false

Department

Economics for Management Studies

Course Code

MGEC71H3

Professor

Jack Parkinson

Description

Sample Midterm Exam Questions – MGEC71
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 2year and 5year FixedRate 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.
STEPUP RATE BOND
The competitive interest rate continues to rise with each year over it’s 5year term. You can redeem every six months.
The interest rates for the stepup 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.
VARIABLERATE BOND
To remain competitive, a new rate is offered annually over the seven year term. You can redeem annually. The interest rate for the sevenyear VariableRate Bond rate is 1.00% for the first year.
FIXEDRATE BOND
Enjoy a set competitive interest rate for the duration of the bond’s term. You may pick a twoyear, threeyear or five
year term for your fixedrate savings bond.
The interest rates for the various fixedrate bonds are:
• the interest rate for twoyear FixedRate Bonds is 1.25%
• the interest rate for threeyear FixedRate Bonds is 2.00%
• the interest rate for fiveyear FixedRate 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
one-year and sol

More
Less
Unlock Document

Related notes for MGEC71H3

Only pages 1,2 and half of page 3 are available for preview. Some parts have been intentionally blurred.

Unlock DocumentJoin OneClass

Access over 10 million pages of study

documents for 1.3 million courses.

Sign up

Join to view

Continue

Continue
OR

By registering, I agree to the
Terms
and
Privacy Policies

Already have an account?
Log in

Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.