ECMC48 - Sample Exam Questions.doc

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Department
Economics for Management Studies
Course
MGEC71H3
Professor
Jack Parkinson
Semester
Fall

Description
Sample Midterm Exam Questions – ECMC48 Q1. What is barter? Describe how it works highlighting its good and bad features. Q2. What is fiat money? Describe how it works highlighting its good and bad features. Q3. Describe the net social welfare impact of the introduction and use of cheques. Q4. What is financial intermediation? Explain how this activity impacts social welfare. Q5. What is money (i.e. define it)? Many assets provide a higher rate of return, given this explain why people bother to hold money. Q6. Describe the key features that define something as money. Which feature is the most important property of money? Explain. Q7. What is the primary market? Explain and provide an example of a primary market. Q8. What is the secondary market? Explain and provide an example of a secondary market. Q9. Explain what is meant by the term direct finance. Explain what is meant by indirect finance. Q10. A dollar in the future is worth more than, the same, or less than a dollar today? Explain why this is so. Q11. What is asymmetric information? Describe the main ways it impacts financial markets. Q12. The PBS Frontline video posted on the course web page describes the financial market meltdown that hit the US economy in 2008. Briefly describe how and why some US financial institutions ran into difficulty (as described in this video). Q13. Use mathematics and words to define the concept of yield to maturity, present value and holding period return of a coupon bond. Q14. Use mathematics and words to define the concepts of current yield, yield to maturity and the rate of return for a coupon bond. Which one do investors care most about? Explain. Q15. Use mathematics and words to describe how a discount bond works. Name (label) its key features and explain what each of these things are. What happens to the price of this bond if interest rates fall? Explain. What happens to the price of this bond as time (measured on a calendar) approaches the maturity date? Explain. Q16. If simple and fixed-payment loans are transferable then there can be a secondary market. Suppose in response to the sale of bonds backed toxic mortgages the government passes a law forcing lenders to keep all loans they make (originate). While valuing/pricing such loans how might lenders respond to such a law? Explain. Q17. Use mathematics and words to describe how a coupon bond works. Name (label) its key features and explain what each of these things are. What happens to the price of this bond if interest rates fall? Explain. What happens to the price of this bond as time (measured on a calendar) approaches the maturity date? Explain. Q18. Use mathematics and words to define a bond’s current yield. How does this compare to the bond’s yield to maturity. Describe if and when these two are equal. Q19. Recently the following advertisement for Ontario Savings Bonds appeared in the press. Read it and then answer the questions that appear below it. 2009 Ontario Savings Bonds rates announced New investment options include 2-year and 5-year Fixed-Rate Bonds Monday, June 1, 2009 Ontario Savings Bonds are building blocks for Ontario. Your guaranteed investment earns a competitive interest rate and at the same time helps support provincial initiatives like health care for you and your neighbors, infrastructure and skills training for our workers. So while you’re building your financial future, you’re also helping build a stronger Ontario. Ontario has announced interest rates for the 2009 issue of Ontario Savings Bonds (OSBs), which go on sale Monday for the next three weeks. Three different savings bond options are available. STEP-UP RATE BOND The competitive interest rate continues to rise with each year over it’s 5-year term. You can redeem every six months. The interest rates for the step-up rate bond are: 0.75% for the first year; 1.50% in the second year; 2.50% in the third year; 3.50% in the fourth year; and 4.50% in the final year. VARIABLE-RATE BOND To remain competitive, a new rate is offered annually over the seven year term. You can redeem annually. The interest rate for the seven-year Variable-Rate Bond rate is 1.00% for the first year. FIXED-RATE BOND Enjoy a set competitive interest rate for the duration of the bond’s term. You may pick a two-year, three-year or five-year term for your fixed-rate savings bond. The interest rates for the various fixed-rate bonds are: • the interest rate for two-year Fixed-Rate Bonds is 1.25% • the interest rate for three-year Fixed-Rate Bonds is 2.00% • the interest rate for five-year Fixed-Rate Bonds is 3.00% QUESTION A) Derive the yield to maturity for the five year step-up bond. Assume the bond is held for the whole five year term. B) Derive the yield to maturity for the step-up bond if the investor holds it for two years. Determine the yield to maturity for this bond if it is held for three years. C) Determine the yield to maturity of: i) the 2-year fixed rate bond; ii) the 3-year fixed rate bond; and iii) the 5-year fixed rate bond. D) Compare the relationship between the yields to maturity of the fixed-rate and step-up rate bonds for the 2, 3 and 5-year maturities/horizons. Are these yields to maturity equal when we hold fixed the maturity horizon? (i.e., compare the 2-year bonds only to each other, and so on). Explain why or why not. E) What are the yields to maturity of the step-up bond and the variable-rate bond assuming both are held only for a one year horizon after their purchase? Are these yields to maturity equal? Explain why or why not. F) Using this interest rate data calculate the one-year interest rate that the Government of Ontario expects to occur two years forward from the launch of these bonds. State any assumptions you have made in order to arrive at your answer. Q21. Suppose you are offered a 1-year discount bond (t-bill) with a face value of $10,000. A) If the market rate of interest is 10% then what is the price you are willing to pay? Show your calculations and explain in words. B) If the market rate of interest were instead 8% then what is the price you are willing to pay? Show your calculations and explain in words. C) One year latter the market interest rate has become 7% derive your rate of return (one-year holding period return)? Q22. Suppose you are offered a 5-year discount bond (t-bill) with a face value of $10,000. A) If the market rate of interest is 10% then what is the price you are willing to pay? Show your calculations and explain in words. B) If the market rate of interest were instead 8% then what is the price you are willing to pay? Show your calculations and explain in words. C) One year latter the market interest rate has become 7% derive your rate of return (one-year holding period return)? Q23. Suppose you are offered a 10-year discount bond (t-bill) with a face value of $10,000. A) If the market rate of interest is 10% then what is the price you are willing to pay? Show your calculations and explain in words. B) If the market rate of interest were instead 8% then what is the price you are willing to pay? Show your calculations and explain in words. C) One year latter the market interest rate has become 7% derive your rate of return (one-year holding period return)? Show your calculations and explain in words. Q24. Derive the percentage change in the price of the 1-year, 5-year and 10-year discount bonds that was observed in the three questions above (when the market interest rate fell from 10% to 8%). Does this percentage change behave as you would expect? Explain. Q25. If a 5-year discount bond with a $10,000 face value presently sells for $8,963.45. Derive the yield to maturity of this bond. Q26. Suppose you were offered a 5-year coupon bond with a $10,000 face value and a 4% coupon rate. A) If the market interest rate is 8% derive the price of this bond. Show your calculations and explain in words. B) If the market interest rate is 9% derive the price of this bond. Show your calculations and explain in words. C) If you bought this bond while the market interest rate was 8% and then held it for o
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