The Economics of Money, Banking, And Financial Markets
COMM 422
Fall 2007
Midterm
October 18, 2007
Name: ____________________________
Student Number: ____________________
1. Is money a better store of value in Canada (Canadian dollar) or in US (US dollar) today? Why? In which country would you have been more willing to hold money? (6 points)
2. Calculate the yield to maturity of the following $1000 bonds: a two-year bond selling for $900 with a current yield of 10% and a one-year bond selling for $900 with a current yield of 5%. (6 points)
3. Question 2 of Chapter 1 of the textbook states
If history repeats itself and we see a decline in the rate of money growth, what might you expect to happen to … interest rates?
In the answer, it states that interest rates would fall. Page 111, Chapter 5 of the textbook contains the following statement: “When the money supply increases (everything else remaining equal), interest rates will decline.”
From discussion in Chapter 1, it seems that the decline of money supply will lower interest rates. From discussion in Chapter 5, it seems that the increase of money supply will lower interest rates. What is your understanding about the relation between money supply and interest rates? Please explain. (6 points)
4. Assuming that the expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to four years, and plot the resulting yield curve for the following path of one-year interest rate over the next four years:
4.5%, 5%, 5.5%, 5%
How would the yield curve change if people prefer shorter-term bonds to longer-term bonds? (7 points)
Glossary:
Yield to maturity The interest rate that equates the present value of payments received from a credit market instrument with its value today.
Current yield An approximation of the yield to maturity that equals the yearly coupon payment divided by the price of a coupon bond.
Fall 2007
Midterm
October 18, 2007
Name: ____________________________
Student Number: ____________________
1. Is money a better store of value in Canada (Canadian dollar) or in US (US dollar) today? Why? In which country would you have been more willing to hold money? (6 points)
2. Calculate the yield to maturity of the following $1000 bonds: a two-year bond selling for $900 with a current yield of 10% and a one-year bond selling for $900 with a current yield of 5%. (6 points)
3. Question 2 of Chapter 1 of the textbook states
If history repeats itself and we see a decline in the rate of money growth, what might you expect to happen to … interest rates?
In the answer, it states that interest rates would fall. Page 111, Chapter 5 of the textbook contains the following statement: “When the money supply increases (everything else remaining equal), interest rates will decline.”
From discussion in Chapter 1, it seems that the decline of money supply will lower interest rates. From discussion in Chapter 5, it seems that the increase of money supply will lower interest rates. What is your understanding about the relation between money supply and interest rates? Please explain. (6 points)
4. Assuming that the expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to four years, and plot the resulting yield curve for the following path of one-year interest rate over the next four years:
4.5%, 5%, 5.5%, 5%
How would the yield curve change if people prefer shorter-term bonds to longer-term bonds? (7 points)
Glossary:
Yield to maturity The interest rate that equates the present value of payments received from a credit market instrument with its value today.
Current yield An approximation of the yield to maturity that equals the yearly coupon payment divided by the price of a coupon bond.