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Review Questions Exam 2 Spr 2012 (97% in the course

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ECON 2035
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ECON 2035 Exam 2Spring 2012Ch 7 17 22 24Review Questions for the Stock Prices Chapter1 What determines the maximum price wed be willing to pay for a stockThe dividend payment over time expectation of the future profit2 We said the discount rate applied to expected dividends on stocks was the sum of the interest rate on bonds and an equity risk premiuma Why are stocks generally regarded as more risky than bondsBecause the bond have the fixed Interest payment while the dividend share of stock is not stable Guaranteed and nonguaranteedb The statement above says that the interest rate on bonds was a component of the discount rate applied to expected dividendsHowever we know there are different types of bondsshortterm bonds and longterm bonds and government bonds and corporate bondsWhich interest rate do you think is most appropriate for computing the discount ratethe interest rate on shortterm government bonds the interest rate on longterm government bonds the interest rate on shortterm corporate bonds or the interest rate on longterm corporate bondsExplain your answerThe long term government bond according to the risk structure the LT coporate Bond have the less risk so it rether stable than all other types of bond3 We said that the equity premium was lower from the mid1980s to mid2007 during the Great Moderation than in the 1960smid1980sExplain why this was the caserisk severe recession less than before 1980until late 2007 only hadfew very mild recessions since early 1980so1987Black Mondayo2000tech CrashTransactions costs stocks fell substantially emergence discount brokersonline trading of stocks lowered transactions costs of stocksGrowth of mutual fundsemergence of stock index funds more diversification in holdings of stocks4 What effect would an expansionary monetary policy have on stock pricesExplainIt will lead to increase aggregate demand total spending the open market purchase by central bank and course the reduce of the supply to public of stock decrease and finally it drive up the Bond price and decrease the interest rate Also The reduction in the interest rate stimulates investment spending by firms and also stimulates the purchase of consumer durables by individuals5 How does technological advance affect stock pricesExplainRate of Tech increase it mean the productivity probable increase than the future more than our expect therefore the profit we expect will be drive up and raise up faster than before it course the expected dividend in future is moreraise of the bond price today
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