 10%


b.
Initial price less than $1,000,000 and a current yield less than 10%


c.
Initial price greater than $1,000,000 and a current yield greater than 10%


d.
Initial price greater than $1,000,000 and a current yield less than 10%.






_____A___________

3.
You buy a discount bond with a maturity date of two years and put it in a safe for 1 year. The initial yield to maturity of the bond was 10%. At the end of 1 years time, the yield to maturity is now 5%. The price of the bond has:


a.
Definitely risen over the course of the year


b.
Definitely fallen over the course of the year.


c.
Definitely stayed the same over the course of the year.


d.
May have risen or fallen over the course year. This cannot be determined without further information.



_________A________

4.
You buy a coupon bond at face value. The initial yield to maturity of the bond was 10%. At the end of 1 years time, the yield to maturity is now 5%. The price of the bond has:


a.
Definitely risen over the course of the year.


b.
Definitely fallen over the course of the year.


c.
Definitely stayed the same over the course of the year.


d.
May have risen or fallen over the course year. This cannot be determined without further information





________A________


Short-Answer and Graphical Questions

5.
(10 points) There are free capital markets between Elbonia and Kneedonia. The only bond selling in Elbonia is a 1-year discount bond with a face value of 100,000 Elbonian Dollars and a price of 80,000 Elbonian Dollars. The only bond selling in Kneedonia is a 1-year discount bond with a face value of 100,000 Kneedonian Yen and a price of 75,000 Kneedonian Yen. Assume that the two bonds have the same risk, information, and liquidity properties. Treating Elbonia as the domestic country, what is the markets forecast of the growth rate of the exchange rate over the cour