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ECON 310 Midterm: Some Practice Questions

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Simon Fraser University
ECON 310
David Cox

Some Practice Questions 1 Explain, in a sentence or two, what the following financial terms mean. (a) Primary Market (b) Legal Tender (c) Fallen Angel 2 What impact will a businesscycle expansion have on corporate bond process and yields? With the aid of a supply and demand model of the corporate bond market, briefly explain. 3 Suppose the return on a two year bond ( 1 + ) is greater than the expected return from buying a 2, current one year bond and reinvesting the return in another one year bond issued one year from now ( 1 + 1, ( 1 + 1,+1). Are the markets for the twoyear bond and todays oneyear bond in equilibrium? If not, briefly describe how equilibrium will be established. 4 (a) Briefly explain how the Segmented Markets Theory of the term structure of interest rates explains the fact that yield curves are generally upward sloping. No diagram is needed in your answer. (b) Briefly explain how the Liquidity Premium (LP) Theory explains the fact that yield curves are generally upward slope. What is the explanation given by economists for the liquidity premium? 5 (a) A bank loan granted by a bank to a borrower involves a swap of IOUs between the bank and the borrower. Agree or disagree? Briefly explain. (b) A banks Bank Capital represents a pool a cash that is available in case of an emergency. Agree or disagree? Briefly explain. 6 What is a loan commitment? What risk do loan commitments present to banks? Briefly explain.
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